Independence Public Interest Entities

Public Interest Entities

General Provisions
• Definition of independence
• Conceptual framework
• Network firms
• Public interest entities
• Related entities
• Those charged with governance


Public Interest Entities

General Provisions – cont’d
• Documentation
• Engagement period
• Mergers and acquisitions
• Other considerations


Public Interest Entities

Definition of Independence
• Independence of Mind
– The state of mind that permits the expression of a conclusion
without being affected by influences that compromise
professional judgment, thereby allowing an individual to act
with integrity and exercise objectivity and professional
skepticism.

• Independence in Appearance

– The avoidance of facts and circumstances that are so significant
that a reasonable and informed third party would be likely to
conclude, weighing all the specific facts and circumstances, that
a firm’s, of a member of the audit team’s, integrity, objectivity
or professional skepticism has been compromised.


Public Interest Entities

Conceptual Framework Approach –
Threats and Safeguards


Public Interest Entities

Conceptual Framework – Threats
• Self-interest
– The threat that a financial or other interest will inappropriate
influence the professional accountant’s judgment or behavior.

• Self-review
– The threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made or service
performed on which the accountant will rely when forming a
judgment as part of providing the current service.

• Advocacy
– The threat that a professional accountant will promote a client’s
position to the point that the accountant’s objectivity is
compromised.

Public Interest Entities

Conceptual Framework – Threats
• Familiarity
– The threat that due to a long or close relationship with a client, a
professional accountant will be too sympathetic to their interests or
too accepting of their work.

• Intimidation
– The threat that a professional accountant will be deterred from
acting objectively because of actual or perceived pressures,
including attempts to exercise undue influence over the accountant.


Public Interest Entities

Conceptual Framework – Safeguards
• Safeguards fall into two broad categories:
– Those created by the profession, legislation or regulation; and
– Those in the work environment.


Public Interest Entities

Conceptual Framework – Prohibitions
When safeguards are never adequate

Public Interest Entities

Network Firms
• Network firms are required to be independent of audit
clients of other firms within the network
• Network is defined as a larger structure that is:
– Aimed at co-operation; and
– Clearly aimed at profit or cost sharing or shares common
ownership, control or management, common quality control
policies and procedures, common business strategy, the use of
a common brand-name, or a significant part of professional
resources.


Public Interest Entities

Public Interest Entities
• Public interest entities defined as:
– Listed entities; and
– Entities
• defined by regulation or legislation as a public interest entity, or
• for which the audit is required by regulation or legislation to be
conducted in compliance with the same independence
requirements that apply to the audit of listed entities.


Public Interest Entities

Public Interest Entities
• Firms and member bodies are encouraged to determine

whether to treat other entities as public interest entities
because the entities have a large number and wide
range of stakeholders
• Factors to be considered include:
– The nature of the business, such as the holding of assets in a
fiduciary capacity for a large number of stakeholders;
– Size; and
– Number of employees.


Public Interest Entities

Related Entities
• Related entities of the audit client are defined as:
– An entity that has direct or indirect control over the client if the client is
material to such entity;
– An entity with a direct financial interest in the client if that entity has
significant influence over the client and the interest in the client is material
to such entity;
– An entity over which the client has direct or indirect control;
– An entity in which the client, or an entity over which the client has direct or
indirect control, has a direct financial interest that gives it significant
influence over such entity and the interest is material to the client and its
related entity; and
– An entity which is under common control with the client (a “sister entity”) if
the sister entity and the client are both material to the entity that controls
both the client and the sister entity.


Public Interest Entities

Related Entities
• Listed entities
– References to “audit client” include its related entities
– Independence is required from all related entities.

• Non-listed entities
– Independence is required from related entities over which the
audit client has direct or indirect control.
– When the audit team knows, or has reason to believe, a
relationship or circumstance involving a related entity is relevant
to the evaluation of the firm’s independence, that related entity
shall be included in the evaluation of independence.


Public Interest Entities

Those Charged with Governance
• Regular communication with those charged with
governance is encouraged.
• Communication enables those charged with governance
to:
– Consider the firm’s judgments in identifying and evaluating
threats to independence,
– Consider the appropriateness of safeguards applied, and
– Take appropriate action.


