1
EXPOSURE DRAFT:
ICAI Code of Ethics, 2018
(Last date for comments: November, 7, 2018)
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
2
CONTENTS
Page
GUIDE TO THE CODE .........................................................................................................
CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (including INDEPENDENCE
STANDARDS)...............................................
PREFACE..............................................................................................................................
PART 1 COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND
CONCEPTUAL FRAMEWORK................................................................................
PART 2 PROFESSIONAL ACCOUNTANTS IN SERVICE ..............................................
PART 3 PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE ................................
INDEPENDENCE STANDARDS (PARTS 4A and 4B)
PART 4A INDEPENDENCE FOR AUDIT AND REVIEW
ENGAGEMENTS ........................................................................................
PART 4B INDEPENDENCE FOR ASSURANCE ENGAGEMENTS
OTHER THAN AUDIT AND REVIEW ENGAGEMENTS ............................
GLOSSARY, INCLUDING LISTS OF ABBREVIATIONS ......................................................
EFFECTIVE DATE ................................................................................................................
3
GUIDE TO THE CODE
GUIDE TO THE CODE
(This Guide is a non-authoritative aid to using the Code.)
Purpose of the Code
This ICAI Code of Ethics is applicable from 1 April, 2019. Where guidance contained in this Code relates to
engagements commencing prior to that date, previous guidance may be applied up to completion of the
said engagements. Transitional arrangements are available in respect of specific sections of this Code.
This Code has been derived from the International Ethics Standards Board for Accountants (IESBA) Code
of Ethics, 2018 issued by the International Federation of Accountants (IFAC).
1. The Code of Ethics for Professional Accountants (including Independence Standards) ("the Code")
sets out fundamental principles of ethics for professional accountants, reflecting the
profession's recognition of its public interest responsibility. These principles establish the standard
of behaviour expected of a professional accountant. The fundamental principles are: integrity,
objectivity, professional competence and due care, confidentiality, and professional behaviour.
2. The Code provides a conceptual framework that professional accountants are to apply in order to
identify, evaluate and address threats to compliance with the fundamental principles. The Code sets
out requirements and application material on various topics to help accountants apply the conceptual
framework to those topics.
3. In the case of audits, reviews and other assurance engagements, the Code sets out
Independence Standards, established by the application of the conceptual framework to threats to
independence in relation to these engagements.
How the Code is structured
4. The Code contains the following material:
Part 1 Complying with the Code, Fundamental Principles and Conceptual Framework, which
includes the fundamental principles and the conceptual framework and is applicable to all
professional accountants.
Part 2 Professional Accountants in Service, which sets out additional material that applies
to professional accountants in service when performing professional activities. Professional
accountants in service include professional accountants employed, engaged or contracted in
an executive or non-executive capacity in, for example:
o Commerce, industry or service.
o The public sector.
o Education.
o The not-for-profit sector.
o Regulatory or professional bodies.
Part 2 is also applicable to individuals who are professional accountants in public practice when
performing professional activities pursuant to their relationship with the firm, whether as a
contractor or employee.
4
GUIDE TO THE CODE
Part 3 Professional Accountants in Public Practice, which sets out additional material that
applies to professional accountants in public practice when providing professional services.
Independence Standards, which sets out additional material that applies to professional
accountants in public practice when providing assurance services, as follows:
o Part 4A Independence for Audit and Review Engagements, which applies when
performing audit or review engagements.
o Part 4B Independence for Assurance Engagements Other than Audit and Review
Engagements, which applies when performing assurance engagements that are not
audit or review engagements.
Glossary, which contains defined terms (together with additional explanations where
appropriate) and described terms which have a specific meaning in certain parts of the Code.
For example, as noted in the Glossary, in Part 4A, the term "audit engagement" applies equally
to both audit and review engagements. The Glossary also includes lists of abbreviations that
are used in the Code and other standards to which the Code refers.
5. The Code contains sections which address specific topics. Some sections contain subsections
dealing with specific aspects of those topics. Each section of the Code is structured, where
appropriate, as follows:
Introduction sets out the subject matter addressed within the section, and introduces the
requirements and application material in the context of the conceptual framework. Introductory
material contains information, including an explanation of terms used, which is important to the
understanding and application of each Part and its sections.
Requirements establish general and specific obligations with respect to the subject matter
addressed.
Application material provides context, explanations, suggestions for actions or matters to
consider, illustrations and other guidance to assist in complying with the requirements.
How to Use the Code
The Fundamental Principles, Independence and Conceptual Framework
6. The Code requires professional accountants to comply with the fundamental principles of ethics. The
Code also requires them to apply the conceptual framework to identify, evaluate and address threats
to compliance with the fundamental principles. Applying the conceptual framework requires
exercising professional judgment, remaining alert for new information and to changes in facts and
circumstances, and using the reasonable and informed third party test.
7. The conceptualframework recognizes that the existence of conditions, policies and procedures
established by the profession, legislation, regulation, the firm, or the employing organization might
impact the identification of threats. Those conditions, policies and procedures might also be a relevant
factor in the professional accountant's evaluation of whether a threat is at an acceptable level. When
threats are not at an acceptable level, the conceptual framework requires the accountant to address
those threats. Applying safeguards is one way that threats might be addressed. Safeguards are
actions individually or in combination that the accountant takes that effectively reduce threats to an
acceptable level.
8. In addition, the Code requires professional accountants to be independent when performing audit,
review and other assurance engagements. The conceptual framework applies in the same way to
identifying, evaluating and addressing threats to independence as to threats to compliance with the
5
GUIDE TO THE CODE
fundamental principles.
9. Complying with the Code requires knowing, understanding and applying:
All of the relevant provisions of a particular section in the context of Part 1, together with the
additional material set out in Sections 200, 300, 400 and 900, as applicable.
All of the relevant provisions of a particular section, for example, applying the provisions that
are set out under the subheadings titled "General" and "All Audit Clients" together with
additional specific provisions, including those set out under the subheadings titled "Audit
Clients that are not Public Interest Entities" or "Audit Clients that are Public Interest Entities."
All of the relevant provisions set out in a particular section together with any additional
provisions set out in any relevant subsection.
Requirements and Application Material
10. Requirements and application material are to be read and applied with the objective of complying
with the fundamental principles, applying the conceptual framework and, when performing audit,
review and other assurance engagements, being independent.
Requirements
11. Requirements are designated with the letter "R" and, in most cases, include the word "shall." The
word "shall" in the Code imposes an obligation on a professional accountant or firm to comply with
the specific provision in which "shall" has been used.
12. In some situations, the Code provides a specific exception to a requirement. In such a situation, the
provision is designated with the letter "R" but uses "may" or conditional wording.
13. When the word "may" is used in the Code, it denotes permission to take a particular action in certain
circumstances, including as an exception to a requirement. It is not used to denote possibility.
14. When the word "might" is used in the Code, it denotes the possibility of a matter arising, an event
occurring or a course of action being taken. The term does not ascribe any particular level of
possibility or likelihood when used in conjunction with a threat, as the evaluation of the level of a
threat depends on the facts and circumstances of any particular matter, event or course of action.
Application Material
15. In addition to requirements, the Code contains application material that provides context relevant to
a proper understanding of the Code. In particular, the application material is intended to help a
professional accountant to understand how to apply the conceptual framework to a particular set of
circumstances and to understand and comply with a specific requirement. While such application
material does not of itself impose a requirement, consideration of the material is necessary to the
proper application of the requirements of the Code, including application of the conceptual
framework. Application material is designated with the letter "A."
16. Where application material includes lists of examples, these lists are not intended to be exhaustive.
Appendix to Guide to the Code
17. The Appendix to this Guide provides an overview of the Code.
6
GUIDE TO THE CODE
Appendix to Guide to the Code
OVERVIEW OF THE CODE
PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK
(ALL PROFESSIONAL ACCOUNTANTS - SECTIONS 100 TO 199)
PART 2 PART 3
PROFESSIONAL ACCOUNTANTS IN Service PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
(SECTIONS 200 TO 299) (SECTIONS 300 TO 399)
(PART 2 IS ALSO APPLICABLE TO INDIVIDUAL PROFESSIONAL ACCOUNTANTS
IN PUBLIC PRACTICE WHEN PERFORMING PROFESSIONAL ACTIVITIES
PURSUANT TO THEIR RELATIONSHIP WITH THE FIRM)
INDEPENDENCE STANDARDS
(PARTS 4A AND 4B)
PART 4A INDEPENDENCE FOR AUDIT AND REVIEW
ENGAGEMENTS
(SECTIONS 400 TO 899)
PART 4B INDEPENDENCE FOR ASSURANCE ENGAGEMENTS
OTHER THAN AUDIT AND REVIEW ENGAGEMENTS
(SECTIONS 900 TO 999)
GLOSSARY
(ALL PROFESSIONAL ACCOUNTANTS)
7
CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS
(including INDEPENDENCE STANDARDS)
TABLE OF CONTENTS
PART 1 COMPLYING WITH THE CODE, FUNDAMENTAL
PRINCIPLES AND CONCEPTUAL FRAMEWORK ...............................................
100 COMPLYING WITH THE CODE ..............................................................................
110 THE FUNDAMENTAL PRINCIPLES........................................................................
111 INTEGRITY.....................................................................................................
112 OBJECTIVITY ................................................................................................
113 PROFESSIONAL COMPETENCE AND DUE CARE.....................................
114 CONFIDENTIALITY .......................................................................................
115 PROFESSIONAL BEHAVIOUR .......................................................................
120 THE CONCEPTUAL FRAMEWORK........................................................................
PART 2 PROFESSIONAL ACCOUNTANTS IN.SERVICE
200 APPLYING THE CONCEPTUAL FRAMEWORK
PROFESSIONAL ACCOUNTANTS IN SERVICE
210 CONFLICTS OF INTEREST ....................................................................................
220 PREPARATION AND PRESENTATION OF INFORMATION...................................
230 ACTING WITH SUFFICIENT EXPERTISE ..............................................................
240 FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES
LINKED TO FINANCIAL REPORTING AND DECISION MAKING ..........................
250 INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY .....
260 RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS ........
270 PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES .............................
PART 3 PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE ..............................
300 APPLYING THE CONCEPTUAL FRAMEWORK PROFESSIONAL
ACCOUNTANTS IN PUBLIC PRACTICE ................................................................
310 CONFLICTS OF INTEREST ....................................................................................
320 PROFESSIONAL APPOINTMENTS ........................................................................
321 SECOND OPINIONS ...............................................................................................
330 FEES AND OTHER TYPES OF REMUNERATION.................................................
340 INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY .......................................
8
THE CODE
350 CUSTODY OF CLIENT ASSETS .............................................................................
360 RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS DURINGTHECOURSEOF
FINANCIAL STATEMENT AUDIT ENGAGEMENTS OF LISTED COMPANIES
...............................................................................................
INDEPENDENCE STANDARDS (PARTS 4A AND 4B)
PART 4A INDEPENDENCE FOR AUDIT AND REVIEW
ENGAGEMENTS .....................................................................................................
400 APPLYING THE CONCEPTUAL FRAMEWORK TO INDEPENDENCE FOR
AUDIT AND REVIEW ENGAGEMENTS .................................................................
410 FEES ........................................................................................................................
411 COMPENSATION AND EVALUATION POLICIES...................................................
420 GIFTS AND HOSPITALITY ......................................................
430 ACTUAL OR THREATENED LITIGATION...............................................................
510 FINANCIAL INTERESTS .........................................................................................
511 LOANS AND GUARANTEES...................................................................................
520 BUSINESS RELATIONSHIPS .................................................................................
521 FAMILY AND PERSONAL RELATIONSHIPS ..........................................................
522 RECENT SERVICE WITH AN AUDIT CLIENT ........................................................
523 SERVING AS A DIRECTOR OR OFFICER OF AN AUDIT CLIENT ........................
524 EMPLOYMENT WITH AN AUDIT CLIENT ..............................................................
525 TEMPORARY PERSONNEL ASSIGNMENTS ........................................................
540 LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT ..................................................
550 AUDITOR ROTATION.............................................................................
600 PROVISION OF NON-ASSURANCE SERVICES TO AN AUDIT CLIENT ..............
601 ACCOUNTING AND BOOKKEEPING SERVICES ........................................
602 ADMINISTRATIVE SERVICES ......................................................................
603 VALUATION SERVICES ................................................................................
604 TAX SERVICES .............................................................................................
605 INTERNAL AUDIT SERVICES.......................................................................
606 INFORMATION TECHNOLOGY SYSTEMS SERVICES ..............................
607 LITIGATION SUPPORT SERVICES ..............................................................
608 LEGAL SERVICES.........................................................................................
609 RECRUITING SERVICES..............................................................................
610 CORPORATE FINANCE SERVICES ............................................................
9
THE CODE
800 REPORTS ON SPECIAL PURPOSE FINANCIAL STATEMENTS
THAT INCLUDE A RESTRICTION ON USE AND DISTRIBUTION
(AUDIT AND REVIEW ENGAGEMENTS) ...............................................................
PART 4B INDEPENDENCE FOR ASSURANCE ENGAGEMENTS
OTHER THAN AUDIT AND REVIEW ENGAGEMENTS ........................................
900 APPLYING THE CONCEPTUAL FRAMEWORK TO INDEPENDENCE FOR
ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW
ENGAGEMENTS .....................................................................................................
905 FEES ........................................................................................................................
906 GIFTS AND HOSPITALITY ......................................................
907 ACTUAL OR THREATENED LITIGATION...............................................................
910 FINANCIAL INTERESTS .........................................................................................
911 LOANS AND GUARANTEES...................................................................................
920 BUSINESS RELATIONSHIPS .................................................................................
921 FAMILY AND PERSONAL RELATIONSHIPS ..........................................................
922 RECENT SERVICE WITH AN ASSURANCE CLIENT ............................................
923 SERVING AS A DIRECTOR OR OFFICER OF AN
ASSURANCE CLIENT ............................................................................................
924 EMPLOYMENT WITH AN ASSURANCE CLIENT...................................................
940 LONG ASSOCIATION OF PERSONNEL WITH AN
ASSURANCE CLIENT .............................................................................................
950 PROVISION OF NON-ASSURANCE SERVICES TO
ASSURANCE CLIENTS OTHER THAN AUDIT AND
REVIEW ENGAGEMENT CLIENTS ........................................................................
990 REPORTS THAT INCLUDE A RESTRICTION ON USE AND DISTRIBUTION
(ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW
ENGAGEMENTS) ....................................................................................................
GLOSSARY, INCLUDING LISTS OF ABBREVIATIONS .....................................................
10
THE CODE
PART 1 COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND
CONCEPTUAL FRAMEWORK ...............................................................................
Section 100 Complying with the Code ..................................................................................
Section 110 The Fundamental Principles..............................................................................
Subsection 111 Integrity ........................................................................................
Subsection 112 Objectivity ....................................................................................
Subsection 113 Professional Competence and Due Care....................................
Subsection 114 Confidentiality ..............................................................................
Subsection 115 Professional Behaviour .................................................................
Section 120 The Conceptual Framework..............................................................................
11
THE CODE
PART 1 COMPLYING WITH THE CODE, FUNDAMENTAL
PRINCIPLES AND CONCEPTUAL FRAMEWORK
SECTION 100
COMPLYING WITH THE CODE
General
100.1 A1 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to
act in the public interest. A professional accountant's responsibility is not exclusively to satisfy
the needs of an individual client or employing organization. Therefore, the Code contains
requirements and application material to enable professional accountants to meet their
responsibility to act in the public interest.
100.2 A1 The requirements in the Code, designated with the letter "R," impose obligations.
100.2 A2 Application material, designated with the letter "A," provides context, explanations, suggestions
for actions or matters to consider, illustrations and other guidance relevant to a proper
understanding of the Code. In particular, the application material is intended to help a
professional accountant to understand how to apply the conceptual framework to a particular
set of circumstances and to understand and comply with a specific requirement. While such
application material does not of itself impose a requirement, consideration of the material is
necessary to the proper application of the requirements of the Code, including application of
the conceptual framework.
R100.3 A professional accountant shall comply with the Code. There might be circumstances where
laws or regulations preclude an accountant from complying with certain parts of the Code. In
such circumstances, those laws and regulations prevail, and the accountant shall comply with
all other parts of the Code.
100.3 A1 The principle of professional behaviour requires a professional accountant to comply
with relevant laws and regulations. Accountants need to be aware of differences in local
regulations from the provisions as set out in the Code, and comply with the more stringent
provisions unless prohibited by law or regulation.
Breaches of the Code
R100.4 Paragraphs R400.80 to R400.89 and R900.50 to R900.55 address a breach of
Independence Standards. A professional accountant who identifies a breach of any other
provision of the Code shall evaluate the significance of the breach and its impact on the
accountant's ability to comply with the fundamental principles. The accountant shall also:
(a) Take whatever actions might be available, as soon as possible, to address the
consequences of the breach satisfactorily; and
(b) Determine whether to report the breach to the relevant parties.
100.4 A1 Relevant parties to whom such a breach might be reported include those who might have been
affected by it.
12
THE CODE
SECTION 110
THE FUNDAMENTAL PRINCIPLES
General
110.1 A1 There are five fundamental principles of ethics for professional accountants:
(a) Integrity to be straightforward and honest in all professional and business relationships.
(b) Objectivity not to compromise professional or business judgments because of bias,
conflict of interest or undue influence of others.
(c) Professional Competence and Due Care to:
(i) Attain and maintain professional knowledge and skill at the level required to ensure
that a client or employing organization receives competent professional service,
based on current technical and professional standards and relevant legislation;
and
(ii) Act diligently and in accordance with applicable technical and professional
standards.
(d) Confidentiality to respect the confidentiality of information acquired as a result of
professional and business relationships.
(e) Professional Behaviour to comply with relevant laws and regulations and avoid
any conduct that the professional accountant knows or should know might discredit
the profession.
R110.2 A professional accountant shall comply with each of the fundamental principles.
110.2 A1 The fundamental principles of ethics establish the standard of behaviour expected of a
professional accountant. The conceptual framework establishes the approach which an
accountant is required to apply to assist in complying with those fundamental principles.
Subsections 111 to 115 set out requirements and application material related to each of the
fundamental principles.
110.2 A2 A professional accountant might face a situation in which complying with one fundamental
principle conflicts with complying with one or more other fundamental principles. In such a
situation, the accountant might consider consulting, with:
Others within the firm or employing organization.
Those charged with governance.
Institute
Legal counsel.
However, such consultation does not relieve the accountant from the responsibility to exercise
professional judgment to resolve the conflict or, if necessary, and unless prohibited by law or
regulation, disassociate from the matter creating the conflict.
110.2 A3 The professional accountant is encouraged to document the substance of the issue, the details
of any discussions, the decisions made and the rationale for those decisions.
13
THE CODE
SUBSECTION 111 INTEGRITY
R111.1 A professional accountant shall comply with the principle of integrity, which requires an accountant
to be straightforward and honest in all professional and business relationships.
111.1 A1 Integrity implies fair dealing and truthfulness.
R111.2 A professional accountant shall not knowingly be associated with reports, returns,
comunications or other information where the accountant believes that the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information provided negligently; or
(c) Omits or obscures required information where such omission or obscurity would be
misleading.
111.2 A1 If a professional accountant provides a modified report in respect of such a report, return,
communication or other information, the accountant is not in breach of paragraph R111.2.
R111.3 When a professional accountant becomes aware of having been associated with information
described in paragraph R111.2, the accountant shall take steps to be disassociated from that
information.
