Revised Non-Assurance Services Provisions of the Code

Compliance with the International Independence Standards when providing NAS to audit clients requires knowledge, understanding and the application of all the relevant provisions that apply to all professional accountants in Part 1 of the Code, together with the additional provisions for professional accountants in public practice (PAPPs) in Part 3 of the Code, and the independence provisions in Part 4A of the Code relating to audit and review engagements. This means that firms and network firms providing NAS to audit clients must comply with:

• The general principles-based requirements contained in the Code¹. Among other matters, these prohibit the provision of:
  • NAS that involve assuming a management responsibility (paragraphR400.13); or
  • NAS that create a threat to independence² that is not at an acceptable
  • level and cannot be addressed by³:
    • Eliminating the circumstance creating the threat (e.g., the proposed service cannot be restructured or its scope otherwise revised); or
    • Applying safeguards (e.g., using professionals who are not audit team members to perform the NAS), where available and capable of being applied, to reduce the threats to independence to an acceptable level.
• The requirements (including prohibitions) applicable to the provision of NAS are set out in Section 600 and, in regard to specific types of NAS, in subsections 601 to 610. In addition to the above, firms are reminded that Part 2 of the Code applies in certain circumstances, for example, in relation to pressure to breach the fundamental principles (see paragraphs R120.4 and R300.5).

Question:

Section 600, paragraph R600.14, specifies how firms and network firms are to determine whether the provision of a NAS might create a self-review threat to independence (“two prong test”). In particular, it notes that before providing a NAS to an audit client, a firm or a network firm shall determine whether the provision of that NAS might create a self-review threat by evaluating whether there is a risk that:

a) The results of the NAS will form part of or affect the accounting records, the internal controls over financial reporting, or the financial statements on which the firm will express an opinion; and

b) In the course of the audit of those financial statements on which the firm will express an opinion, the audit team will evaluate or rely on any judgments made or activities performed by the firm or network firm when providing the NAS.

Are firms to apply both elements of the above “two prong” test in determining whether a self-review threat might be created? How should a firm or a network firm interpret the terms “form part of” and “affect” in subparagraph R600.14(a)?

 The “two prong test” in paragraph R600.14 of the Code provides additional direction to help firms and network firms determine whether a self-review threat to independence might arise from the provision of a NAS to an audit client.

• Might create versus will create.

The phase “…whether the provision of that service might create a self-review threat…” in the introductory wording of paragraph R600.14 is intended to convey a clear threshold. The words “…whether there is a risk that…” explain what the threshold means and how it should be applied. In determining whether the proposed NAS might create a self-review threat to independence, the firm or network firm will need to consider whether there is any possibility that the circumstances set out in each subparagraph will arise. The IESBA settled on the threshold of “might create” instead of “will create” to reduce the possibility that a firm or network firm might breach the self-review threat prohibition on NAS in paragraph R600.16 because the firm incorrectly concluded that the proposed NAS will not create a self-review threat when in fact its assessment should have led it to conclude that there would be a risk of self-review, even if such risk is remote (see paragraph 47(a) of the NAS Basis for Conclusions).

• Proper Application of the Two-Prong Test.

Considering whether a proposed NAS might create a self-review threat involves an assessment of whether there is a risk that the proposed NAS will give rise to the circumstances in subparagraphs R600.14 (a) and (b)[emphasis added]. In the case of audit clients that are PIEs, if there is a risk that the circumstances in each subparagraph will arise, then paragraph R600.16 applies, and provision of the proposed NAS is prohibited.

Further, under the Code’s drafting conventions, the use of a lettered list in paragraph R600.14 means that the considerations in subparagraphs (a) and (b) apply and need to be satisfied together (see paragraph 47(b) of the NAS Basis for Conclusions).

• Meaning of “Form Part Of” and “Affect.”

The words “…form part of…” and “affect” are self-explanatory, with meanings derived from the dictionary. In particular, the dictionary definition of the word “affect” is “to have an effect on” or “to make a difference to” which was the IESBA’s intention in using that term.

Where a firm proposes to provide a NAS to an audit client, the firm considers the potential for interaction between the work involved in undertaking the proposed NAS, which may include advice and recommendations, and the information that it can foresee considering in the course of the audit insofar as the accounting records, internal controls over financial reporting and the financial statements are concerned.When doing so, the firm is expected to apply the conceptual framework and the provisions in Section 600 to determine whether, in its professional judgment, there is a risk that the results of the proposed NAS will form part of or affect the accounting records, the internal controls over financial reporting, or the financial statements on which the firm will express an opinion. It is important that the relevant teams exercise appropriate professional judgment in determining:

• whether there is a risk that the results of a NAS will form part of or affect the accounting records, the internal controls over financial reporting, or the financial statements, and
• in the course of the audit, there is a risk that the audit team will evaluate or rely on any judgments made or activities performed by the firm or network firm when providing the NAS. Accordingly, firms and network firms might wish to put in place policies, procedures, and training programs to help promote consistent application of subparagraph R600.14(a) as well as paragraph R600.14 overall. In doing so, the considerations set out above are of particular importance. 

Question:

In some jurisdiction-level codes, firms may prepare the statutory financial statements for related entities for their PIE audit client in limited circumstances. Is there a similar provision under the Code?

Yes. The Code prohibits the provision of accounting and bookkeeping services to audit clients that are PIEs (paragraph R601.6).

However, as an exception to this prohibition, under paragraph R601.7, a firm or a network firm may prepare statutory financial statements for certain related entities10 of a PIE audit client provided that the following conditions are met:

• The audit report on the group financial statements of the PIE has been issued;
• The firm or network firm does not assume management responsibility and applies the conceptual framework to identify, evaluate and address threats to independence;
• The firm or network firm does not prepare the accounting records underlying the statutory financial statements of the related entity and those financial statements are based on client approved information; and
• The statutory financial statements of the related entity will not form the basis of future group financial statements of that PIE.

This exception is intended to accommodate situations in which a PIE audit client has related entities in different jurisdictions around the world⁴, and a local regulator requires the issuance of financial statements for those related entities that are prepared in accordance with the local law or regulation.

Based on the Questions and Answers publication issued by the Staff of the IESBA.

_{¹A high-level overview of the prohibitions in the Code, Summary of Prohibitions Applicable to Audits of Public Interest Entities is available on the IESBA website.}

²_{The categories of threats to compliance with the fundamental principles in 120.6 A3 are also the categories of threats to independence.}

³_{See paragraphs R120.10 to 120.10 A2 and 600.18 A1 to 600.18 A4.}

⁴_{The exception in paragraph R601.7 provides an approach that is similar to US Securities and Exchange Commission (SEC) independence requirements, which contain an analogous exemption to the Adopting Release of US SEC Rule 2-01 of Regulation S-X, SEC Release (2003) – Strengthening the Commission’s Requirements Regarding Auditor Independence. The US SEC exemption allows for the preparation of statutory financial statements of affiliate foreign companies as long as the accountant’s independence is not impaired, and those statements do not form the basis of the financial statements that are filed with the SEC.}

27/10/2022