Public Interest Entities

Documentation
• The professional accountant shall document conclusions
regarding compliance with independence requirements
and the substance of relevant discussions supporting
conclusions:
– When safeguards are required, the nature of the threat and
safeguards in place or applied to reduce threat to an acceptable
level shall be documented.
– When a threat required significant analysis to determine
whether safeguards were necessary and the accountant
concluded safeguards were not necessary because the threat
was already at an acceptable level, the nature of the threat and
rationale for the conclusion shall be documented.


Public Interest Entities

Engagement Period
• Independence is required during the engagement period
and the period covered by the financial statements.
• The engagement period starts when the audit team
begins to perform audit services and ends when the
audit report is issued.
• If the engagement is recurring, the period ends at the
later of the notification by either party that the
professional relationship has terminated or the issuance
of the final report.


Public Interest Entities

Mergers and Acquisitions
• When, as a result of merger or acquisition, an entity
becomes a related entity of the audit client, the firm
shall:
– Identify and evaluate previous and current relationships that
could affect independence, and
– Take steps necessary by the effective date of the merger or
acquisition to terminate any current interests or relationships
that are not permitted.


Public Interest Entities

Mergers and Acquisitions
• If the firm cannot reasonably terminate an interest or
relationship by the effective date, the firm shall:
– Evaluate the significance of the threat, and
– Discuss the matter with those charged with governance and if
those charged with governance request the firm to continue as
auditor, the firm shall do so only if:
• The interest or relationship will be terminated as soon as reasonably
possible and in all cases within six months of the effective date;
• Any individual with such an interest or relationship is not a member of
the engagement team or the individual responsible for the engagement
quality control review; and
• Appropriate transitional measures are applied and discussed with
those charged with governance.

Public Interest Entities

Mergers and Acquisitions
• When the firm has completed a significant amount of audit work
before the effective date of the merger or acquisition and can
complete the audit in a short period of time, and those charged with
governance request the firm to complete the audit while continuing
with an interest or relationship that would otherwise be prohibited,
the firm shall do so only if :
– The firm has evaluated the significance of the threats and discussed such
evaluation with those charged with governance;
– The individual with such an interest or relationship is not a member of the
engagement team or the individual responsible for the engagement quality
control review;
– Appropriate transitional measures are applied; and
– The firm ceases to be the auditor no later than the issuance of the audit
report.


Public Interest Entities

Mergers and Acquisitions
• In all cases, the firm shall determine whether, even if all the
requirements can be met, the interests or relationships create
threats that would remain so significant that objectivity would be
compromised .
• The firm shall document any prohibited interests or relationships
that will not be terminated by the effective date of the merger or
acquisition, including the:
– Reasons why the interest or relationship was not terminated;

– Transitional measures applied;
– Results of the discussion with those charged with governance; and
– Rationale as to why the threats that remain are not so significant that
objectivity would be compromised.


Public Interest Entities

Other Considerations
• An inadvertent violation of an independence
requirement generally will be deemed not to
compromise independence provided:
– The firm has appropriate quality control policies and
procedures (equivalent to ISCQ 1) in place to maintain
independence; and
– Once discovered, the violation is corrected promptly and any
necessary safeguards are applied to eliminate any threat or
reduce it to an acceptable level.

• The firm shall determine whether to discuss the matter
with those charged with governance.


Public Interest Entities

Key Independence Provisions
• General Provision
• Financial interests
• Loans and guarantees
• Business relationship

• Family and personal relationships
• Employments with an audit client


Public Interest Entities

Key Independence Provisions
• Temporary staff assignments
• Recent service with an audit client
• Serving as a director or officer
• Long association (including partner rotation)
• Provision of non-assurance services
• Fees


Public Interest Entities

Key Independence Provisions
• Compensation and evaluation policies
• Gifts and hospitality
• Actual of threatened litigation
• Reports that include a restriction on use or
distribution


Public Interest Entities

General Provision
• The slides that follow cover particular circumstances or
relationships addressed in Section 290 of the Code.

• However, Section 290 does not describe all of the
circumstances or relationships that create or may create
threats to independence.
• The firm and members of the audit team shall evaluate
the implications of similar, but different, circumstances
and relationships and determine whether safeguards can
be applied when necessary to eliminate the threats or
reduce them to an acceptable level.