SUBSECTION 112 OBJECTIVITY
R112.1 A professional accountant shall comply with the principle of objectivity, which requires an
accountant not to compromise professional or business judgment because of bias, conflict of
interest or undue influence of others.
R112.2 A professional accountant shall not undertake a professional activity if a circumstance or
relationship unduly influences the accountant's professional judgment regarding that activity.
SUBSECTION 113 PROFESSIONAL COMPETENCE AND DUE CARE
R113.1 A professional accountant shall comply with the principle of professional competence and due
care, which requires an accountant to:
(a) Attain and maintain professional knowledge and skill at the level required to ensure that
a client or employing organization receives competent professional service, based on
current technical and professional standards and relevant legislation; and
(b) Act diligently and in accordance with applicable technical and professional standards.
113.1 A1 Serving clients and employing organizations with professional competence requires the
exercise of sound judgment in applying professional knowledge and skill when undertaking
professional activities.
113.1 A2 Maintaining professional competence requires a continuing awareness and an understanding
of relevant technical, professional and business developments. Continuing professional
development enables a professional accountant to develop and maintain the capabilities to
perform competently within the professional environment.
113.1 A3 Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on a timely basis.
14
THE CODE
R113.2 In complying with the principle of professional competence and due care, a professional
accountant shall take reasonable steps to ensure that those working in a professional capacity
under the accountant's authority have appropriate training and supervision.
R113.3 Where appropriate, a professional accountant shall make clients, the employing organization,
or other users of the accountant's professional services or activities, aware of the limitations
inherent in the services or activities.
SUBSECTION 114 CONFIDENTIALITY
R114.1 A professional accountant shall comply with the principle of confidentiality, which requires an
accountant to respect the confidentiality of information acquired as a result of professional and
employment relationships. An accountant shall:
(a) Be alert to the possibility of inadvertent disclosure, including in a social environment, and
particularly to a close business associate or an immediate or a close family member;
(b) Maintain confidentiality of information within the firm or employing organization;
(c) Maintain confidentiality of information disclosed by a prospective client or employing
organization;
(d) Not disclose confidential information acquired as a result of professional and
employment relationships outside the firm or employing organization without proper
and specific authority, unless there is a legal or professional duty or right to disclose;
(e) Not use confidential information acquired as a result of professional and
employment relationships for the personal advantage of the accountant or for the
advantage of a third party;
(f) Not use or disclose any confidential information, either acquired or received as a result
of a professional or employment relationship, after that relationship has ended; and
(g) Take reasonable steps to ensure that personnel under the accountant's control, and
individuals from whom advice and assistance are obtained, respect the accountant's
duty of confidentiality.
114.1 A1 Confidentiality serves the public interest because it facilitates the free flow of information from
the professional accountant's client or employing organization to the accountant in the
knowledge that the information will not be disclosed to a third party. Nevertheless, the following
are circumstances where professional accountants are or might be required to disclose
confidential information or when such disclosure might be appropriate:
(a) Disclosure is required by law, for example:
(i) Production of documents or other provision of evidence in the course of legal
proceedings; or
(ii) Disclosure to the appropriate public authorities of infringements of the law that
come to light;
(b) Disclosure is permitted by law and is authorized by the client or the employing
organization; and
(c) There is a professional duty or right to disclose, when not prohibited by law:
15
THE CODE
(i) To comply with the requirements of peer review or quality review of the Institute
(ii) To respond to an inquiry or investigation by a professional or regulatory body;
(iii) To protect the professional interests of a professional accountant in legal
proceedings; or
(iv) To comply with technical and professional standards, including ethics
requirements.
114.1 A2 In deciding whether to disclose confidential information, factors to consider, depending on the
circumstances, include:
Whether the interests of any parties, including third parties whose interests might be
affected, could be harmed if the client or employing organization consents to the
disclosure of information by the professional accountant.
Whether all the relevant information is known and substantiated, to the extent
practicable. Factors affecting the decision to disclose include:
o Unsubstantiated facts.
o Incomplete information.
o Unsubstantiated conclusions.
The proposed type of communication, and to whom it is addressed.
Whether the parties to whom the communication is addressed are appropriate recipients.
R114.2 A professional accountant shall continue to comply with the principle of confidentiality even after
the end of the relationship between the accountant and a client r employing organization. When
changing employment or acquiring a new client, the accountant is entitled to use prior
experience but shall not use or disclose any confidential information acquired or received as a
result of a professional or employment relationship.
SUBSECTION 115 PROFESSIONAL BEHAVIOUR
R115.1 A professional accountant shall comply with the principle of professional behaviour,
which requires an accountant to comply with relevant laws and regulations and avoid any
conduct that the accountant knows or should know might discredit the profession. A
professional accountant shall not knowingly engage in any employment, occupation or
activity that impairs or might impair the integrity, objectivity or good reputation of the
profession, and as a result would be incompatible with the fundamental principles.
115.1 A1 Conduct that might discredit the profession includes conduct that a reasonable and informed
third party would be likely to conclude adversely affects the good reputation of the profession.
R115.2 When promoting himself and his work, a professional accountant shall not bring the
profession into disrepute. A professional Accountant is required to conduct his affairs in a manner that
he remains outside the boundaries of professional and other misconduct. A professional accountant
shall be honest and truthful and shall not make:
(a) Exaggerated claims for the services offered by, or the qualifications or experience of, the
accountant; or
(b) Disparaging references or unsubstantiated comparisons to the work of others.
16
THE CODE
(c) Any direct or indirect measures to advertise any professional/other facts which are in
violation of advertisement guidelines issued by the Council of the Institute from time to
time.
115.2 A1 If a professional accountant is in doubt about whether a form of advertising is appropriate,
the accountant is encouraged to consult with the Ethical Standards Board of ICAI.
SECTION 120
THE CONCEPTUAL FRAMEWORK
Introduction
120.1 The circumstances in which professional accountants operate might create threats to
compliance with the fundamental principles. Section 120 sets out requirements and application
material, including a conceptual framework, to assist accountants in complying with the
fundamental principles and meeting their responsibility to act in the public interest. Such
requirements and application material accommodate the wide range of facts and
circumstances, including the various professional activities, interests and relationships that
create threats to compliance with the fundamental principles. In addition, they deter
accountants from concluding that a situation is permitted solely because that situation is not
specifically prohibited by the Code.
120.2 The conceptual framework specifies an approach for a professional accountant to:
(a) Identify threats to compliance with the fundamental principles;
(b) Evaluate the threats identified; and
(c) Address the threats by eliminating or reducing them to an acceptable level.
Requirements and Application Material
General
R120.3 The professional accountant shall apply the conceptual framework to identify, evaluate and
address threats to compliance with the fundamental principles set out in Section 110.
120.3 A1 Additional requirements and application material that are relevant to the application of the
conceptual framework are set out in:
(a) Part 2 Professional Accountants in Service;
(b) Part 3 Professional Accountants in Public Practice; and
(c) Independence Standards, as follows:
(i) Part 4A Independence for Audit and Review Engagements; and
(ii) Part 4B Independence for Assurance Engagements Other than Audit and
Review Engagements.
R120.4 When dealing with an ethics issue, the professional accountant shall consider the context in
which the issue has arisen or might arise. Where an individual who is a professional accountant
in public practice is performing professional activities pursuant to the accountant's relationship
with the firm, whether as a contractor, employee or owner, the individual shall comply with the
provisions in Part 2 that apply to these circumstances.
17
THE CODE
R120.5 When applying the conceptual framework, the professional accountant shall:
(a) Exercise professional judgment;
(b) Remain alert for new information and to changes in facts and circumstances; and
(c) Use the reasonable and informed third party test described in paragraph 120.5 A4.
Exercise of Professional Judgment
120.5 A1 Professional judgment involves the application of relevant training, professional knowledge,
skill and experience commensurate with the facts and circumstances, including the nature and
scope of the particular professional activities, and the interests and relationships involved. In
relation to undertaking professional activities, the exercise of professional judgment is required
when the professional accountant applies the conceptual framework in order to make informed
decisions about the courses of actions available, and to determine whether such decisions are
appropriate in the circumstances.
120.5 A2 An understanding of known facts and circumstances is a prerequisite to the proper application
of the conceptual framework. Determining the actions necessary to obtain this understanding
and coming to a conclusion about whether the fundamental principles have been complied with
also require the exercise of professional judgment.
120.5 A3 In exercising professional judgment to obtain this understanding, the professional accountant
might consider, among other matters, whether:
There is reason to be concerned that potentially relevant information might be missing
from the facts and circumstances known to the accountant.
There is an inconsistency between the known facts and circumstances and the
accountant's expectations.
The accountant's expertise and experience are sufficient to reach a conclusion.
There is a need to consult with others with relevant expertise or experience.
The information provides a reasonable basis on which to reach a conclusion.
The accountant's own preconception or bias might be affecting the accountant's exercise
of professional judgment.
There might be other reasonable conclusions that could be reached from the available
information.
Reasonable and Informed Third Party
120.5 A4 The reasonable and informed third party test is a consideration by the professional accountant
about whether the same conclusions would likely be reached by another party. Such
consideration is made from the perspective of a reasonable and informed third party, who
weighs all the relevant facts and circumstances that the accountant knows, or could reasonably
be expected to know, at the tie the conclusions are made. The reasonable and informed third
party does not need to be an accountant, but would possess the relevant knowledge and
experience to understand and evaluate the appropriateness of the accountant's conclusions in
an impartial manner.
Identifying Threats
R120.6 The professional accountant shall identify threats to compliance with the fundamental
18
THE CODE
principles.
120.6 A1 An understanding of the facts and circumstances, including any professional activities,
interests and relationships that might compromise compliance with the fundamental principles,
is a prerequisite to the professional accountant's identification of threats to such compliance.
The existence of certain conditions, policies and procedures established by the profession,
legislation, regulation, the firm, or the employing organization that can enhance the accountant
acting ethically might also help identify threats to compliance with the fundamental principles.
Paragraph 120.8 A2 includes general examples of such conditions, policies and procedures
which are also factors that are relevant in evaluating the level of threats.
120.6 A2 Threats to compliance with the fundamental principles might be created by a broad range of
facts and circumstances. It is not possible to define every situation that creates threats. In
addition, the nature of engagements and work assignments might differ and, consequently,
different types of threats might be created.
120.6 A3 Threats to compliance with the fundamental principles fall into one or more of the following
categories:
(a) Self-interest threat the threat that a financial or other interest will inappropriately
influence a professional accountant's judgment or behaviour;
(b) Self-review threat the threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made; or an activity performed by the
accountant, or by another individual within the accountant's firm or employing
organization, on which the accountant will rely when forming a judgment as part of
performing a current activity;
(c) Advocacy threat the threat that a professional accountant will promote a client's or
employing organization's position to the point that the accountant's objectivity is
compromised;
(d) Familiarity threat the threat that due to a long or close relationship with a client, or
employing organization, a professional accountant will be too sympathetic to their
interests or too accepting of their work; and
(e) Intimidation threat 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.
120.6 A4 A circumstance might create more than one threat, and a threat might affect compliance with
more than one fundamental principle.
Evaluating Threats
R120.7 When the professional accountant identifies a threat to compliance with the fundamental
principles, the accountant shall evaluate whether such a threat is at an acceptable level.
Acceptable Level
120.7 A1 An acceptable level is a level at which a professional accountant using the reasonable and
informed third party test would likely conclude that the accountant complies with the
fundamental principles.
19
THE CODE
Factors Relevant in Evaluating the Level of Threats
120.8 A1 The consideration of qualitative as well as quantitative factors is relevant in the professional
accountant's evaluation of threats, as is the combined effect of multiple threats, if applicable.
120.8 A2 The existence of conditions, policies and procedures described in paragraph 120.6 A1 might
also be factors that are relevant in evaluating the level of threats to compliance with
fundamental principles. Examples of such conditions, policies and procedures include:
Corporate governance requirements.
Educational, training and experience requirements for the profession.
Effective complaint systems which enable the professional accountant and the general
public to draw attention to unethical behaviour.
An explicitly stated duty to report breaches of ethics requirements.
Professional or regulatory monitoring and disciplinary procedures.
Consideration of New Information or Changes in Facts and Circumstances
R120.9 If the professional accountant becomes aware of new information or changes in facts and
circumstances that might impact whether a threat has been eliminated or reduced to an
acceptable level, the accountant shall re-evaluate and address that threat accordingly.
120.9 A1 Remaining alert throughout the professional activity assists the professional accountant in
determining whether new information has emerged or changes in facts and circumstances
have occurred that:
(a) Impact the level of a threat; or
(b) Affect the accountant's conclusions about whether safeguards applied continue to be
appropriate to address identified threats.
120.9 A2 If new information results in the identification of a new threat, the professional accountant is
required to evaluate and, as appropriate, address this threat. (Ref: Paras. R120.7 and
R120.10).
Addressing Threats
R120.10 If the professional accountant determines that the identified threats to compliance with the
fundamental principles are not at an acceptable level, the accountant shall address the threats
by eliminating them or reducing them to an acceptable level. The accountant shall do so by:
(a) Eliminating the circumstances, including interests or relationships, that are creating the
threats;
(b) Applying safeguards, where available and capable of being applied, to reduce the threats
to an acceptable level; or
(c) Declining or ending the specific professional activity.
Actions to Eliminate Threats
120.10 A1 Depending on the facts and circumstances, a threat might be addressed by eliminating the
circumstance creating the threat. However, there are some situations in which threats can only
be addressed by declining or ending the specific professional activity. This is because the
circumstances that created the threats cannot be eliminated and safeguards are not capable
20
THE CODE
of being applied to reduce the threat to an acceptable level.
Safeguards
120.10 A2 Safeguards are actions, individually or in combination, that the professional accountant takes
that effectively reduce threats to compliance with the fundamental principles to an acceptable
level.
Consideration of Significant Judgments Made and Overall Conclusions Reached
R120.11 The professional accountant shall form an overall coclusion about whether the actions that
the accountant takes, or intends to take, to address the threats created will eliminate those
threats or reduce them to an acceptable level. In forming the overall conclusion, the accountant
shall:
(a) Review any significant judgments made or conclusions reached; and
(b) Use the reasonable and informed third party test.
Considerations for Audits, Reviews and Other Assurance Engagements
Independence
120.12 A1 Professional accountants in public practice are required by Independence Standards to be
independent when performing audits, reviews, or other assurance engagements.
Independence is linked to the fundamental principles of objectivity and integrity. It comprises:
(a) 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.
(b) 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 that a
firm's or an audit or assurance team member's integrity, objectivity or professional
skepticism has been compromised.
120.12 A2 Independence Standards set out requirements and application material on how to apply the
conceptual framework to maintain independence when performing audits, reviews or other
assurance engagements. Professional accountants and firms are required to comply with
these standards in order to be independent when conducting such engagements. The
conceptual framework to identify, evaluate and address threats to compliance with the
fundamental principles applies in the same way to compliance with independence
requirements. The categories of threats to compliance with the fundamental principles
described in paragraph 120.6 A3 are also the categories of threats to compliance with
independence requirements.
Professional Skepticism
120.13 A1 Under auditing, review and other assurance standards, including those issued by the AASB,
professional accountants in public practice are required to exercise professional skepticism
when planning and performing audits, reviews and other assurance engagements.
Professional skepticism and the fundamental principles that are described in Section 110 are
inter-related concepts.
21
THE CODE
120.13 A2 In an audit of financial statements, compliance with the fundamental principles, individually and
collectively, supports the exercise of professional skepticism, as shown in the following
examples:
Integrity requires the professional accountant to be straightforward and honest. For
example, the accountant complies with the principle of integrity by:
(a) Being straightforward and honest when raising concerns about a position taken
by a client; and
(b) Pursuing inquiries about inconsistent information and seeking further audit
evidence to address concerns about statements that might be materially false or
misleading in order to make informed decisions about the appropriate course of
action in the circumstances.
In doing so, the accountant demonstrates the critical assessment of audit evidence that
contributes to the exercise of professional skepticism.
Objectivity requires the professional accountant not to compromise professional or
business judgment because of bias, conflict of interest or the undue influence of others.
For example, the accountant complies with the principle of objectivity by:
(a) Recognizing circumstances or relationships such as familiarity with the client, that
might compromise the accountant's professional or business judgment; and
(b) Considering the impact of such circumstances and relationships on the
accountant's judgment when evaluating the sufficiency and appropriateness of
audit evidence related to a matter material to the client's financial statements.
In doing so, the accountant behaves in a manner that contributes to the exercise of
professional skepticism.
Professional competence and due care requires the professional accountant to have
professional knowledge and skill at the level required to ensure the provision of
competent professional service, and to act diligently in accordance with applicable
standards, laws and regulations. For example, the accountant complies with the principle
of professional competence and due care by:
(a) Applying knowledge that is relevant to a particular client's industry and business
activities in order to properly identify risks of material misstatement;
(b) Designing and performing appropriate audit procedures; and
(c) Applying relevant knowledge when critically assessing whether audit evidence is
sufficient and appropriate in the circumstances.
In doing so, the accountant behaves in a manner that contributes to the exercise of
professional skepticism.
22
THE CODE
PART 2 PROFESSIONAL ACCOUNTANTS IN SERVICE.............................................
Section 200 Applying the Conceptual Framework Professional Accountants in Service ..
Section 210 Conflicts of Interest ...........................................................................................
Section 220 Preparation and Presentation of Information ....................................................
Section 230 Acting with Sufficient Expertise .........................................................................
Section 240 Financial Interests, Compensation and Incentives Linked to Financial
Reporting and Decision Making ...............................................................................
Section 250 Inducements, Including Gifts And Hospitality............................
Section 260 Responding to Non-Compliance with Laws and Regulations ...........................
Section 270 Pressure to Breach the Fundamental Principles ..............................................
23
THE CODE
PART 2 PROFESSIONAL ACCOUNTANTS IN SERVICE
SECTION 200
APPLYING THE CONCEPTUAL FRAMEWORK PROFESSIONAL ACCOUNTANTS IN
SERVICE
Introduction
200.1 This Part of the Code sets out requirements and application material for professional
accountants in service when applying the conceptual framework set out in Section 120. It
does not describe all of the facts and circumstances, including professional activities, interests
and relationships that could be encountered by professional accountants in service, which
create or might create threats to compliance with the fundamental principles. Therefore, the
conceptual framework requires professional accountants in service to be alert for such facts
and circumstances.
200.2 Investors, creditors, employing organizations and other sectors of the business community, as
well as governments and the general public, might rely on the work of professional accountants
in service. Professional accountants in service might be solely or jointly responsible for the
preparation and reporting of financial and other information, on which both their employing
organizations and third parties might rely. They might also be responsible for providing effective
financial management and competent advice on a variety of business-related matters.
200.3 A professional accountant in service might be an employee, contractor, partner, director
(executive or non-executive), owner-manager, or volunteer of an employing organization. The
legal form of the relationship of the accountant with the employing organization has no bearing
on the ethical responsibilities placed on the accountant.
200.4 In this Part, the term "professional accountant" refers to:
(a) A professional accountant in service; and
(b) An individual who is a professional accountant in public practice when performing
professional activities pursuant to the accountant's relationship with the accountant's
firm, whether as a contractor or employee. More information on when Part 2 is
applicable to professional accountants in public practice is set out in paragraphs R120.4,
R300.5 and 300.5 A1.
Requirements and Application Material
General
R200.5 A professional accountant shall comply with the fundamental principles set out in Section 110
and apply the conceptual framework set out in Section 120 to identify, evaluate and address
threats to compliance with the fundamental principles.
200.5 A1 A professional accountant has a responsibility to further the legitimate objectives of the
accountant's employing organization. The Code does not seek to hinder accountants from
fulfilling that responsibility, but addresses circumstances in which compliance with the
fundamental principles might be compromised.
200.5 A2 Professional accountants may promote the position of the employing organization when
furthering the legitimate goals and objectives of their employing organization, provided that any
24
THE CODE
statements made are neither false nor misleading. Such actions usually would not create an
advocacy threat.
200.5 A3 The more senior the position of a professional accountant, the greater will be the ability and
opportunity to access information, and to influence policies, decisions made and actions taken
by others involved with the employing organization. To the extent that they are able to do so,
taking into account their position and seniority in the organization, accountants are expected
to encourage and promote an ethics-based culture in the organization. Examples of actions
that might be taken include the introduction, implementation and oversight of:
Ethics education and training programs.
Ethics and whistle-blowing policies.
Policies and procedures designed to prevent non-compliance with laws and regulations.
Identifying Threats
200.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of
facts and circumstances. The categories of threats are described in paragraph 120.6 A3. The
following are examples of facts and circumstances within each of those categories that might
create threats for a professional accountant when undertaking a professional activity:
(a) Self-interest Threats
A professional accountant holding a financial interest in, or receiving a loan or
guarantee from, the employing organization.
A professional accountant participating in incentive compensation arrangements
offered by the employing organization.
A professional accountant having access to corporate assets for personal use.
A professional accountant being offered a gift or special treatment from a supplier
of the employing organization.
(b) Self-review Threats
A professional accountant determining the appropriate accounting treatment for
a business combination after performing the feasibility study supporting the
purchase decision.
(c) Advocacy Threats
A professional accountant having the opportunity to manipulate information in a
prospectus in order to obtain favorable financing.
(d) Familiarity Threats
A professional accountant being responsible for the financial reporting of the
employing organization when an immediate or close family member employed by
the organization makes decisions that affect the financial reporting of the
organization.
A professional accountant having a long association with individuals influencing
business decisions.
25
THE CODE
(e) Intimidation Threats
A professional accountant or immediate or close family member facing the threat
of dismissal or replacement over a disagreement about:
o The application of an accounting principle.
o The way in which financial information is to be reported.
An individual attempting to influence the decision-making process of the
professional accountant, for example with regard to the awarding of contracts or
the application of an accounting principle.
Evaluating Threats
200.7 A1 The conditions, policies and procedures described in paragraphs 120.6 A1 and 120.8 A2 might
impact the evaluation of whether a threat to compliance with the fundamental principles is at
an acceptable level.
200.7 A2 The professional accountant's evaluation of the level of a threat is also impacted by the nature
and scope of the professional activity.
200.7 A3 The professional accountant's evaluation of the level of a threat might be impacted by the work
environment within the employing organization and its operating environment. For example:
Leadership that stresses the importance of ethical behaviour and the expectation
that employees will act in an ethical manner.
Policies and procedures to empower and encourage employees to communicate ethics
issues that concern them to senior levels of management without fear of retribution.
Policies and procedures to implement and monitor the quality of employee performance.
Systems of corporate oversight or other oversight structures and strong internal controls.
Recruitment procedures emphasizing the importance of employing high caliber
competent personnel.
Timely communication of policies and procedures, including any changes to them, to all
employees, and appropriate training and education on such policies and procedures.
Ethics and code of conduct policies.
200.7 A4 Professional accountants might consider obtaining legal advice where they believe that
unethical behaviour or actions by others have occurred, or will continue to occur, within
the employing organization.
Addressing Threats
200.8 A1 Sections 210 to 270 describe certain threats that might arise during the course of performing
professional activities and include examples of actions that might address such threats.
200.8 A2 In extreme situations, if the circumstances that created the threats cannot be eliminated and
safeguards are not available or capable of being applied to reduce the threat to an acceptable
level, it might be appropriate for a professional accountant to resign from the employing
organization.
26
THE CODE
Communicating with Those Charged with Governance
R200.9 When communicating with those charged with governance in accordance with the Code, a
professional accountant shall determine the appropriate individual(s) within the employing
organization's governance structure with whom to communicate. If the accountant
communicates with a subgroup of those charged with governance, the accountant shall
determine whether communication with all of those charged with governance is also necessary
so that they are adequately informed.
200.9 A1 In determining with whom to communicate, a professional accountant might consider:
(a) The nature and importance of the circumstances; and
(b) The matter to be communicated.
200.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an
individual member of those charged with governance.
R200.10 If a professional accountant communicates with individuals who have management
responsibilities as well as governance responsibilities, the accountant shall be satisfied that
communication with those individuals adequately informs all of those in a governance role with
whom the accountant would otherwise communicate.
200.10 A1 In some circumstances, all of those charged with governance are involved in managing the
employing organization, for example, a small business where a single owner manages the
organization and no one else has a governance role. In these cases, if matters are
communicated with individual(s) with management responsibilities, and those individual(s) also
have governance responsibilities, the professional accountant has satisfied the requirement to
communicate with those charged with governance.
27
THE CODE
SECTION 210
CONFLICTS OF INTEREST
Introduction
210.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
210.2 A conflict of interest creates threats to compliance with the principle of objectivity and might
create threats to compliance with the other fundamental principles. Such threats might be
created when:
(a) A professional accountant undertakes a professional activity related to a particular matter
for two or more parties whose interests with respect to that matter are in conflict; or
(b) The interest of a professional accountant with respect to a particular matter and the
interests of a party for whom the accountant undertakes a professional activity related to
that matter are in conflict.
A party might include an employing organization, a vendor, a customer, a lender, a
shareholder, or another party.
210.3 This section sets out specific requirements and application material relevant to applying the
conceptual framework to conflicts of interest.
Requirements and Application Material
General
R210.4 A professional accountant shall not allow a conflict of interest to compromise professional or
business judgment.
210.4 A1 Examples of circumstances that might create a conflict of interest include:
Serving in a management or governance position for two employing organizations and
acquiring confidential information from one organization that might be used by the
professional accountant to the advantage or disadvantage of the other organization.
Undertaking a professional activity for each of two parties in a partnership, where both
parties are employing the accountant to assist them to dissolve their partnership.
Preparing financial information for certain members of management of the accountant's
employing organization who are seeking to undertake a management buy-out.
Being responsible for selecting a vendor for the employing organization when an
immediate family member of the accountant might benefit financially from the
transaction.
Serving in a governance capacity in an employing organization that is approving certain
investments for the company where one of those investments will increase the value of
the investment portfolio of the accountant or an immediate family member.
Conflict Identification
R210.5 A professional accountant shall take reasonable steps to identify circumstances that might
create a conflict of interest, and therefore a threat to compliance with one or more of the
fundamental principles. Such steps shall include identifying:
28
THE CODE
(a) The nature of the relevant interests and relationships between the parties involved; and
(b) The activity and its implication for relevant parties.
R210.6 A professional accountant shall remain alert to changes over time in the nature of the activities,
interests and relationships that might create a conflict of interest while performing a
professional activity.
Threats Created by Conflicts of Interest
210.7 A1 In general, the more direct the connection between the professional activity and the matter on
which the parties' interests conflict, the more likely the level of the threat is not at an acceptable
level.
210.7 A2 An example of an action that might eliminate threats created by conflicts of interest is
withdrawing from the decision-making process related to the matter giving rise to the conflict
of interest.
210.7 A3 Examples of actions that might be safeguards to address threats created by conflicts of interest
include:
Restructuring or segregating certain responsibilities and duties.
Obtaining appropriate oversight, for example, acting under the supervision of an
executive or non-executive director.
Disclosure and Consent
General
210.8 A1 It is generally necessary to:
(a) Disclose the nature of the conflict of interest and how any threats created were
addressed to the relevant parties, including to the appropriate levels within the employing
organization affected by a conflict; and
(b) Obtain consent from the relevant parties for the professional accountant to undertake
the professional activity when safeguards are applied to address the threat.
210.8 A2 Consent might be implied by a party's conduct in circumstances where the professional
accountant has sufficient evidence to conclude that the parties know the circumstances at the
outset and have accepted the conflict of interest if they do not raise an objection to the
existence of the conflict.
210.8 A3 If such disclosure or consent is not in writing, the professional accountant is encouraged to
document:
(a) The nature of the circumstances giving rise to the conflict of interest;
(b) The safeguards applied to address the threats when applicable; and
(c) The consent obtained.
Other Considerations
210.9 A1 When addressing a conflict of interest, the professional accountant is encouraged to seek
guidance from within the employing organization or from the Institute, legal counsel or
another accountant. When making such disclosures or sharing information within the
employing organization and seeking guidance of third parties, the principle of
confidentiality applies.
29
THE CODE
SECTION 220
PREPARATION AND PRESENTATION OF INFORMATION
Introduction
220.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
220.2 Preparing or presenting information might create a self-interest, intimidation or other threats to
compliance with one or more of the fundamental principles. This section sets out specific
requirements and application material relevant to applying the conceptual framework in such
circumstances.
Requirements and Application Material
General
220.3 A1 Professional accountants at all levels in an employing organization are involved in the
preparation or presentation of information both within and outside the organization.
220.3 A2 Stakeholders to whom, or for whom, such information is prepared or presented, include:
Management and those charged with governance.
Investors and lenders or other creditors.
Regulatory bodies.
This information might assist stakeholders in understanding and evaluating aspects of the
employing organization's state of affairs and in making decisions concerning the organization.
Information can include financial and non-financial information that might be made public or
used for internal purposes.
Examples include:
Operating and performance reports.
Decision support analyses.
Budgets and forecasts.
Information provided to the internal and external auditors.
Risk analyses.
General and special purpose financial statements.
Tax returns.
Reports filed with regulatory bodies for legal and compliance purposes.
220.3 A3 For the purposes of this section, preparing or presenting information includes recording,
maintaining and approving information.
R220.4 When preparing or presenting information, a professional accountant shall:
(a) Prepare or present the information in accordance with a relevant reporting framework,
where applicable;
(b) Prepare or present the information in a manner that is intended neither to mislead nor to
30
THE CODE
influence contractual or regulatory outcomes inappropriately;
(c) Exercise professional judgment to:
(i) Represent the facts accurately and completely in all material respects;
(ii) Describe clearly the true nature of business transactions or activities; and
(iii) Classify and record information in a timely and proper manner; and
(d) Not omit anything with the intention of rendering the information misleading or of
influencing contractual or regulatory outcomes inappropriately.
220.4 A1 An example of influencing a contractual or regulatory outcome inappropriately is using an
unrealistic estimate with the intention of avoiding violation of a contractual requirement such as
a debt covenant or of a regulatory requirement such as a capital requirement for a financial
institution.
Use of Discretion in Preparing or Presenting Information
R220.5 Preparing or presenting information might require the exercise of discretion in making
professional judgments. The professional accountant shall not exercise such discretion with
the intention of misleading others or influencing contractual or regulatory outcomes
inappropriately.
220.5 A1 Examples of ways in which discretion might be misused to achieve inappropriate outcomes
include:
Determining estimates, for example, determining fair value estimates in order to
misrepresent profit or loss.
Selecting or changing an accounting policy or method among two or more alternatives
permitted under the applicable financial reporting framework, for example, selecting a
policy for accounting for long-term contracts in order to misrepresent profit or loss.
Determining the timing of transactions, for example, timing the sale of an asset near the
end of the fiscal year in order to mislead.
Determining the structuring of transactions, for example, structuring financing
transactions in order to misrepresent assets and liabilities or classification of cash flows.
Selecting disclosures, for example, omitting or obscuring information relating to financial
or operating risk in order to mislead.
R220.6 When performing professional activities, especially those that do not require compliance with
a relevant reporting framework, the professional accountant shall exercise professional
judgment to identify and consider:
(a) The purpose for which the information is to be used;
(b) The context within which it is given; and
(c) The audience to whom it is addressed.
31
THE CODE
220.6 A1 For example, when preparing or presenting pro forma reports, budgets or forecasts, the
inclusion of relevant estimates, approximations and assumptions, where appropriate, would
enable those who might rely on such information to form their own judgments.
220.6 A2 The professional accountant might also consider clarifying the intended audience, context and
purpose of the information to be presented.
Relying on the Work of Others
R220.7 A professional accountant who intends to rely on the work of others, either internal or external
to the employing organization, shall exercise professional judgment to determine what steps
to take, if any, in order to fulfill the responsibilities set out in paragraph R220.4.
220.7 A1 Factors to consider in determining whether reliance on others is reasonable include:
The reputation and expertise of, and resources available to, the other individual or
organization.
Whether the other individual is subject to applicable professional and ethics standards.
Such information might be gained from prior association with, or from consulting others about,
the other individual or organization.
Addressing Information that Is or Might be Misleading
R220.8 When the professional accountant knows or has reason to believe that the information with
which the accountant is associated is misleading, the accountant shall take appropriate actions
to seek to resolve the matter.
220.8 A1 Actions that might be appropriate include:
Discussing concerns that the information is misleading with the professional
accountant's superior and/or the appropriate level(s) of management within the
accountant's employing organization or those charged with governance, and requesting
such individuals to take appropriate action to resolve the matter. Such action might
include:
o Having the information corrected.
o If the information has already been disclosed to the intended users, informing them
of the correct information.
Consulting the policies and procedures of the employing organization (for example, an
ethics or whistle-blowing policy) regarding how to address such matters internally.
220.8 A2 The professional accountant might determine that the employing organization has not taken
appropriate action. If the accountant continues to have reason to believe that the information
is misleading, the following further actions might be appropriate provided that the accountant
remains alert to the principle of confidentiality:
Consulting with:
o The Institute
o The internal or external auditor of the employing organization.
o Legal counsel.
32
THE CODE
Determining whether any requirements exist to communicate to:
o Third parties, including users of the information.
o Regulatory and oversight authorities.
R220.9 If after exhausting all feasible options, the professional accountant determines that appropriate
action has not been taken and there is reason to believe that the information is still misleading,
the accountant shall refuse to be or to remain associated with the information.
220.9 A1 In such circumstances, it might be appropriate for a professional accountant to resign from the
employing organization.
Documentation
220.10 A1 The professional accountant is encouraged to document:
The facts.
The accounting principles or other relevant professional standards involved.
The communications and parties with whom matters were discussed.
The courses of action considered.
How the accountant attempted to address the matter(s).
Other Considerations
220.11 A1 Where threats to compliance with the fundamental principles relating to the preparation or
presentation of information arise from a financial interest, including compensation and
incentives linked to financial reporting and decision making, the requirements and application
material set out in Section 240 apply.
220.11 A2 Where the misleading information might involve non-compliance with laws and regulations, the
requirements and application material set out in Section 260 apply.
220.11 A3 Where threats to compliance with the fundamental principles relating to the preparation or
presentation of information arise from pressure, the requirements and application material set
out in Section 270 apply.
33
THE CODE
SECTION 230
ACTING WITH SUFFICIENT EXPERTISE
Introduction
230.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
230.2 Acting without sufficient expertise creates a self-interest threat to compliance with the principle
of professional competence and due care. This section sets out specific requirements and
application material relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
R230.3 A professional accountant shall not intentionally mislead an employing organization as to the
level of expertise or experience possessed.
230.3 A1 The principle of professional competence and due care requires that a professional accountant
only undertake significant tasks for which the accountant has, or can obtain, sufficient training
or experience.
230.3 A2 A self-interest threat to compliance with the principle of professional competence and due care
might be created if a professional accountant has:
Insufficient time for performing or completing the relevant duties.
Incomplete, restricted or otherwise inadequate information for performing the duties.
Insufficient experience, training and/or education.
Inadequate resources for the performance of the duties.
230.3 A3 Factors that are relevant in evaluating the level of such a threat include:
The extent to which the professional accountant is working with others.
The relative seniority of the accountant in the business.
The level of supervision and review applied to the work.
230.3 A4 Examples of actions that might be safeguards to address such a self-interest threat include:
Obtaining assistance or training from someone with the necessary expertise.
Ensuring that there is adequate time available for performing the relevant duties.
R230.4 If a threat to compliance with the principle of professional competence and due care cannot be
addressed, a professional accountant shall determine whether to decline to perform the duties
in question. If the accountant determines that declining is appropriate, the accountant shall
communicate the reasons.
Other Considerations
230.5 A1 The requirements and application material in Section 270 apply when a professional
accountant is pressured to act in a manner that might lead to a breach of the principle of
professional competence and due care.
34
THE CODE
SECTION 240
FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES LINKED TO FINANCIAL
REPORTING AND DECISION MAKING
Introduction
240.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
240.2 Having a financial interest, or knowing of a financial interest held by an immediate or close
family member might create a self-interest threat to compliance with the principles of objectivity
or confidentiality. This section sets out specific requirements and application material relevant
to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
R240.3 A professional accountant shall not manipulate information or use confidential information for
personal gain or for the financial gain of others.
240.3 A1 Professional accountants might have financial interests or might know of financial interests of
immediate or close family members that, in certain circumstances, might create threats to
compliance with the fundamental principles. Financial interests include those arising from
compensation or incentive arrangements linked to financial reporting and decision making.
240.3 A2 Examples of circumstances that might create a self-interest threat include situations in which
the professional accountant or an immediate or close family member:
Has a motive and opportunity to manipulate price-sensitive information in order to gain
financially.
Holds a direct or indirect financial interest in the employing organization and the value of
that financial interest might be directly affected by decisions made by the accountant.
Is eligible for a profit-related bonus and the value of that bonus might be directly affected
by decisions made by the accountant.
Holds, directly or indirectly, deferred bonus share rights or share options in the employing
organization, the value of which might be affected by decisions made by the accountant.
Participates in compensation arrangements which provide incentives to achieve targets
or to support efforts to maximize the value of the employing organization's shares. An
example of such an arrangement might be through participation in incentive plans which
are linked to certain performance conditions being met.
240.3 A3 Factors that are relevant in evaluating the level of such a threat include:
The significance of the financial interest. What constitutes a significant financial interest
will depend on personal circumstances and the materiality of the financial interest to the
individual.
Policies and procedures for a committee independent of management to determine the
level or form of senior management remuneration.
In accordance with any internal policies, disclosure to those charged with governance
35
THE CODE
of:
o All relevant interests.
o Any plans to exercise entitlements or trade in relevant shares.
Internal and external audit procedures that are specific to address issues that give rise
to the financial interest.
240.3 A4 Threats created by compensation or incentive arrangements might be compounded by explicit
or implicit pressure from superiors or colleagues. See Section 270, Pressure to Breach the
Fundamental Principles.
36
SECTION 250
INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY
Introduction
250.1 Professional accountants are required to comply with the fundamental
principles and apply the conceptual framework set out in Section 120 to
identify, evaluate and address threats.
250.2 Offering or accepting inducements might create a self-interest,
familiarity or intimidation threat to compliance with the fundamental
principles, particularly the principles of integrity, objectivity and
professional behaviour.
250.3 This section sets out requirements and application material relevant to
applying the conceptual framework in relation to the offering and
accepting of inducements when undertaking professional activities that
does not constitute non-compliance with laws and regulations. This
section also requires a professional accountant to comply with relevant
laws and regulations when offering or accepting inducements.
Requirements and Application Material
General
250.4 A1 An inducement is an object, situation, or action that is used as a means
to influence another individual's behaviour, but not necessarily with the
intent to improperly influence that individual's behaviour. Inducements
can range from minor acts of hospitality between business colleagues
to acts that result in non-compliance with laws and regulations. An
inducement can take many different forms, for example:
Gifts.
Hospitality.
Entertainment.
Political or charitable donations.
Appeals to friendship and loyalty.
Employment or other commercial opportunities.
Preferential treatment, rights or privileges.
Inducements Prohibited by Laws and Regulations
R250.5 The professional accountant shall obtain an understanding of relevant
laws and regulations and comply with them when the accountant
encounters such circumstances.
Inducements Not Prohibited by Laws and Regulations
250.6 A1 The offering or accepting of inducements that is not prohibited by laws
37
and regulations might still create threats to compliance with the
fundamental principles.
Inducements with Intent to Improperly Influence Behaviour
R250.7 A professional accountant shall not offer, or encourage others to offer,
any inducement that is made, or which the accountant considers a
reasonable and informed third party would be likely to conclude is
made, with the intent to improperly influence the behaviour of the
recipient or of another individual.
R250.8 A professional accountant shall not accept, or encourage others to
accept, any inducement that the accountant concludes is made, or
considers a reasonable and informed third party would be likely to
conclude is made, with the intent to improperly influence the behaviour
of the recipient or of another individual.
250.9 A1 An inducement is considered as improperly influencing an individual's
behaviour if it causes the individual to act in an unethical manner. Such
improper influence can be directed either towards the recipient or
towards another individual who has some relationship with the
recipient. The fundamental principles are an appropriate frame of
reference for a professional accountant in considering what constitutes
unethical behaviour on the part of the accountant and, if necessary by
analogy, other individuals.
250.9 A2 A breach of the fundamental principle of integrity arises when a
professional accountant offers or accepts, or encourages others to offer
or accept, an inducement where the intent is to improperly influence the
behaviour of the recipient or of another individual.
250.9 A3 The determination of whether there is actual or perceived intent to
improperly influence behaviour requires the exercise of professional
judgment. Relevant factors to consider might include:
The nature, frequency, value and cumulative effect of the
inducement.
Timing of when the inducement is offered relative to any action or
decision that it might influence.
Whether the inducement is a customary or cultural practice in the
circumstances, for example, offering a gift on the occasion of a
religious holiday or wedding.
Whether the inducement is an ancillary part of a professional
activity, for example, offering or accepting lunch in connection
with a business meeting.
Whether the offer of the inducement is limited to an individual
recipient or available to a broader group. The broader group
might be internal or external to the employing organization, such
as other customers or vendors.
The roles and positions of the individuals offering or being offered
the inducement.
38
Whether the professional accountant knows, or has reason to
believe, that accepting the inducement would breach the policies
and procedures of the counterparty's employing organization.
The degree of transparency with which the inducement is offered.
Whether the inducement was required or requested by the recipient.
The known previous behaviour or reputation of the offeror.
Consideration of Further Actions
250.10 A1 If the professional accountant becomes aware of an inducement
offered with actual or perceived intent to improperly influence
behaviour, threats to compliance with the fundamental principles might
still be created even if the requirements in paragraphs R250.7 and
R250.8 are met.
250.10 A2 Examples of actions that might be safeguards to address such threats
include:
Informing senior management or those charged with governance
of the employing organization of the professional accountant or
the offeror regarding the offer.
Amending or terminating the business relationship with the offeror.
Inducements with No Intent to Improperly Influence Behaviour
250.11 A1 The requirements and application material set out in the conceptual
framework apply when a professional accountant has concluded there
is no actual or perceived intent to improperly influence the behaviour of
the recipient or of another individual.
250.11 A2 If such an inducement is trivial and inconsequential, any threats created
will be at an acceptable level.
250.11 A3 Examples of circumstances where offering or accepting such an
inducement might create threats even if the professional accountant has
concluded there is no actual or perceived intent to improperly influence
behaviour include:
Self-interest threats
o A professional accountant is offered part-time employment by
a vendor.
Familiarity threats
o A professional accountant regularly takes a customer or
supplier to sporting events.
Intimidation threats
o A professional accountant accepts hospitality, the nature of
which could be perceived to be inappropriate were it to be
publicly disclosed.
250.11 A4 Relevant factors in evaluating the level of such threats created by
39
offering or accepting such an inducement include the same factors set
out in paragraph 250.9 A3 for determining intent.
250.11 A5 Examples of actions that might eliminate threats created by offering or
accepting such an inducement include:
Declining or not offering the inducement.
Transferring responsibility for any business-related decision
involving the counterparty to another individual who the
professional accountant has no reason to believe would be, or
would be perceived to be, improperly influenced in making the
decision.
250.11 A6 Examples of actions that might be safeguards to address such threats created by
offering or accepting such an inducement include:
Being transparent with senior management or those charged with governance of
the employing organization of the professional accountant or of the counterparty
about offering or accepting an inducement.
Registering the inducement in a log maintained by the employing organization of
the accountant or the counterparty.
Having an appropriate reviewer, who is not otherwise involved in undertaking the
professional activity, review any work performed or decisions made by the
accountant with respect to the individual or organization from which the
accountant accepted the inducement.
Donating the inducement to charity after receipt and appropriately disclosing the
donation, for example, to those charged with governance or the individual who
offered the inducement.
Reimbursing the cost of the inducement, such as hospitality, received.
As soon as possible, returning the inducement, such as a gift, after it was initially
accepted.
Immediate or Close Family Members
R250.12 A professional accountant shall remain alert to potential threats to the accountant's
compliance with the fundamental principles created by the offering of an inducement:
(a) By an immediate or close family member of the accountant to a counterparty with
whom the accountant has a professional relationship; or
(b) To an immediate or close family member of the accountant by a counterparty with
whom the accountant has a professional relationship.
R250.13 Where the professional accountant becomes aware of an inducement being offered to
or made by an immediate or close family member and concludes there is intent to
improperly influence the behaviour of the accountant or of the counterparty, or
considers a reasonable and informed third party would be likely to conclude such intent
exists, the accountant shall advise the immediate or close family member not to offer
or accept the inducement.
250.13 A1 The factors set out in paragraph 250.9 A3 are relevant in determining whether there is
40
actual or perceived intent to improperly influence the behaviour of the professional
accountant or of the counterparty. Another factor that is relevant is the nature or
closeness of the relationship, between:
(a) The accountant and the immediate or close family member;
(b) The immediate or close family member and the counterparty; and
(c) The accountant and the counterparty.
For example, the offer of employment, outside of the normal recruitment process, to the
spouse of the accountant by a counterparty with whom the accountant is negotiating a
significant contract might indicate such intent.
250.13 A2 The application material in paragraph 250.10 A2 is also relevant in addressing threats
that might be created when there is actual or perceived intent to improperly influence
the behaviour of the professional accountant or of the counterparty even if the
immediate or close family member has followed the advice given pursuant to
paragraph R250.13.
Application of the Conceptual Framework
250.14 A1 Where the professional accountant becomes aware of an inducement offered in the
circumstances addressed in paragraph R250.12, threats to compliance with the
fundamental principles might be created where:
(a) The immediate or close family member offers or accepts the inducement contrary to
the advice of the accountant pursuant to paragraph R250.13; or
(b) The accountant does not have reason to believe an actual or perceived intent to
improperly influence the behaviour of the accountant or of the counterparty exists.
250.14 A2 The application material in paragraphs 250.11 A1 to 250.11 A6 is relevant for the
purposes of identifying, evaluating and addressing such threats. Factors that are relevant
in evaluating the level of threats in these circumstances also include the nature or
closeness of the relationships set out in paragraph 250.13 A1.
Other Considerations
250.15 A1 If a professional accountant is offered an inducement by the employing organization
relating to financial interests, compensation and incentives linked to performance, the
requirements and application material set out in Section 240 apply.
250.15 A2 If a professional accountant encounters or is made aware of inducements that might
result in non-compliance or suspected non-compliance with laws and regulations by
other individuals working for or under the direction of the employing organization, the
requirements and application material set out in Section 260 apply.
250.15 A3 If a professional accountant faces pressure to offer or accept inducements that might
create threats to compliance with the fundamental principles, the requirements and
application material set out in Section 270 apply.
41
THE CODE
RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS
Introduction
260.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
260.2 A self-interest or intimidation threat to compliance with the principles of integrity and
professional behaviour is created when a professional accountant becomes aware of
non- compliance or suspected non-compliance with laws and regulations.
260.3 A professional accountant might encounter or be made aware of non-compliance or suspected
non-compliance in the course of carrying out professional activities. This section guides the
accountant in assessing the implications of the matter and the possible courses of action when
responding to non-compliance or suspected non-compliance with:
(a) Laws and regulations generally recognized to have a direct effect on the determination
of material amounts and disclosures in the employing organization's financial
statements; and
(b) Other laws and regulations that do not have a direct effect on the determination of the
amounts and disclosures in the employing organization's financial statements, but
compliance with which might be fundamental to the operating aspects of the employing
organization's business, to its ability to continue its business, or to avoid material penalties.
Objectives of the Professional Accountant in Relation to Non-compliance with Laws and
Regulations
260.4 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to
act in the public interest. When responding to non-compliance or suspected non-compliance,
the objectives of the professional accountant are:
(a) To comply with the principles of integrity and professional behaviour;
(b) By alerting management or, where appropriate, those charged with governance of the
employing organization, to seek to:
(i) Enable them to rectify, remediate or mitigate the consequences of the identified or
suspected non-compliance; or
(ii) Deter the non-compliance where it has not yet occurred; and
(c) To take such further action as appropriate in the public interest.
Requirements and Application Material
General
260.5 A1 Non-compliance with laws and regulations ("non-compliance") comprises acts of omission or
commission, intentional or unintentional, which are contrary to the prevailing laws or
regulations committed by the following parties:
(a) The professional accountant's employing organization;
(b) Those charged with governance of the employing organization;
(c) Management of the employing organization; or
(d) Other individuals working for or under the direction of the employing organization.
42
THE CODE
260.5 A2 Examples of laws and regulations which this section addresses include those that deal with:
Fraud, corruption and bribery.
Money laundering, terrorist financing and proceeds of crime.
Securities markets and trading.
Banking and other financial products and services.
Data protection.
Tax and pension liabilities and payments.
Environmental protection.
Public health and safety.
260.5 A3 Non-compliance might result in fines, litigation or other consequences for the employing
organization, potentially materially affecting its financial statements. Importantly, such non-
compliance might have wider public interest implications in terms of potentially substantial
harm to investors, creditors, employees or the general public. For the purposes of this section,
non-compliance that causes substantial harm is one that results in serious adverse
consequences to any of these parties in financial or non-financial terms. Examples include the
perpetration of a fraud resulting in significant financial losses to investors, and breaches of
environmental laws and regulations endangering the health or safety of employees or the
public.
R260.6 When encountering such non-compliance or suspected non-compliance, the accountant shall
obtain an understanding of those legal or regulatory provisions, if any, and comply with them,
including:
(a) Any requirement to report the matter to an appropriate authority; and
(b) Any prohibition on alerting the relevant party.
260.6 A1 A prohibition on alerting the relevant party might arise, for example, pursuant to anti-money
laundering legislation.
260.7 A1 This section applies regardless of the nature of the employing organization, including whether
or not it is a public interest entity.
260.7 A2 A professional accountant who encounters or is made aware of matters that are clearly
inconsequential is not required to comply with this section. Whether a matter is clearly
inconsequential is to be judged with respect to its nature and its impact, financial or otherwise,
on the employing organization, its stakeholders and the general public.
260.7 A3 This section does not address:
(a) Personal misconduct unrelated to the business activities of the employing organization;
and
(b) Non-compliance by parties other than those specified in paragraph 260.5 A1.
The professional accountant might nevertheless find the guidance in this section helpful in
considering how to respond in these situations.
Responsibilities of the Employing Organization's Management and Those Charged with
Governance
43
THE CODE
260.8 A1 The employing organization's management, with the oversight of those charged with
governance, is responsible for ensuring that the employing organization's business activities
are conducted in accordance with laws and regulations. Management and those charged with
governance are also responsible for identifying and addressing any non-compliance by:
(a) The employing organization;
(b) An individual charged with governance of the employing organization;
(c) A member of management; or
(d) Other individuals working for or under the direction of the employing organization.
Responsibilities of All Professional Accountants
R260.9 If protocols and procedures exist within the professional accountant's employing organization
to address non-compliance or suspected non-compliance, the accountant shall consider them
in determining how to respond to such non-compliance.
260.9 A1 Many employing organizations have established protocols and procedures regarding how to
raise non-compliance or suspected non-compliance internally. These protocols and procedures
include, for example, an ethics policy or internal whistle-blowing mechanism. Such protocols
and procedures might allow matters to be reported anonymously through designated channels.
R260.10 Where a professional accountant becomes aware of a matter to which this section applies, the
steps that the accountant takes to comply with this section shall be taken on a timely basis.
For the purpose of taking timely steps, the accountant shall have regard to the nature of the
matter and the potential harm to the interests of the employing organization, investors,
creditors, employees or the general public.
Responsibilities of Senior Professional Accountants in Service
260.11 A1 Senior professional accountants in service ("senior professional accountants") are directors,
officers or senior employees able to exert significant influence over, and make decisions
regarding, the acquisition, deployment and control of the employing organization's human,
financial, technological, physical and intangible resources. There is a greater expectation for
such individuals to take whatever action is appropriate in the public interest to respond to non-
compliance or suspected non-compliance than other professional accountants within the
employing organization. This is because of senior professional accountants' roles, positions
and spheres of influence within the employing organization.
Obtaining an Understanding of the Matter
R260.12 If, in the course of carrying out professional activities, a senior professional accountant
becomes aware of information concerning non-compliance or suspected non-compliance, the
accountant shall obtain an understanding of the matter. This understanding shall include:
(a) The nature of the non-compliance or suspected non-compliance and the circumstances
in which it has occurred or might occur;
(b) The application of the relevant laws and regulations to the circumstances; and
(c) An assessment of the potential consequences to the employing organization, investors,
creditors, employees or the wider public.
260.12 A1 A senior professional accountant is expected to apply knowledge and expertise, and exercise
professional judgment. However, the accountant is not expected to have a level of
44
THE CODE
understanding of laws and regulations greater than that which is required for the accountant's
role within the employing organization. Whether an act constitutes non-compliance is ultimately
a matter to be determined by a court or other appropriate adjudicative body.
260.12 A2 Depending on the nature and significance of the matter, the senior professional accountant
might cause, or take appropriate steps to cause, the matter to be investigated internally. The
accountant might also consult on a confidential basis with others within the employing
organization or Institute, or with legal counsel.
Addressing the Matter
R260.13 If the senior professional accountant identifies or suspects that non-compliance has occurred
or might occur, the accountant shall, subject to paragraph R260.9, discuss the matter with the
accountant's immediate superior, if any. If the accountant's immediate superior appears to be
involved in the matter, the accountant shall discuss the matter with the next higher level of
authority within the employing organization.
260.13 A1 The purpose of the discussion is to enable a determination to be made as to how to address
the matter.
R260.14 The senior professional accountant shall also take appropriate steps to:
(a) Have the matter communicated to those charged with governance;
(b) Comply with applicable laws and regulations, including legal or regulatory provisions
governing the reporting of non-compliance or suspected non-compliance to an
appropriate authority;
(c) Have the consequences of the non-compliance or suspected non-compliance rectified,
remediated or mitigated;
(d) Reduce the risk of re-occurrence; and
(e) Seek to deter the commission of the non-compliance if it has not yet occurred.
260.14 A1 The purpose of communicating the matter to those charged with governance is to obtain their
concurrence regarding appropriate actions to take to respond to the matter and to enable them
to fulfill their responsibilities.
260.14 A2 Some laws and regulations might stipulate a period within which reports of non-compliance or
suspected non-compliance are to be made to an appropriate authority.
R260.15 In addition to responding to the matter in accordance with the provisions of this section, the
senior professional accountant shall determine whether disclosure of the matter to the
employing organization's external auditor, if any, is needed.
260.15 A1 Such disclosure would be pursuant to the senior professional accountant's duty or legal
obligation to provide all information necessary to enable the auditor to perform the audit.
Determining Whether Further Action Is Needed
R260.16 The senior professional accountant shall assess the appropriateness of the response of the
accountant's superiors, if any, and those charged with governance.
260.16 A1 Relevant factors to consider in assessing the appropriateness of the response of the senior
professional accountant's superiors, if any, and those charged with governance include
whether:
45
THE CODE
The response is timely.
They have taken or authorized appropriate action to seek to rectify, remediate or mitigate
the consequences of the non-compliance, or to avert the non-compliance if it has not yet
occurred.
The matter has been disclosed to an appropriate authority where appropriate and, if so,
whether the disclosure appears adequate.
R260.17 In light of the response of the senior professional accountant's superiors, if any, and those
charged with governance, the accountant shall determine if further action is needed in the
public interest.
260.17 A1 The determination of whether further action is needed, and the nature and extent of it, will
depend on various factors, including:
The legal and regulatory framework.
The urgency of the situation.
The pervasiveness of the matter throughout the employing organization.
Whether the senior professional accountant continues to have confidence in the integrity
of the accountant's superiors and those charged with governance.
Whether the non-compliance or suspected non-compliance is likely to recur.
Whether there is credible evidence of actual or potential substantial harm to the interests
of the employing organization, investors, creditors, employees or the general public.
260.17 A2 Examples of circumstances that might cause the senior professional accountant no longer to
have confidence in the integrity of the accountant's superiors and those charged with
governance include situations where:
The accountant suspects or has evidence of their involvement or intended involvement
in any non-compliance.
Contrary to legal or regulatory requirements, they have not reported, or authorized the
reporting of, the matter to an appropriate authority within a reasonable period.
R260.18 The senior professional accountant shall exercise professional judgment in determining the
need for, and nature and extent of, further action. In making this determination, the accountant
shall take into account whether a reasonable and informed third party would be likely to
conclude that the accountant has acted appropriately in the public interest.
260.18 A1 Further action that the senior professional accountant might take includes:
Informing the management of the parent entity of the matter if the employing organization
is a member of a group.
Disclosing the matter to an appropriate authority
Resigning from the employing organization.
260.18 A2 Resigning from the employing organization is not a substitute for taking other actions that might
be needed to achieve the senior professional accountant's objectives under this section.
However, there might be limitations as to the further actions available to the accountant. In
such circumstances, resignation might be the only available course of action.
Seeking Advice
46
THE CODE
260.19 A1 As assessment of the matter might involve complex analysis and judgments, the senior
professional accountant might consider:
Consulting internally.
Obtaining legal advice to understand the accountant's options and the professional or
legal implications of taking any particular course of action.
Consulting on a confidential basis with the Institute.
Determining Whether to Disclose the Matter to an Appropriate Authority
260.20 A1 Disclosure of the matter to an appropriate authority would be precluded if doing so would be
contrary to law or regulation. Otherwise, the purpose of making disclosure is to enable an
appropriate authority to cause the matter to be investigated and action to be taken in the public
interest.
260.20 A2 The determination of whether to make such a disclosure depends in particular on the nature
and extent of the actual or potential harm that is or might be caused by the matter to investors,
creditors, employees or the general public. For example, the senior professional accountant
might determine that disclosure of the matter to an appropriate authority is an appropriate
course of action if:
The employing organization is engaged in bribery (for example, of local or foreign
government officials for purposes of securing large contracts).
The employing organization is regulated and the matter is of such significance as to
threaten its license to operate.
The employing organization is listed on a securities exchange and the matter might result
in adverse consequences to the fair and orderly market in the employing organization's
securities or pose a systemic risk to the financial markets.
It is likely that the employing organization would sell products that are harmful to public
health or safety.
The employing organization is promoting a scheme to its clients to assist them in evading
taxes.
260.20 A3 The determination of whether to make such a disclosure will also depend on external factors
such as:
Whether there is an appropriate authority that is able to receive the information, and
cause the matter to be investigated and action to be taken. The appropriate authority will
depend upon the nature of the matter. For example, the appropriate authority would be
Securities and Exchange Board of India (SEBI) in the case of fraudulent financial
reporting or an environmental protection agency, e.g. Environment Pollution
(Prevention & Control) Authority for National Capital Region of Delhi in the case of a
breach of environmental laws and regulations.
Whether there exists robust and credible protection from civil, criminal or professional
liability or retaliation afforded by legislation or regulation, such as under whistle-blowing
legislation or regulation.
Whether there are actual or potential threats to the physical safety of the senior
professional accountant or other individuals.
47
THE CODE
R260.21 If the senior professional accountant determines that disclosure of the matter to an appropriate
authority is an appropriate course of action in the circumstances, that disclosure is permitted
pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the accountant
shall act in good faith and exercise caution when making statements and assertions.
Imminent Breach
R260.22 In exceptional circumstances, the senior professional accountant might become aware of
actual or intended conduct that the accountant has reason to believe would constitute an
imminent breach of a law or regulation that would cause substantial harm to investors,
creditors, employees or the general public. Having first considered whether it would be
appropriate to discuss the matter with management or those charged with governance of the
employing organization, the accountant shall exercise professional judgment and determine
whether to disclose the matter immediately to an appropriate authority in order to prevent or
mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is
permitted pursuant to paragraph R114.1(d) of the Code.
Documentation
260.23 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this
section, the senior professional accountant is encouraged to have the following matters
documented:
The matter.
The results of discussions with the accountant's superiors, if any, and those charged with
governance and other parties.
How the accountant's superiors, if any, and those charged with governance have
responded to the matter.
The courses of action the accountant considered, the judgments made and the decisions
that were taken.
How the accountant is satisfied that the accountant has fulfilled the responsibility set out
in paragraph R260.17.
Responsibilities of Professional Accountants Other than Senior Professional Accountants
R260.24 If, in the course of carrying out professional activities, a professional accountant becomes
aware of information concerning non-compliance or suspected non-compliance, the
accountant shall seek to obtain an understanding of the matter. This understanding shall include
the nature of the non-compliance or suspected non-compliance and the circumstances in which
it has occurred or might occur.
260.24 A1 The professional accountant is expected to apply knowledge and expertise, and exercise
professional judgment. However, the accountant is not expected to have a level of
understanding of laws and regulations greater than that which is required for the accountant's
role within the employing organization. Whether an act constitutes non-compliance is ultimately
a matter to be determined by a court or other appropriate adjudicative body.
260.24 A2 Depending on the nature and significance of the matter, the professional accountant might
consult on a confidential basis with others within the employing organization or the Institute, or
with legal counsel.
48
THE CODE
R260.25 If the professional accountant identifies or suspects that non-compliance has occurred or might
occur, the accountant shall, subject to paragraph R260.9, inform an immediate superior to
enable the superior to take appropriate action. If the accountant's immediate superior appears
to be involved in the matter, the accountant shall inform the next higher level of authority within
the employing organization.
R260.26 In exceptional circumstances, the professional accountant may determine that disclosure of
the matter to an appropriate authority is an appropriate course of action. If the accountant does
so pursuant to paragraphs 260.20 A2 and A3, that disclosure is permitted pursuant to
paragraph R114.1(d) of the Code. When making such disclosure, the accountant shall act in
good faith and exercise caution when making statements and assertions.
Documentation
260.27 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this
section, the professional accountant is encouraged to have the following matters documented:
The matter.
The results of discussions with the accountant's superior, management and, where
applicable, those charged with governance and other parties.
How the accountant's superior has responded to the matter.
The courses of action the accountant considered, the judgments made and the decisions
that were taken.
49
THE CODE
SECTION 270
PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES
Introduction
270.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
270.2 Pressure exerted on, or by, a professional accountant might create an intimidation or other
threat to compliance with one or more of the fundamental principles. This section sets out
specific requirements and application material relevant to applying the conceptual framework
in such circumstances.
Requirements and Application Material
General
R270.3 A professional accountant shall not:
(a) Allow pressure from others to result in a breach of compliance with the fundamental
principles; or
(b) Place pressure on others that the accountant knows, or has reason to believe, would
result in the other individuals breaching the fundamental principles.
270.3 A1 A professional accountant might face pressure that creates threats to compliance with the
fundamental principles, for example an intimidation threat, when undertaking a professional
activity. Pressure might be explicit or implicit and might come from:
Within the employing organization, for example, from a colleague or superior.
An external individual or organization such as a vendor, customer or lender.
Internal or external targets and expectations.
270.3 A2 Examples of pressure that might result in threats to compliance with the fundamental principles
include:
Pressure related to conflicts of interest:
o Pressure from a family member bidding to act as a vendor to the professional
accountant's employing organization to select the family member over another
prospective vendor.
See also Section 210, Conflicts of Interest.
Pressure to influence preparation or presentation of information:
o Pressure to report misleading financial results to meet investor, analyst or lender
expectations.
o Pressure from elected officials on public sector accountants to misrepresent
programs or projects to voters.
o Pressure from colleagues to misstate income, expenditure or rates of return to
bias decision-making on capital projects and acquisitions.
50
THE CODE
o Pressure from superiors to approve or process expenditures that are not legitimate
business expenses.
o Pressure to suppress internal audit reports containing adverse findings.
See also Section 220, Preparation and Presentation of Information.
Pressure to act without sufficient expertise or due care:
o Pressure from superiors to inappropriately reduce the extent of work performed.
o Pressure from superiors to perform a task without sufficient skills or training or
within unrealistic deadlines.
See also Section 230, Acting with Sufficient Expertise.
Pressure related to financial interests:
o Pressure from superiors, colleagues or others, for example, those who might
benefit from participation in compensation or incentive arrangements to
manipulate performance indicators.
See also Section 240, Financial Interests, Compensation and Incentives Linked to
Financial Reporting and Decision Making.
Pressure related to inducements:
o Pressure from others, either internal or external to the employing organization, to
offer inducements to influence inappropriately the judgment or decision making
process of an individual or organization.
o Pressure from colleagues to accept a bribe or other inducement, for example to
accept inappropriate gifts or entertainment from potential vendors in a bidding
process.
See also Section 250, Inducements, Including Gifts and Hospitality.
Pressure related to non-compliance with laws and regulations:
o Pressure to structure a transaction to evade tax.
See also Section 260, Responding to Non-compliance with Laws and Regulations.
270.3 A3 Factors that are relevant in evaluating the level of threats created by pressure include:
The intent of the individual who is exerting the pressure and the nature and extent of the
pressure.
The application of laws, regulations, and professional standards to the circumstances.
The culture and leadership of the employing organization including the extent to which
they reflect or emphasize the importance of ethical behaviour and the expectation
that employees will act ethically. For example, a corporate culture that tolerates
unethical behaviour might increase the likelihood that the pressure would result in
a threat to compliance with the fundamental principles.
Policies and procedures, if any, that the employing organization has established, such
as ethics or human resources policies that address pressure.
51
THE CODE
270.3 A4 Discussing the circumstances creating the pressure and consulting with others about those
circumstances might assist the professional accountant to evaluate the level of the threat. Such
discussion and consultation, which requires being alert to the principle of confidentiality, might
include:
Discussing the matter with the individual who is exerting the pressure to seek to resolve
it.
Discussing the matter with the accountant's superior, if the superior is not the individual
exerting the pressure.
Escalating the matter within the employing organization, including when appropriate,
explaining any consequential risks to the organization, for example with:
o Higher levels of management.
o Internal or external auditors.
o Those charged with governance.
Disclosing the matter in line with the employing organization's policies, including ethics
and whistleblowing policies, using any established mechanism, such as a confidential
ethics hotline.
Consulting with:
o A colleague, superior, human resources personnel, or another professional
accountant;
o Institute or industry associations; or
o Legal counsel.
270.3 A5 An example of an action that might eliminate threats created by pressure is the professional
accountant's request for a restructure of, or segregation of, certain responsibilities and duties
so that the accountant is no longer involved with the individual or entity exerting the pressure.
Documentation
270.4 A1 The professional accountant is encouraged to document:
The facts.
The communications and parties with whom these matters were discussed.
The courses of action considered.
How the matter was addressed.
52
THE CODE
PART 3 PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE ..............................
Section 300 Applying the Conceptual Framework Professional Accountants in Public Practice
.........................................................................................................
Section 310 Conflicts of Interest ...........................................................................................
Section 320 Professional Appointments ...............................................................................
Section 321 Second Opinions...............................................................................................
Section 330 Fees and Other Types of Remuneration...........................................................
Section 340 Inducements, Including Gifts and Hospitality............................
Section 350 Custody of Client Assets ...................................................................................
Section 360 Responding to Non-Compliance with Laws and Regulations during the course of financial
statement Audit Engagements of Listed Companies.
53
THE CODE
PART 3 PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
SECTION 300
APPLYING THE CONCEPTUAL FRAMEWORK PROFESSIONAL ACCOUNTANTS IN
PUBLIC PRACTICE
Introduction
300.1 This Part of the Code sets out requirements and application material for professional
accountants in public practice when applying the conceptual framework set out in Section 120.
It does not describe all of the facts and circumstances, including professional activities,
interests and relationships, that could be encountered by professional accountants in public
practice, which create or might create threats to compliance with the fundamental principles.
Therefore, the conceptual framework requires professional accountants in public practice to be
alert for such facts and circumstances.
300.2 The requirements and application material that apply to professional accountants in public
practice are set out in:
Part 3 Professional Accountants in Public Pactice, Sections 300 to 399, which applies
to all professional accountants in public practice, whether they provide assurance
services or not.
Independence Standards as follows:
o Part 4A Independence for Audit and Review Engagements, Sections 400 to 899,
which applies to professional accountants in public practice when performing audit
and review engagements.
o Part 4B Independence for Assurance Engagements Other than Audit and
Review Engagements, Sections 900 to 999, which applies to professional
accountants in public practice when performing assurance engagements other
than audit or review engagements.
300.3 In this Part, the term "professional accountant" refers to individual professional accountants in
public practice and their firms.
Requirements and Application Material
General
R300.4 A professional accountant shall comply with the fundamental principles set out in Section 110
and apply the conceptual framework set out in Section 120 to identify, evaluate and address
threats to compliance with the fundamental principles.
R300.5 When dealing with an ethics issue, the professional accountant shall consider the context in
which the issue has arisen or might arise. Where an individual who is a professional accountant
in public practice is performing professional activities pursuant to the accountant's relationship
with the firm, whether as a contractor or employee, the individual shall comply with the
provisions in Part 2 that apply to these circumstances.
300.5 A1 Examples of situations in which the provisions in Part 2 apply to a professional accountant in
public practice include:
54
THE CODE
Facing a conflict of interest when being responsible for selecting a vendor for the firm
when an immediate family member of the accountant might benefit financially from the
contract. The requirements and application material set out in Section 210 apply in
these circumstances.
Preparing or presenting financial information for the accountant's client or firm. The
requirements and application material set out in Section 220 apply in these
circumstances.
Being offered an inducement such as being regularly offered complimentary tickets to
attend sporting events by a supplier of the firm. The requirements and application
material set out in Section 250 apply in these circumstances.
Facing pressure from an engagement partner to report chargeable hours inaccurately
for a client engagement. The requirements and application material set out in Section
270 apply in these circumstances.
Identifying Threats
300.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of
facts and circumstances. The categories of threats are described in paragraph 120.6 A3. The
following are examples of facts and circumstances within each of those categories of threats
that might create threats for a professional accountant when undertaking a professional
service:
(a) Self-interest Threats
A professional accountant having a direct financial interest in a client.
A professional accountant quoting a low fee to obtain a new engagement and the
fee is so low that it might be difficult to perform the professional service in
accordance with applicable technical and professional standards for that price.
A professional accountant having a close business relationship with a client.
A professional accountant having access to confidential information that might be
used for personal gain.
A professional accountant discovering a significant error when evaluating the
results of a previous professional service performed by a member of the
accountant's firm.
(b) Self-review Threats
A professional accountant issuing an assurance report on the effectiveness of the
operation of financial systems after implementing the systems.
A professional accountant having prepared the original data used to generate
records that are the subject matter of the assurance engagement.
(c) Advocacy Threats
A professional accountant promoting the interests of, or shares in, a client.
A professional accountant acting as an advocate on behalf of a client in litigation
or disputes with third parties.
55
THE CODE
A professional accountant lobbying in favor of legislation on behalf of a client.
(d) Familiarity Threats
A professional accountant having a close or immediate family member who is a
director or officer of the client.
A director or officer of the client, or an employee in a position to exert significant
influence over the subject matter of the engagement, having recently served as
the engagement partner.
An audit team member having a long association with the audit client.
(e) Intimidation Threats
A professional accountant being threatened with dismissal from a client
engagement or the firm because of a disagreement about a professional matter.
A professional accountant feeling pressured to agree with the judgment of a client
because the client has more expertise on the matter in question.
A professional accountant being informed that a planned promotion will not occur
unless the accountant agrees with an inappropriate accounting treatment.
A professional accountant having accepted a significant gift from a client and being
threatened that acceptance of this gift will be made public.
Evaluating Threats
300.7 A1 The conditions, policies and procedures described in paragraph 120.6 A1 and 120.8 A2 might
impact the evaluation of whether a threat to compliance with the fundamental principles is at
an acceptable level. Such conditions, policies and procedures might relate to:
(a) The client and its operating environment; and
(b) The firm and its operating environment.
300.7 A2 The professional accountant's evaluation of the level of a threat is also impacted by the nature
and scope of the professional service.
The Client and its Operating Environment
300.7 A3 The professional accountant's evaluation of the level of a threat might be impacted by whether
the client is:
(a) An audit client and whether the audit client is a public interest entity;
(b) An assurance client that is not an audit client; or
(c) A non-assurance client.
For example, providing a non-assurance service to an audit cliet that is a public interest entity
might be perceived to result in a higher level of threat to compliance with the principle of
objectivity with respect to the audit.
300.7 A4 The corporate governance structure, including the leadership of a client might promote
compliance with the fundamental principles. Accordingly, a professional accountant's
56
THE CODE
evaluation of the level of a threat might also be impacted by a client's operating environment.
For example:
The client requires appropriate individuals other than management to ratify or approve
the appointment of a firm to perform an engagement.
The client has competent employees with experience and seniority to make managerial
decisions.
The client has implemented internal procedures that facilitate objective choices in
tendering non-assurance engagements.
The client has a corporate governance structure that provides appropriate oversight and
communications regarding the firm's services.
The Firm and its Operating Environment
300.7 A5 A professional accountant's evaluation of the level of a threat might be impacted by the work
environment within the accountant's firm and its operating environment. For example:
Leadership of the firm that promotes compliance with the fundamental principles and
establishes the expectation that assurance team members will act in the public interest.
Policies or procedures for establishing and monitoring compliance with the fundamental
principles by all personnel.
Compensation, performance appraisal and disciplinary policies and procedures that
promote compliance with the fundamental principles.
Management of the reliance on revenue received from a single client.
The engagement partner having authority within the firm for decisions concerning
compliance with the fundamental principles, including decisions about accepting or
providing services to a client.
Educational, training and experience requirements.
Processes to facilitate and address internal and external concerns or complaints.
Consideration of New Information or Changes in Facts and Circumstances
300.7 A6 New information or changes in facts and circumstances might:
(a) Impact the level of a threat; or
(b) Affect the professional accountant's conclusions about whether safeguards applied
continue to address identified threats as intended.
In these situations, actions that were already implemented as safeguards might no longer be
effective in addressing threats. Accordingly, the application of the conceptual framework
requires that the professional accountant re-evaluate and address the threats accordingly.
(Ref: Paras. R120.9 and R120.10).
300.7 A7 Examples of new information or changes in facts and circumstances that might impact the level
of a threat include:
When the scope of a professional service is expanded.
57
THE CODE
When the client becomes a listed entity or acquires another business unit.
When the firm merges with another firm.
When the professional accountant is jointly engaged by two clients and a dispute
emerges between the two clients.
When there is a change in the professional accountant's personal or immediate family
relationships.
Addressing Threats
300.8 A1 Paragraphs R120.10 to 120.10 A2 set out requirements and application material for addressing
threats that are not at an acceptable level.
Examples of Safeguards
300.8 A2 Safeguards vary depending on the facts and circumstances. Examples of actions that in certain
circumstances might be safeguards to address threats include:
Assigning additional time and qualified personnel to required tasks when an engagement
has been accepted might address a self-interest threat.
Having an appropriate reviewer who was not a member of the team review the work
performed or advise as necessary might address a self-review threat.
Using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client might address self-review,
advocacy or familiarity threats.
Involving another firm to perform or re-perform part of the engagement might address
self-interest, self-review, advocacy, familiarity or intimidation threats.
Separating teams when dealing with matters of a confidential nature might address a
self-interest threat.
300.8 A3 The remaining sections of Part 3 and Independence Standards describe certain threats that
might arise during the course of performing professional services and include examples of
actions that might address threats.
Appropriate Reviewer
300.8 A4 An appropriate reviewer is a professional with the necessary knowledge, skills, experience and
authority to review, in an objective manner, the relevant work performed or service provided.
Such an individual might be a professional accountant.
Communicating with Those Charged with Governance
R300.9 When communicating with those charged with governance in accordance with the Code, a
professional accountant shall determine the appropriate individual(s) within the entity's
governance structure with whom to communicate. If the accountant communicates with a
subgroup of those charged with governance, the accountant shall determine whether
58
THE CODE
communication with all of those charged with governance is also necessary so that they are
adequately informed.
300.9 A1 In determining with whom to communicate, a professional accountant might consider:
(a) The nature and importance of the circumstances; and
(b) The matter to be communicated.
300.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an
individual member of those charged with governance.
R300.10 If a professional accountant communicates with individuals who have management
responsibilities as well as governance responsibilities, the accountant shall be satisfied that
communication with those individuals adequately informs all of those in a governance role with
whom the accountant would otherwise communicate.
300.10 A1 In some circumstances, all of those charged with governance are involved in managing the
entity, for example, a small business where a single owner manages the entity and no one else
has a governance role. In these cases, if matters are communicated to individual(s) with
management responsibilities, and those individual(s) also have governance responsibilities,
the professional accountant has satisfied the requirement to communicate with those charged
with governance.
59
THE CODE
SECTION 310
CONFLICTS OF INTEREST
Introduction
310.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
310.2 A conflict of interest creates threats to compliance with the principle of objectivity and might
create threats to compliance with the other fundamental principles. Such threats might be
created when:
(a) A professional accountant provides a professional service related to a particular matter
for two or more clients whose interests with respect to that matter are in conflict; or
(b) The interests of a professional accountant with respect to a particular matter and the
interests of the client for whom the accountant provides a professional service related to
that matter are in conflict.
310.3 This section sets out specific requirements and application material relevant to applying the
conceptual framework to conflicts of interest. When a professional accountant provides an
audit, review or other assurance service, independence is also required in accordance with
Independence Standards.
Requirements and Application Material
General
R310.4 A professional accountant shall not allow a conflict of interest to compromise professional or
business judgment.
310.4 A1 Examples of circumstances that might create a conflict of interest include:
Providing a transaction advisory service to a client seeking to acquire an audit client,
where the firm has obtained confidential information during the course of the audit that
might be relevant to the transaction.
Providing advice to two clients at the same time where the clients are competing to
acquire the same company and the advice might be relevant to the parties' competitive
positions.
Providing services to a seller and a buyer in relation to the same transaction.
Preparing valuations of assets for two parties who are in an adversarial position with
respect to the assets.
Representing two clients in the same matter who are in a legal dispute with each other,
such as during divorce proceedings, or the dissolution of a partnership.
In relation to a license agreement, providing an assurance report for a licensor on the
royalties due while advising the licensee on the amounts payable.
Advising a client to invest in a business in which, for example, the spouse of the
professional accountant has a financial interest.
Providing strategic advice to a client on its competitive position while having a joint
60
THE CODE
venture or similar interest with a major competitor of the client.
Advising a client on acquiring a business which the firm is also interested in acquiring.
Conflict Identification
General
R310.5 Before accepting a new client relationship, engagement, or business relationship, a
professional accountant shall take reasonable steps to identify circumstances that might create
a conflict of interest, and therefore a threat to compliance with one or more of the fundamental
principles. Such steps shall include identifying:
(a) The nature of the relevant interests and relationships between the parties involved; and
(b) The service and its implication for relevant parties.
310.5 A1 An effective conflict identification process assists a professional accountant when taking
reasonable steps to identify interests and relationships that might create an actual or potential
conflict of interest, both before determining whether to accept an engagement and throughout
the engagement. Such a process includes considering matters identified by external parties,
for example clients or potential clients. The earlier an actual or potential conflict of interest is
identified, the greater the likelihood of the accountant being able to address threats created by
the conflict of interest.
310.5 A2 An effective process to identify actual or potential conflicts of interest will take into account
factors such as:
The nature of the professional services provided.
The size of the firm.
The size and nature of the client base.
The structure of the firm, for example, the number and geographic location of offices.
310.5 A3 More information on client acceptance is set out in Section 320, Professional Appointments.
Changes in Circumstances
R310.6 A professional accountant shall remain alert to changes over time in the nature of services,
interests and relationships that might create a conflict of interest while performing an
engagement.
310.6 A1 The nature of services, interests and relationships might change during the engagement. This
is particularly true when a professional accountant is asked to conduct an engagement in a
situation that might become adversarial, even though the parties who engage the accountant
initially might not be involved in a dispute.
Network Firms
R310.7 If the firm is a member of a network, a professional accountant shall consider conflicts of
interest that the accountant has reason to believe might exist or arise due to interests and
61
THE CODE
relationships of a network firm.
310.7 A1 Factors to consider when identifying interests and relationships involving a network firm
include:
The nature of the professional services provided.
The clients served by the network.
The geographic locations of all relevant parties.
Threats Created by Conflicts of Interest
310.8 A1 In general, the more direct the connection between the professional service and the matter on
which the parties' interests conflict, the more likely the level of the threat is not at an acceptable
level.
310.8 A2 Factors that are relevant in evaluating the level of a threat created by a conflict of interest
include measures that prevent unauthorized disclosure of confidential information when
performing professional services related to a particular matter for two or more clients whose
interests with respect to that matter are in conflict. These measures include:
The existence of separate practice areas for specialty functions within the firm, which
might act as a barrier to the passing of confidential client information between practice
areas.
Policies and procedures to limit access to client files.
Confidentiality agreements signed by personnel and partners of the firm.
Separation of confidential information physically and electronically.
Specific and dedicated training and communication.
310.8 A3 Examples of actions that might be safeguards to address threats created by a conflict of interest
include:
Having separate engagement teams who are provided with clear policies and
procedures on maintaining confidentiality.
Having an appropriate reviewer, who is not involved in providing the service or otherwise
affected by the conflict, review the work performed to assess whether the key judgments
and conclusions are appropriate.
Disclosure and Consent
General
R310.9 A professional accountant shall exercise professional judgment to determine whether the
nature and significance of a conflict of interest are such that specific disclosure and explicit
consent are necessary when addressing the threat created by the conflict of interest.
310.9 A1 Factors to consider when determining whether specific disclosure and explicit consent are
necessary include:
The circumstances creating the conflict of interest.
The parties that might be affected.
62
THE CODE
The nature of the issues that might arise.
The potential for the particular matter to develop in an unexpected manner.
310.9 A2 Disclosure and consent might take different forms, for example:
General disclosure to clients of circumstances where, as is common commercial
practice, the professional accountant does not provide professional services exclusively
to any one client (for example, in a particular professional service and market sector).
This enables the client to provide general consent accordingly. For example, an
accountant might make general disclosure in the standard terms and conditions for the
engagement.
Specific disclosure to affected clients of the circumstances of the particular conflict in
sufficient detail to enable the client to make an informed decision about the matter and
to provide explicit consent accordingly. Such disclosure might include a detailed
presentation of the circumstances and a comprehensive explanation of any planned
safeguards and the risks involved.
Consent might be implied by clients' conduct in circumstances where the professional
accountant has sufficient evidence to conclude that clients know the circumstances at
the outset and have accepted the conflict of interest if they do not raise an objection to
the existence of the conflict.
310.9 A3 It is generally necessary:
(a) To disclose the nature of the conflict of interest and how any threats created were
addressed to clients affected by a conflict of interest; and
(b) To obtain consent of the affected clients to perform the professional services when
safeguards are applied to address the threat.
310.9 A4 If such disclosure or consent is not in writing, the professional accountant is encouraged to
document:
(a) The nature of the circumstances giving rise to the conflict of interest;
(b) The safeguards applied to address the threats when applicable; and
(c) The consent obtained.
When Explicit Consent is Refused
R310.10 If a professional accountant has determined that explicit consent is necessary in accordance
with paragraph R310.9 and the client has refused to provide consent, the accountant shall
either:
(a) End or decline to perform professional services that would result in the conflict of interest;
or
(b) End relevant relationships or dispose of relevant interests to eliminate the threat or
reduce it to an acceptable level.
63
THE CODE
Confidentiality
General
R310.11 A professional accountant shall remain alert to the principle of confidentiality, including when
making disclosures or sharing information within the firm or network and seeking guidance
from third parties.
310.11 A1 Subsection 114 sets out requirements and application material relevant to situations that might
create a threat to compliance with the principle of confidentiality.
When Disclosure to Obtain Consent would Breach Confidentiality
R310.12 When making specific disclosure for the purpose of obtaining explicit consent would result in a
breach of confidentiality, and such consent cannot therefore be obtained, the firm shall only
accept or continue an engagement if:
(a) The firm does not act in an advocacy role for one client in an adversarial position against
another client in the same matter;
(b) Specific measures are in place to prevent disclosure of confidential information between
the engagement teams serving the two clients; and
(c) The firm is satisfied that a reasonable and informed third party would be likely to conclude
that it is appropriate for the firm to accept or continue the engagement because a
restriction on the firm's ability to provide the professional service would produce a
disproportionate adverse outcome for the clients or other relevant third parties.
310.12 A1 A breach of confidentiality might arise, for example, when seeking consent to perform:
A transaction-related service for a client in a hostile takeover of another client of the firm.
A forensic investigation for a client regarding a suspected fraud, where the firm has
confidential information from its work for another client who might be involved in the
fraud.
Documentation
R310.13 In the circumstances set out in paragraph R310.12, the professional accountant shall
document:
(a) The nature of the circumstances, including the role that the accountant is to undertake;
(b) The specific measures in place to prevent disclosure of information between the
engagement teams serving the two clients; and
(c) Why it is appropriate to accept or continue the engagement.
64
THE CODE
SECTION 320
PROFESSIONAL APPOINTMENTS
Introduction
320.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
320.2 Acceptance of a new client relationship or changes in an existing engagement might create a
threat to compliance with one or more of the fundamental principles. This section sets out
specific requirements and application material relevant to applying the conceptual framework
in such circumstances.
Requirements and Application Material
Client and Engagement Acceptance
General
320.3 A1 Threats to compliance with the principles of integrity or professional behaviour might be created,
for example, from questionable issues associated with the client (its owners, management or
activities). Issues that, if known, might create such a threat include client involvement in illegal
activities, dishonesty, questionable financial reporting practices or other unethical behaviour.
320.3 A2 Factors that are relevant in evaluating the level of such a threat include:
Knowledge and understanding of the client, its owners, management and those charged
with governance and business activities.
The client's commitment to address the questionable issues, for example, through
improving corporate governance practices or internal controls.
320.3 A3 A self-interest threat to compliance with the principle of professional competence and due care
is created if the engagement team does not possess, or cannot acquire, the competencies to
perform the professional services.
320.3 A4 Factors that are relevant in evaluating the level of such a threat include:
An appropriate understanding of:
o The nature of the client's business;
o The complexity of its operations;
o The requirements of the engagement; and
o The purpose, nature and scope of the work to be performed.
Knowledge of relevant industries or subject matter.
Experience with relevant regulatory or reporting requirements.
The existence of quality control policies and procedures designed to provide reasonable
assurance that engagements are accepted only when they can be performed
competently.
65
THE CODE
320.3 A5 Examples of actions that might be safeguards to address a self-interest threat include:
Assigning sufficient engagement personnel with the necessary competencies.
Agreeing on a realistic time frame for the performance of the engagement.
Using experts where necessary.
R320. 3 A6 Professional accountants while accepting engagement of attest functions are required to
comply with the "Know Your client" (KYC) Norms of the Institute as under:-
1. Where Client is an individual /proprietor
A. General Information
Name of the Individual
PAN No. or Aadhar Card No. of the Individual
Business Description
Copy of last Audited Financial Statement
B. Engagement Information
Type of Engagement
2. Where Client is a Corporate Entity
A. General Information
Name and Address of the Entity
Business Description
Name of the Parent Company in case of Subsidiary
Copy of last Audited Financial Statement
B. Engagement Information
Type of Engagement
C. Regulatory Information
Company PAN No.
Company Identification No.
Directors' Names & Addresses
Directors' Identification No.
3. Where Client is a Non- Corporate Entity
A. General Information
Name and Address of the Entity
Copy of PAN No.
Business Description
Partner's Names & Addresses (with their PAN/Aadhar Card/DIN No.)
Copy of last Audited Financial Statement
B. Engagement Information
Type of Engagement
Explanation: "Attest Functions" for the purpose of this Announcement will include services pertaining
to Audit, Review, Agreed upon Procedures and Compilation of Financial Statements.
Changes in a Professional Appointment
General
66
THE CODE
R320.4 Subject to compliance with the provisions of Clause (8) of Part-I of First Schedule to The
Chartered Accountants Act, 1949, and Council directions thereunder, a professional
accountant , shall determine whether there are any reasons for not accepting an engagement
when the accountant:
(a) Is asked by a potential client to replace another accountant;
(b) Considers tendering for an engagement held by another accountant; or
(c) Considers undertaking work that is complementary or additional to that of another
accountant.
320.4 A1 There might be reasons for not accepting an engagement. One such reason might be if a threat
created by the facts and circumstances cannot be addressed by applying safeguards. For
example, there might be a self-interest threat to compliance with the principle of professional
competence and due care if a professional accountant accepts the engagement before
knowing all the relevant facts.
320.4 A2 If a professional accountant is asked to undertake work that is complementary or additional to
the work of an existing or predecessor accountant, a self-interest threat to compliance with the
principle of professional competence and due care might be created, for example, as a result
of incomplete information.
320.4 A3 A factor that is relevant in evaluating the level of such a threat is whether tenders state that,
before accepting the engagement, contact with the existing or predecessor accountant will be
requested. This contact gives the proposed accountant the opportunity to inquire whether there
are any reasons why the engagement should not be accepted.
320.4 A4 Examples of actions that might be safeguards to address such a self-interest threat include:
Asking the existing or predecessor accountant to provide any known information of
which, in the existing or predecessor accountant's opinion, the proposed accountant
needs to be aware before deciding whether to accept the engagement. For example,
inquiry might reveal previously undisclosed pertinent facts and might indicate
disagreements with the existing or predecessor accountant that might influence the
decision to accept the appointment.
Obtaining information from other sources such as through inquiries of third parties or
background investigations regarding senior management or those charged with
governance of the client.
Communicating with the Existing or Predecessor Accountant (except in case of Audit, Review, Report or
any other assignment, as may be prescribed by ICAI from time to time to be governed with the provisions
of Clause (8) of Part-I of First Schedule to The Chartered Accountants Act, 1949, and Council directions
thereunder)
320.5 A1 A proposed accountant will usually need the client's permission, preferably in writing, to initiate
discussions with the existing or predecessor accountant.
R320.6 If unable to communicate with the existing or predecessor accountant, the proposed
accountant shall take other reasonable steps to obtain information about any possible threats.
Communicating with the Proposed Accountant
R320.7 When an existing or predecessor accountant is asked to respond to a communication from a
proposed accountant, the existing or predecessor accountant shall:
67
THE CODE
(a) Comply with relevant laws and regulations governing the request; and
(b) Provide any information honestly and unambiguously.
320.7 A1 An existing or predecessor accountant is bound by confidentiality. Whether the existing or
predecessor accountant is permitted or required to discuss the affairs of a client with a
proposed accountant will depend on the nature of the engagement and:
(a) Whether the existing or predecessor accountant has permission from the client for the
discussion; and
(b) The legal and ethics requirements relating to such communications and disclosure,
320.7 A2 Circumstances where a professional accountant is or might be required to disclose confidential
information, or when disclosure might be appropriate, are set out in paragraph 114.1 A1 of the
Code.
Changes in Audit or Review Appointments
R320.8 Subject to provisions of Clause (8) of Part I of First Schedule of the Chartered Accountants
Act, 1949, and Council directions thereunder, in the case of an audit or review of financial
statements, a professional accountant shall request the existing or predecessor accountant
to provide known information regarding any facts or other information of which, in the
existing or predecessor accountant's opinion, the proposed accountant needs to be aware
before deciding whether to accept the engagement.
The existing or predecessor accountant shall provide the information honestly and
unambiguously
Client and Engagement Continuance
R320.9 For a recurring client engagement, a professional accountant shall periodically review whether
to continue with the engagement.
320.9 A1 Potential threats to compliance with the fundamental principles might be created after
acceptance which, had they been known earlier, would have caused the professional
accountant to decline the engagement. For example, a self-interest threat to compliance with
the principle of integrity might be created by improper earnings management or balance sheet
valuations.
Using the Work of an Expert
R320.10 When a professional accountant intends to use the work of an expert, the accountant shall
determine whether the use is warranted.
320.10 A1 Factors to consider when a professional accountant intends to use the work of an expert
include the reputation and expertise of the expert, the resources available to the expert, and
the professional and ethics standards applicable to the expert. This information might be
gained from prior association with the expert or from consulting others.
68
THE CODE
SECTION 321
SECOND OPINIONS
Introduction
321.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
321.2 Providing a second opinion to an entity that is not an existing client might create a self-interest
or other threat to compliance with one or more of the fundamental principles. This section sets
out specific requirements and application material relevant to applying the conceptual
framework in such circumstances.
Requirements and Application Material
General
321.3 A1 A professional accountant might be asked to provide a second opinion on the application of
accounting, auditing, reporting or other standards or principles to (a) specific circumstances,
or (b) transactions by or on behalf of a company or an entity that is not an existing client. A
threat, for example, a self-interest threat to compliance with the principle of professional
competence and due care, might be created if the second opinion is not based on the same
facts that the existing or predecessor accountant had, or is based on inadequate evidence.
321.3 A2 A factor that is relevant in evaluating the level of such a self-interest threat is the circumstances
of the request and all the other available facts and assumptions relevant to the expression of
a professional judgment.
321.3 A3 Examples of actions that might be safeguards to address such a self-interest threat include:
With the client's permission, obtaining information from the existing or predecessor
accountant.
Describing the limitations surrounding any opinion in communications with the client.
Providing the existing or predecessor accountant with a copy of the opinion.
When Permission to Communicate is Not Provided
R321.4 If an entity seeking a second opinion from a professional accountant will not permit the
accountant to communicate with the existing or predecessor accountant, the accountant shall
determine whether the accountant may provide the second opinion sought.
69
THE CODE
SECTION 330
FEES AND OTHER TYPES OF REMUNERATION
Introduction
330.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
330.2 The level and nature of fee and other remuneration arrangements might create a self-interest
threat to compliance with one or more of the fundamental principles. This section sets out
specific application material relevant to applying the conceptual framework in such
circumstances.
Application Material
Level of Fees
330.3 A1 The level of fees quoted might impact a professional accountant's ability to perform
professional services in accordance with professional standards.
330.3 A2 A professional accountant might quote whatever fee is considered appropriate. Quoting a fee
lower than another accountant is not in itself unethical. However, the level of fees quoted
creates a self-interest threat to compliance with the principle of professional competence and
due care if the fee quoted is so low that it might be difficult to perform the engagement in
accordance with applicable technical and professional standards.
330.3 A3 Factors that are relevant in evaluating the level of such a threat include:
Whether the client is aware of the terms of the engagement and, in particular, the basis
on which fees are charged and which professional services the quoted fee covers.
Whether the level of the fee is set by an independent third party such as a regulatory
body.
330.3 A4 Examples of actions that might be safeguards to address such a self-interest threat include:
Adjusting the level of fees or the scope of the engagement.
Having an appropriate reviewer review the work performed.
Contingent Fees
330.4 The fees which are based on a percentage of profits or which are contingent upon the
findings, or results of such work, is not allowed except in cases which are permitted under
Regulation 192 of The Chartered Accountants Regulations, 1988.
Referral Fees or Commissions
330.5 A1 A self-interest threat to compliance with the principles of objectivity and professional
competence and due care is created if a professional accountant pays or receives a referral
fee or receives a commission relating to a client. Such referral fees or commissions include,
for example:
A fee paid to another professional accountant for the purposes of obtaining new client
work when the client continues as a client of the existing accountant but requires
70
THE CODE
specialist services not offered by that accountant.
A fee received for referring a continuing client to another professional accountant or other
expert where the existing accountant does not provide the specific professional service
required by the client.
330.5 A2 Examples of actions that might be safeguards to address such a self-interest threat include:
Disclosing to clients any referral fees or commission arrangements paid to, or received
from, another professional accountant for recommending services might address a
self-interest threat.
Purchase or Sale of a Firm
330.6 A1 In accordance with the Council guidelines, sale of goodwill is permissible only after the death
of the proprietor of the Firm, in accordance with the prescribed procedure
71
THE CODE
SECTION 340
INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY
Introduction
340.1 Professional accountants are required to comply with the fundamental principles and
apply the conceptual framework set out in Section 120 to identify, evaluate and address
threats.
340.2 Offering or accepting inducements might create a self-interest, familiarity or intimidation
threat to compliance with the fundamental principles, particularly the principles of integrity,
objectivity and professional behaviour.
340.3 This section sets out requirements and application material relevant to applying the
conceptual framework in relation to the offering and accepting of inducements when
performing professional services that does not constitute non-compliance with laws and
regulations. This section also requires a professional accountant to comply with relevant
laws and regulations when offering or accepting inducements.
Requirements and Application Material
General
340.4 A1 An inducement is an object, situation, or action that is used as a means to influence
another individual's behaviour, but not necessarily with the intent to improperly influence
that individual's behaviour. Inducements can range from minor acts of hospitality
between professional accountants and existing or prospective clients to acts that result
in non-compliance with laws and regulations. An inducement can take many different
forms, for example:
Gifts.
Hospitality.
Entertainment.
Political or charitable donations.
Appeals to friendship and loyalty.
Employment or other commercial opportunities.
Preferential treatment, rights or privileges.
Inducements Prohibited by Laws and Regulations
R340.5 The professional accountant shall obtain an understanding of relevant laws and
regulations, if any, and comply with them when the accountant encounters such
circumstances.
Inducements Not Prohibited by Laws and Regulations
340.6 A1 The offering or accepting of inducements that is not prohibited by laws and regulations
might still create threats to compliance with the fundamental principles.
Inducements with Intent to Improperly Influence Behaviour
72
THE CODE
R340.7 A professional accountant shall not offer, or encourage others to offer, any inducement
that is made, or which the accountant considers a reasonable and informed third party
would be likely to conclude is made, with the intent to improperly influence the behaviour
of the recipient or of another individual.
R340.8 A professional accountant shall not accept, or encourage others to accept, any
inducement that the accountant concludes is made, or considers a reasonable and
informed third party would be likely to conclude is made, with the intent to improperly
influence the behaviour of the recipient or of another individual.
340.9 A1 An inducement is considered as improperly influencing an individual's behaviour if it
causes the individual to act in an unethical manner. Such improper influence can be
directed either towards the recipient or towards another individual who has some
relationship with the recipient. The fundamental principles are an appropriate frame of
reference for a professional accountant in considering what constitutes unethical
behaviour on the part of the accountant and, if necessary by analogy, other individuals.
340.9 A2 A breach of the fundamental principle of integrity arises when a professional accountant
offers or accepts, or encourages others to offer or accept, an inducement where the
intent is to improperly influence the behaviour of the recipient or of another individual.
340.9 A3 The determination of whether there is actual or perceived intent to improperly influence
behaviour requires the exercise of professional judgment. Relevant factors to consider
might include:
The nature, frequency, value and cumulative effect of the inducement.
Timing of when the inducement is offered relative to any action or decision that it
might influence.
Whether the inducement is a customary or cultural practice in the circumstances,
for example, offering a gift on the occasion of a religious holiday or wedding.
Whether the inducement is an ancillary part of a professional service, for example,
offering or accepting lunch in connection with a business meeting.
Whether the offer of the inducement is limited to an individual recipient or available
to a broader group. The broader group might be internal or external to the firm, such
as other suppliers to the client.
The roles and positions of the individuals at the firm or the client offering or being
offered the inducement.
Whether the professional accountant knows, or has reason to believe, that accepting
the inducement would breach the policies and procedures of the client.
The degree of transparency with which the inducement is offered.
Whether the inducement was required or requested by the recipient.
The known previous behaviour or reputation of the offeror.
Consideration of Further Actions
340.10 A1 If the professional accountant becomes aware of an inducement offered with actual or
perceived intent to improperly influence behaviour, threats to compliance with the
fundamental principles might still be created even if the requirements in paragraphs
73
THE CODE
R340.7 and R340.8 are met.
340.10 A2 Examples of actions that might be safeguards to address such threats include:
Informing senior management of the firm or those charged with governance of the
client regarding the offer.
Amending or terminating the business relationship with the client.
Inducements with No Intent to Improperly Influence Behaviour
340.11 A1 The requirements and application material set out in the conceptual framework apply
when a professional accountant has concluded there is no actual or perceived intent to
improperly influence the behaviour of the recipient or of another individual.
340.11 A2 If such an inducement is trivial and inconsequential, any threats created will be at an
acceptable level.
340.11 A3 Examples of circumstances where offering or accepting such an inducement might
create threats even if the professional accountant has concluded there is no actual or
perceived intent to improperly influence behaviour include:
Self-interest threats
o A professional accountant is offered hospitality from the prospective acquirer of
a client while providing corporate finance services to the client.
Familiarity threats
o A professional accountant regularly takes an existing or prospective client to
sporting events.
Intimidation threats
o A professional accountant accepts hospitality from a client, the nature of which
could be perceived to be inappropriate were it to be publicly disclosed.
340.11 A4 Relevant factors in evaluating the level of such threats created by offering or accepting
such an inducement include the same factors set out in paragraph 340.9 A3 for
determining intent.
340.11 A5 Examples of actions that might eliminate threats created by offering or accepting such
an inducement include:
Declining or not offering the inducement.
Transferring responsibility for the provision of any professional services to the client
to another individual who the professional accountant has no reason to believe
would be, or would be perceived to be, improperly influenced when providing the
services.
340.11 A6 Examples of actions that might be safeguards to address such threats created by
offering or accepting such an inducement include:
Being transparent with senior management of the firm or of the client about offering
or accepting an inducement.
Registering the inducement in a log monitored by senior management of the firm or
74
THE CODE
another individual responsible for the firm's ethics compliance or maintained by the
client.
Having an appropriate reviewer, who is not otherwise involved in providing the
professional service, review any work performed or decisions made by the
professional accountant with respect to the client from which the accountant
accepted the inducement.
Donating the inducement to charity after receipt and appropriately disclosing the
donation, for example, to a member of senior management of the firm or the
individual who offered the inducement.
Reimbursing the cost of the inducement, such as hospitality, received.
As soon as possible, returning the inducement, such as a gift, after it was initially
accepted.
Immediate or Close Family Members
R340.12 A professional accountant shall remain alert to potential threats to the accountant's
compliance with the fundamental principles created by the offering of an inducement:
(a) By an immediate or close family member of the accountant to an existing or
prospective client of the accountant.
(b) To an immediate or close family member of the accountant by an existing or
prospective client of the accountant.
R340.13 Where the professional accountant becomes aware of an inducement being offered to or
made by an immediate or close family member and concludes there is intent to
improperly influence the behaviour of the accountant or of an existing or prospective
client of the accountant, or considers a reasonable and informed third party would be
likely to conclude such intent exists, the accountant shall advise the immediate or close
family member not to offer or accept the inducement.
340.13 A1 The factors set out in paragraph 340. 9 A3 are relevant in determining whether there is
actual or perceived intent to improperly influence the behaviour of the professional
accountant or of the existing or prospective client. Another factor that is relevant is the
nature or closeness of the relationship, between:
(a) The accountant and the immediate or close family member;
(b) The immediate or close family member and the existing or prospective client; and
(c) The accountant and the existing or prospective client.
For example, the offer of employment, outside of the normal recruitment process, to the
spouse of the accountant by a client for whom the accountant is providing a business
valuation for a prospective sale might indicate such intent.
340.13 A2 The application material in paragraph 340.10 A2 is also relevant in addressing threats that
might be created when there is actual or perceived intent to improperly influence the
behavior of the professional accountant, or of the existing or prospective client even if the
immediate or close family member has followed the advice given pursuant to paragraph
R340.13.
Application of the Conceptual Framework
75
THE CODE
340.14 A1 Where the professional accountant becomes aware of an inducement offered in the
circumstances addressed in paragraph R340.12, threats to compliance with the
fundamental principles might be created where:
(a) The immediate or close family member offers or accepts the inducement
contrary to the advice of the accountant pursuant to paragraph R340.13; or
(b) The accountant does not have reason to believe an actual or perceived intent to
improperly influence the behaviour of the accountant or of the existing or
prospective client exists.
340.14 A2 The application material in paragraphs 340.11 A1 to 340.11 A6 is relevant for the
purposes of identifying, evaluating and addressing such threats. Factors that are relevant
in evaluating the level of threats in these circumstances also include the nature or
closeness of the relationships set out in paragraph 340.13 A1.
Other Considerations
340.15 A1 If a professional accountant encounters or is made aware of inducements that might
result in non-compliance or suspected non-compliance with laws and regulations by a
client or individuals working for or under the direction of the client, the requirements and
application material in Section 360 apply.
340.15 A2 If a firm, network firm or an audit team member is being offered gifts or hospitality from an
audit client, the requirement and application material set out in Section 420 apply.
340.15 A3 If a firm or an assurance team member is being offered gifts or hospitality from an
assurance client, the requirement and application material set out in Section 906 apply.
76
THE CODE
SECTION 350
CUSTODY OF CLIENT ASSETS
Introduction
350.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
350.2 Holding client assets creates a self-interest or other threat to compliance with the principles of
professional behaviour and objectivity. This section sets out specific requirements and
application material relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
Before Taking Custody
R350.3 A professional accountant shall not assume custody of client money or other assets unless
permitted to do so by law and in accordance with any conditions under which such custody
may be taken.
R350.4 As part of client and engagement acceptance procedures related to assuming custody of client
money or assets, a professional accountant shall:
(a) Make inquiries about the source of the assets; and
(b) Consider related legal and regulatory obligations.
350.4 A1 Inquiries about the source of client assets might reveal, for example, that the assets were
derived from illegal activities, such as money laundering. In such circumstances, a threat would
be created and the provisions of Section 360 would apply.
After Taking Custody
R350.5 A professional accountant entrusted with money or other assets belonging to others shall:
(a) Comply with the laws and regulations relevant to holding and accounting for the assets;
(b) Keep the assets separately from personal or firm assets;
(c) Use the assets only for the purpose for which they are intended; and
(d) Be ready at all times to account for the assets and any income, dividends, or gains
generated, to any individuals entitled to that accounting.
77
THE CODE
SECTION 360
RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS DURING
THE COURSE OF FINANCIAL STATEMENT AUDIT ENGAGEMENTS OF LISTED
COMPANIES
Introduction
360.1 Professional accountants are required to comply with the fundamental principles and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats.
360.2 A self-interest or intimidation threat to compliance with the principles of integrity and
professional behaviour is created when a professional accountant becomes aware of
non- compliance or suspected non-compliance with laws and regulations.
360.3 A professional accountant might encounter or be made aware of non-compliance or suspected
non-compliance during the course of Financial Statement Audit Engagements of Listed Companies. This
section guides the accountant in assessing the implications of the matter and the possible
courses of action when responding to non-compliance or suspected non-compliance with:
(a) Laws and regulations generally recognized to have a direct effect on the determination
of material amounts and disclosures in the client's financial statements; and
(b) Other laws and regulations that do not have a direct effect on the determination of the
amounts and disclosures in the client's financial statements, but compliance with which
might be fundamental to the operating aspects of the client's business, to its ability to
continue its business, or to avoid material penalties.
Objectives of the Professional Accountant in Relation to Non-compliance with Laws and
Regulations
360.4 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to
act in the public interest. When responding to non-compliance or suspected non-compliance,
the objectives of the professional accountant are:
(a) To comply with the principles of integrity and professional behaviour;
(b) By alerting management or, where appropriate, those charged with governance of the
client, to seek to:
(i) Enable them to rectify, remediate or mitigate the consequences of the identified or
suspected non-compliance; or
(ii) Deter the commission of the non-compliance where it has not yet occurred; and
(c) To take such further action as appropriate in the public interest.
Requirements and Application Material
General
360.5 A1 Non-compliance with laws and regulations ("non-compliance") comprises acts of omission or
commission, intentional or unintentional, which are contrary to the prevailing laws or
regulations committed by the following parties:
(a) A client;
(b) Those charged with governance of a client;
78
THE CODE
(c) Management of a client; or
(d) Other individuals working for or under the direction of a client.
360.5 A2 Examples of laws and regulations which this section addresses include those that deal
with:
Fraud, corruption and bribery.
Money laundering, terrorist financing and proceeds of crime.
Securities markets and trading.
Banking and other financial products and services.
Data protection.
Tax and pension liabilities and payments.
Environmental protection.
Public health and safety.
360.5 A3 Non-compliance might result in fines, litigation or other consequences for the client,
potentially materially affecting its financial statements. Importantly, such non-
compliance might have wider public interest implications in terms of potentially
substantial harm to investors, creditors, employees or the general public. For the
purposes of this section, an act that causes substantial harm is one that results in
serious adverse consequences to any of these parties in financial or non-financial
terms. Examples include the perpetration of a fraud resulting in significant financial
losses to investors, and breaches of environmental laws and regulations endangering
the health or safety of employees or the public.
R360.6 When encountering such non-compliance or suspected non-compliance, the accountant
shall obtain an understanding of legal or regulatory provisions governing such non-
compliance or suspected non-compliance, and comply with them, including:
(a) Any requirement to report the matter to an appropriate authority; and
(b) Any prohibition on alerting the client.
360.6 A1 A prohibition on alerting the client might arise, for example, pursuant to anti-money
laundering legislation.
360.7 A1 This section applies to financial statement audit engagements of public interest entities.
360.7 A2 A professional accountant who encounters or is made aware of matters that are
clearly inconsequential is not required to comply with this section. Whether a
matter is clearly inconsequential is to be judged with respect to its nature and its impact,
financial or otherwise, on the client, its stakeholders and the general public.
360.7 A3 This section does not address:
(a) Personal misconduct unrelated to the business activities of the client; and
(b) Non-compliance by parties other than those specified in paragraph 360.5 A1.
The accountant might nevertheless find the guidance in this section helpful in
considering how to respond in these situations.
79
THE CODE
Responsibilities of Management and Those Charged with Governance
360.8 A1 Management, with the oversight of those charged with governance, is responsible for
ensuring that the client's business activities are conducted in accordance with laws
and regulations. Management and those charged with governance are also
responsible for identifying and addressing any non-compliance by:
(a) The client;
(b) An individual charged with governance of the entity;
(c) A member of management; or
(d) Other individuals working for or under the direction of the client.
Responsibilities of the Professional Accountant
R360.9 Where a professional accountant becomes aware of a matter to which this section applies,
the steps that the accountant takes to comply with this section shall be taken on a timely
basis. In taking timely steps, the accountant shall have regard to the nature of the
matter and the potential harm to the interests of the entity, investors, creditors,
employees or the general public.
Obtaining an Understanding of the Matter
R360.10 If a professional accountant engaged to perform an audit of financial statements
becomes aware of information concerning non-compliance or suspected non-
compliance, the accountant shall obtain an understanding of the matter. This
understanding shall include the nature of the non-compliance or suspected non-
compliance and the circumstances in which it has occurred or might occur.
360.10 A1 The professional accountant might become aware of the non-compliance or suspected
non- compliance in the course of performing the engagement or through information
provided by other parties.
360.10 A2 The professional accountant is expected to apply knowledge and expertise, and
exercise professional judgment. However, the accountant is not expected to have a level
of knowledge of laws and regulations greater than that which is required to
undertake the engagement. Whether an act constitutes non-compliance is ultimately a
matter to be determined by a court or other appropriate adjudicative body.
360.10 A3 Depending on the nature and significance of the matter, the professional accountant
might consult on a confidential basis with others within the firm, a network firm or the
Institute or with legal counsel.
R360.11 If the professional accountant identifies or suspects that non-compliance has occurred or
might occur, the accountant shall discuss the matter with the appropriate level of
management and, where appropriate, those charged with governance.
360.11 A1 The purpose of the discussion is to clarify the professional accountant's understanding of
the facts and circumstances relevant to the matter and its potential consequences. The
discussion also might prompt management or those charged with governance to
investigate the matter.
360.11 A2 The appropriate level of management with whom to discuss the matter is a
question of professional judgment. Relevant factors to consider include:
80
THE CODE
The nature and circumstances of the matter.
The individuals actually or potentially involved.
The likelihood of collusion.
The potential consequences of the matter.
Whether that level of management is able to investigate the matter and take
appropriate action.
360.11 A3 The appropriate level of management is usually at least one level above the
individual or individuals involved or potentially involved in the matter. In the context
of a group, the appropriate level might be management at an entity that controls the
client.
360.11 A4 The professional accountant might also consider discussing the matter with internal
auditors, where applicable.
R360.12 If the professional accountant believes that management is involved in the non-
compliance or suspected non-compliance, the accountant shall discuss the matter with
those charged with governance.
Addressing the Matter
R360.13 In discussing the non-compliance or suspected non-compliance with management and,
where appropriate, those charged with governance, the professional accountant shall
advise them to take appropriate and timely actions, if they have not already done so, to:
(a) Rectify, remediate or mitigate the consequences of the non-compliance;
(b) Deter the commission of the non-compliance where it has not yet occurred; or
(c) Disclose the matter to an appropriate authority where required by law or
regulation or where considered necessary in the public interest.
R360.14 The professional accountant shall consider whether management and those charged
with governance understand their legal or regulatory responsibilities with respect to
the non- compliance or suspected non-compliance.
360.14 A1 If management and those charged with governance do not understand their legal or
regulatory responsibilities with respect to the matter, the professional accountant might
suggest appropriate sources of information or recommend that they obtain legal advice.
R360.15 The professional accountant shall comply with applicable:
(a) Laws and regulations, including legal or regulatory provisions governing the
reporting of non-compliance or suspected non-compliance to an appropriate
authority; and
(b) Requirements under auditing standards, including those relating to:
Identifying and responding to non-compliance, including fraud.
Communicating with those charged with governance.
Considering the implications of the non-compliance or suspected non-
compliance for the auditor's report.
360.15 A1 Some laws and regulations might stipulate a period within which reports of non-
81
THE CODE
compliance or suspected non-compliance are to be made to an appropriate authority.
Communication with Respect to Groups
R360.16 Where a professional accountant becomes aware of non-compliance or suspected
non- compliance in relation to a component of a group in either of the following two
situations, the accountant shall communicate the matter to the group engagement
partner unless prohibited from doing so by law or regulation:
(a) The accountant is, for purposes of an audit of the group financial statements,
requested by the group engagement team to perform work on financial
information related to the component; or
(b) The accountant is engaged to perform an audit of the component's financial
statements for purposes other than the group audit, for example, a statutory audit.
The communication to the group engagement partner shall be in addition to responding to
the matter in accordance with the provisions of this section.
360.16 A1 The purpose of the communication is to enable the group engagement partner to be
informed about the matter and to determine, in the context of the group audit, whether
and, if so, how to address it in accordance with the provisions in this section. The
communication requirement in paragraph R360.16 applies regardless of whether the
group engagement partner's firm or network is the same as or different from the
professional accountant's firm or network.
R360.17 Where the group engagement partner becomes aware of non-compliance or suspected
non- compliance in the course of an audit of group financial statements, the group
engagement partner shall consider whether the matter might be relevant to one or more
components:
(a) Whose financial information is subject to work for purposes of the audit of the
group financial statements; or
(b) Whose financial statements are subject to audit for purposes other than the group
audit, for example, a statutory audit.
This consideration shall be in addition to responding to the matter in the context of the
group audit in accordance with the provisions of this section.
R360.18 If the non-compliance or suspected non-compliance might be relevant to one or more of
the components specified in paragraph R360.17(a) and (b), the group engagement
partner shall take steps to have the matter communicated to those performing work at
the components, unless prohibited from doing so by law or regulation. If necessary,
the group engagement partner shall arrange for appropriate inquiries to be made
(either of management or from publicly available information) as to whether the relevant
component(s) specified in paragraph R360.17(b) is subject to audit and, if so, to ascertain
to the extent practicable the identity of the auditor.360.18 A1 The purpose of the
communication is to enable those responsible for work at the components to be informed
about the matter and to determine whether and, if so, how to address it in accordance
with the provisions in this section. The communication requirement applies regardless
of whether the group engagement partner's firm or network is the same as or different
from the firms or networks of those performing work at the components.
82
THE CODE
Determining Whether Further Action Is Needed
R360.19 The professional accountant shall assess the appropriateness of the response of
management and, where applicable, those charged with governance.
360.19 A1 Relevant factors to consider in assessing the appropriateness of the response of
management and, where applicable, those charged with governance include whether:
The response is timely.
The non-compliance or suspected non-compliance has been adequately
investigated.
Action has been, or is being, taken to rectify, remediate or mitigate the
consequences of any non-compliance.
Action has been, or is being, taken to deter the commission of any non-
compliance where it has not yet occurred.
Appropriate steps have been, or are being, taken to reduce the risk of re-
occurrence, for example, additional controls or training.
The non-compliance or suspected non-compliance has been disclosed to an
appropriate authority where appropriate and, if so, whether the disclosure appears
adequate.
R360.20 In light of the response of management and, where applicable, those charged with
governance, the professional accountant shall determine if further action is needed in the
public interest.
360.20 A1 The determination of whether further action is needed, and the nature and extent of it,
will depend on various factors, including:
The legal and regulatory framework.
The urgency of the situation.
The pervasiveness of the matter throughout the client.
Whether the professional accountant continues to have confidence in the
integrity of management and, where applicable, those charged with governance.
Whether the non-compliance or suspected non-compliance is likely to recur.
Whether there is credible evidence of actual or potential substantial harm to the
interests of the entity, investors, creditors, employees or the general public.
360.20 A2 Examples of circumstances that might cause the professional accountant no longer to
have confidence in the integrity of management and, where applicable, those charged
with governance include situations where:
The accountant suspects or has evidence of their involvement or intended
involvement in any non-compliance.
The accountant is aware that they have knowledge of such non-compliance
and, contrary to legal or regulatory requirements, have not reported, or
authorized the reporting of, the matter to an appropriate authority within a
reasonable period.
R360.21 The professional accountant shall exercise professional judgment in determining the
83
THE CODE
need for, and nature and extent of, further action. In making this determination, the
accountant shall take into account whether a reasonable and informed third party
would be likely to conclude that the accountant has acted appropriately in the public
interest.
360.21 A1 Further action that the professional accountant might take includes:
Disclosing the matter to an appropriate authority
Withdrawing from the engagement and the professional relationship where
permitted by law or regulation.
360.21 A2 Withdrawing from the engagement and the professional relationship is not a substitute
for taking other actions that might be needed to achieve the professional accountant's
objectives under this section. However, there might be limitations as to the further
actions available to the accountant. In such circumstances, withdrawal might be the
only available course of action.
R360.22 Where the professional accountant has withdrawn from the professional relationship
pursuant to paragraphs R360.20 and 360.21 A1, the accountant shall, on request by
the proposed accountant pursuant to paragraph R320.8, provide all relevant facts
and other information concerning the identified or suspected non-compliance to the
proposed accountant.
360.22 A1 The facts and other information to be provided are those that, in the predecessor
accountant's opinion, the proposed accountant needs to be aware of before deciding
whether to accept the audit appointment. Section 320 addresses communications from
proposed accountants.
360.23 A1 As assessment of the matter might involve complex analysis and judgments, the
professional accountant might consider:
Consulting internally.
Obtaining legal advice to understand the accountant's options and the
professional or legal implications of taking any particular course of action.
Consulting on a confidential basis with the Institute.
Determining Whether to Disclose the Matter to an Appropriate Authority
360.24 A1 Disclosure of the matter to an appropriate authority would be precluded if doing so
would be contrary to law or regulation. Otherwise, the purpose of making disclosure
is to enable an appropriate authority to cause the matter to be investigated and action to
be taken in the public interest.
360.24 A2 The determination of whether to make such a disclosure depends in particular on the
nature and extent of the actual or potential harm that is or might be caused by the matter
to investors, creditors, employees or the general public. For example, the professional
accountant might determine that disclosure of the matter to an appropriate authority is
an appropriate course of action if:
The entity is engaged in bribery (for example, of local or foreign government
officials for purposes of securing large contracts).
The entity is regulated and the matter is of such significance as to threaten its
license to operate.
84
THE CODE
The entity is listed on a securities exchange and the matter might result in
adverse consequences to the fair and orderly market in the entity's securities or
pose a systemic risk to the financial markets.
It is likely that the entity would sell products that are harmful to public health or
safety.
The entity is promoting a scheme to its clients to assist them in evading taxes.
360.24 A3 The determination of whether to make such a disclosure will also depend on external
factors such as:
Whether there is an appropriate authority that is able to receive the information,
and cause the matter to be investigated and action to be taken. The appropriate
authority will depend on the nature of the matter. For example, the appropriate
authority would be a Securities and Exchange Board of India (SEBI) in the case of
fraudulent financial reporting or an environmental protection agency e.g.
Environment Pollution (Prevention & Control) Authority for National Capital Region
of Delhi in the case of a breach of environmental laws and regulations.
Whether there exists robust and credible protection from civil, criminal or
professional liability or retaliation afforded by legislation or regulation, such as
under whistle-blowing legislation or regulation.
Whether there are actual or potential threats to the physical safety of the
professional accountant or other individuals.
R360.25 If the professional accountant determines that disclosure of the non-compliance or
suspected non-compliance to an appropriate authority is an appropriate course of
action in the circumstances, that disclosure is permitted pursuant to paragraph
R114.1(d) of the Code. When making such disclosure, the accountant shall act in good
faith and exercise caution when making statements and assertions. The accountant shall
also consider whether it is appropriate to inform the client of the accountant's intentions
before disclosing the matter.
Imminent Breach
R360.26 In exceptional circumstances, the professional accountant might become aware of
actual or intended conduct that the accountant has reason to believe would constitute
an imminent breach of a law or regulation that would cause substantial harm to
investors, creditors, employees or the general public. Having first considered whether it
would be appropriate to discuss the matter with management or those charged with
governance of the entity, the accountant shall exercise professional judgment and
determine whether to disclose the matter immediately to an appropriate authority in
order to prevent or mitigate the consequences of such imminent breach.
Documentation
R360.27 In relation to non-compliance or suspected non-compliance that falls within the scope of
this section, the professional accountant shall document:
How management and, where applicable, those charged with governance have
responded to the matter.
The courses of action the accountant considered, the judgments made and the
85
THE CODE
decisions that were taken, having regard to the reasonable and informed third
party test.
How the accountant is satisfied that the accountant has fulfilled the responsibility set
out in paragraph R360.20.
360.27 A1 This documentation is in addition to complying with the documentation requirements
under applicable auditing standards. SAs, for example, require a professional accountant
performing an audit of financial statements to:
Prepare documentation sufficient to enable an understanding of significant
matters arising during the audit, the conclusions reached, and significant
professional judgments made in reaching those conclusions;
Document discussions of significant matters with management, those charged
with governance, and others, including the nature of the significant matters
discussed and when and with whom the discussions took place; and
Document identified or suspected non-compliance, and the results of discussion
with management and, where applicable, those charged with governance and
other parties outside the entity.
86
THE CODE
PART 4A INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS.....................
Section 400 Applying the Conceptual Framework to Independence for
Audit and Review Engagements..............................................................................
Section 410 Fees ..................................................................................................................
Section 411 Compensation and Evaluation Policies.............................................................
Section 420 Gifts and Hospitality.................................................................
Section 430 Actual or Threatened Litigation .........................................................................
Section 510 Financial Interests .............................................................................................
Section 511 Loans and Guarantees......................................................................................
Section 520 Business Relationships .....................................................................................
Section 521 Family and Personal Relationships...................................................................
Section 522 Recent Service with an Audit Client .................................................................
Section 523 Serving as a Director or Officer of an Audit Client ............................................
Section 524 Employment with an Audit Client ......................................................................
Section 525 Temporary Personnel Assignments ..................................................................
Section 540 Long Association of Personnel (Including Partner Rotation) with an Audit
Client...................................................................................................
Section 550 Auditor Rotation ..................................................................
Section 600 Provision of Non-Assurance Services to an Audit Client ..................................
Subsection 601 Accounting and Bookkeeping Services.......................................
Subsection 602 Administrative Services ...............................................................
Subsection 603 Valuation Services.......................................................................
Subsection 604 Tax Services ................................................................................
Subsection 605 Internal Audit Services ................................................................
Subsection 606 Information Technology Systems Services .................................
Subsection 607 Litigation Support Services .........................................................
Subsection 608 Legal Services.............................................................................
Subsection 609 Recruiting Services .....................................................................
Subsection 610 Corporate Finance Services .......................................................
Section 800 Reports on Special Purpose Financial Statements That Include a
Restriction on Use and Distribution (Audit and Review Engagements)...................
87
THE CODE
INDEPENDENCE STANDARDS (PARTS 4A AND 4B)
PART 4A INDEPENDENCE FOR AUDIT AND REVIEW
ENGAGEMENTS
SECTION 400
APPLYING THE CONCEPTUAL FRAMEWORK TO INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS
Introduction
General
400.1 It is in the public interest and required by the Code that professional accountants in public
practice be independent when performing audit or review engagements in accordance with the
requirements of the Code along with any additional requirements prescribed from time to time
under the applicable Act, Regulation etc. such as the Companies Act 2013, the Reserve Bank
of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory
Development Authority (IRDA) etc.
400.2 This Part applies to both audit and review engagements. The terms "audit," "audit team," "audit
engagement," "audit client," and "audit report" apply equally to review, review team, review
engagement, review client, and review engagement report.
400.3 In this Part, the term "professional accountant" refers to individual professional accountants in
public practice and their firms.
400.4 SQC 1 requires a firm to establish policies and procedures designed to provide it with
reasonable assurance that the firm, its personnel and, where applicable, others subject to
independence requirements (including network firm personnel), maintain independence where
required by relevant ethics requirements. SAs and SREs establish responsibilities for
engagement partners and engagement teams at the level of the engagement for audits and
reviews, respectively. The allocation of responsibilities within a firm will depend on its size,
structure and organization. Many of the provisions of this Part do not prescribe the specific
responsibility of individuals within the firm for actions related to independence, instead referring
to "firm" for ease of reference. Firms assign responsibility for a particular action to an individual
or a group of individuals (such as an audit team), in accordance with SQC 1. In addition, an
individual professional accountant remains responsible for compliance with any provisions that
apply to that accountant's activities, interests or relationships.
400.5 Independence is linked to the principles of objectivity and integrity. It comprises:
(a) 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.
(b) 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 that a
firm's, or an audit team member's, integrity, objectivity or professional skepticism has
been compromised.
In this Part, references to an individual or firm being "independent" mean that the individual or
88
THE CODE
firm has complied with the provisions of this Part.
400.6 When performing audit engagements, the Code requires firms to comply with the fundamental
principles and be independent. This Part sets out specific requirements and application
material on how to apply the conceptual framework to maintain independence when performing
such engagements. The conceptual framework set out in Section 120 applies to independence
as it does to the fundamental principles set out in Section 110.
R400.6.1 Additional independence requirements are set out for a statutory auditor under the Companies Act
2013. Section 139 of the Companies Act, 2013 prescribes the auditor rotation requirements which
have been discussed in detail in Section 550.
Section 141(3) of the Companies Act 2013 (subject to amendments as may be made from time to
time) is as follows:
141 (3) The following persons shall not be eligible for appointment as an auditor of a company,
namely:--
(a) a body corporate other than a limited liability partnership registered under the Limited Liability
Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the
company;
(d) a person who, or his relative or partner--
(i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company:
Provided that the relative may hold security or interest in the company of face value not exceeding
one thousand rupees or such sum as may be prescribed1;
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary
of such holding company, in excess of such amount as may be prescribed2; or
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third
person o the company, or its subsidiary, or its holding or associate company or a subsidiary of
such holding company, for such amount as may be prescribed3;
(e) a person or a firm who, whether directly or indirectly, has business relationship4 with the
company, or its subsidiary, or its holding or associate company or subsidiary of such holding
company or associate company of such nature as may be prescribed;
1
(1) For the purpose of proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141, a relative of an auditor may hold
securities in the company of face value not exceeding rupees one lakh:
Provided that the condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share
capital or other securities:
Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action
to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest.
2
For the purpose of sub-clause (ii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner is indebted
to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of rupees five
lakhs shall not be eligible for appointment.
3 For the purpose of sub-clause (iii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner has given a
guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees shall not be eligible for
appointment.
4
For the purpose of clause (e) of sub-section (3) of section 141, the term "business relationship" shall be construed as any transaction
entered into for a commercial purpose, except -
(i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under
the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course of business of the company at arm's length pri ce - like sale of products or
services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications,
airlines, hospitals, hotels and such other similar businesses.
89
THE CODE
(f) a person whose relative is a director or is in the employment of the company as a director
or key managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies
(h) a person who has been convicted by a court of an offence involving fraud and a period of
ten years has not elapsed from the date of such conviction;
(i) a person who, directly or indirectly, renders any service referred to in section 144 to the
company or its holding company or its subsidiary company.
Explanation -- For the purposes of this clause, the term "directly or indirectly" shall have the
meaning assigned to it in the Explanation to section 144.
(4) Where a person appointed as an auditor of a company incurs any of the disqualifications
mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor
and such vacation shall be deemed to be a casual vacancy in the office of the auditor.
400.7 This Part describes:
(a) Facts and circumstances, including professional activities, interests and relationships,
that create or might create threats to independence;
(b) Potential actions, including safeguards, that might be appropriate to address any such
threats; and
(c) Some situations where the threats cannot be eliminated or there can be no safeguards
to reduce them to an acceptable level.
Public Interest Entities
400.8 Some of the requirements and application material set out in this Part reflect the extent of public
interest in certain entities which are defined to be public interest entities. Firms are encouraged
to determine whether to treat additional entities, or certain categories of entities, as public
interest entities because they 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. Examples might include financial institutions, such as
banks and insurance companies, and pension funds.
Size.
Number of employees.
Reports that Include a Restriction on Use and Distribution
400.9 An audit report might include a restriction on use and distribution. If it does and the conditions
set out in Section 800 are met, then the independence requirements in this Part may be
modified as provided in Section 800.
Assurance Engagements other than Audit and Review Engagements
400.10 Independence standards for assurance engagements that are not audit or review
90
THE CODE
engagements are set out in Part 4B Independence for Assurance Engagements Other than
Audit and Review Engagements.
Requirements and Application Material
General
R400.11 A firm performing an audit engagement shall be independent.
R400.12 A firm shall apply the conceptual framework set out in Section 120 to identify, evaluate and
address threats to independence in relation to an audit engagement.
Related Entities
R400.20 As defined, an audit client that is a listed entity includes all of its related entities. For all other
entities, references to an audit client in this Part include related entities over which the client
has direct or indirect control. When the audit team knows, or has reason to believe, that a
relationship or circumstance involving any other related entity of the client is relevant to the
evaluation of the firm's independence from the client, the audit team shall include that related
entity when identifying, evaluating and addressing threats to independence. Besides the
above, where the audit client is subject to the provisions of Companies Act, 2013, additional
restrictions are prescribed under Section 141 and 144 of the Companies Act, 2013.
Period During which Independence is Required
R400.30 Independence, as required by this Part, shall be maintained during both:
(a) The engagement period; and
(b) The period covered by the financial statements.
400.30 A1 The engagement period starts when the audit team begins to perform the audit. The engagement
period ends when the audit report is issued. When the engagement is of a recurring nature, it ends
at the later of the notification by either party that the professional relationship has ended or the
issuance of te final audit report. Where the audit client is a statutory audit client under the
Companies Act, 2013, the engagement period shall be determined in accordance with the
provisions of the Companies Act, 2013.
R400.31 If an entity becomes an audit client during or after the period covered by the financial
statements on which the firm will express an opinion, the firm shall determine whether any
threats to independence are created by:
(a) Financial or business relationships with the audit client during or after the period covered
by the financial statements but before accepting the audit engagement; or
(b) Previous services provided to the audit client by the firm or a network firm.
400.31 A1 Threats to independence are created if a non-assurance service was provided to an audit client
during, or after the period covered by the financial statements, but before the audit team begins
to perform the audit, and the service would not be permitted during the engagement period.
400.31 A2 Subject to the applicable restrictions under Companies Act, 2013, examples of actions that
might be safeguards to address such threats include:
Using professionals who are not audit team members to perform the service.
Having an appropriate reviewer review the audit and non-assurance work as appropriate.
91
THE CODE
Engaging another firm outside of the network to evaluate the results of the non-
assurance service or having another firm outside of the network re-perform the non-
assurance service to the extent necessary to enable the other firm to take responsibility
for the service.
Communication with those Charged with Governance
400.40 A1 Paragraphs R300.9 and R300.10 set out requirements with respect to communicating with
those charged with governance.
400.40 A2 Even when not required by the Code, applicable professional standards, laws or regulations,
regular communication is encouraged between a firm and those charged with governance of
the client regarding relationships and other matters that might, in the firm's opinion, reasonably
bear on independence. Such communication enables those charged with governance to:
(a) Consider the firm's judgments in identifying and evaluating threats;
(b) Consider how threats have been addressed including the appropriateness of safeguards
when they are available and capable of being applied; and
(c) Take appropriate action.
Such an approach can be particularly helpful with respect to intimidation and familiarity threats.
Network Firms
400.50 A1 Firms frequently form larger structures with other firms and entities to enhance their ability to
provide professional services. Whether these larger structures create a network depends on
the particular facts and circumstances. It does not depend on whether the firms and entities
are legally separate and distinct. Reference may be made to the Guidelines of Network issued
by the Institute in this regard.
R400.51 A network firm shall be independent of the audit clients of the other firms within the network as
required by this Part.
400.51 A1 The independence requirements in this Part that apply to a network firm apply to any entity that
meets the definition of a network firm.
General Documentation of Independence for Audit and Review Engagements
R400.60 A firm shall document conclusions regarding compliance with this Part, and the substance of
any relevant discussions that support those conclusions. In particular:
(a) When safeguards are applied to address a threat, the firm shall document the nature of
the threat and the safeguards in place or applied; and
(b) When a threat required significant analysis and the firm concluded that the threat was
already at an acceptable level, the firm shall document the nature of the threat and the
rationale for the conclusion.
400.60 A1 Documentation provides evidence of the firm's judgments in forming conclusions regarding
compliance with this Part. However, a lack of documentation does not determine whether a
firm considered a particular matter or whether the firm is independent.
Mergers and Acquisitions
92
THE CODE
When a Client Merger Creates a Threat
400.70 A1 An entity might become a related entity of an audit client because of a merger or acquisition. A
threat to independence and, therefore, to the ability of a firm to continue an audit engagement
might be created by previous or current interests or relationships between a firm or network
firm and such a related entity.
R400.71 In the circumstances set out in paragraph 400.70 A1,
(a) The firm shall identify and evaluate previous and current interests and relationships with
the related entity that, taking into account any actions taken to address the threat, might
affect its independence and therefore its ability to continue the audit engagement after
the effective date of the merger or acquisition; and
(b) Subject to paragraph R400.72, the firm shall take steps to end any interests or
relationships that are not permitted by the Code by the effective date of the merger or
acquisition.
R400.72 As an exception to paragraph R400.71(b), if the interest or relationship cannot reasonably be
ended by the effective date of the merger or acquisition, the firm shall:
(a) Evaluate the threat that is created by the interest or relationship; and
(b) Discuss with those charged with governance the reasons why the interest or relationship
cannot reasonably be ended by the effective date and the evaluation of the level of the
threat.
400.72 A1 In some circumstances, it might not be reasonably possible to end an interest or relationship
creating a threat by the effective date of the merger or acquisition. This might be because the
firm provides a non-assurance service to the related entity, which the entity is not able to
transition in an orderly manner to another provider by that date.
400.72 A2 Factors that are relevant in evaluating the level of a threat created by mergers and acquisitions
when there are interests and relationships that cannot reasonably be ended include:
The nature and significance of the interest or relationship.
The nature and significance of the related entity relationship (for example, whether the
related entity is a subsidiary or parent).
The length of time until the interest or relationship can reasonably be ended.
R400.73 Subject to applicable restrictions under Companies Act, 2013 or any other laws and
regulations, if, following the discussion set out in paragraph R400.72(b), those charged with
governance request the firm to continue as the auditor, the firm shall do so only if:
(a) The interest or relationship will be ended as soon as reasonably possible but no later
than six months after the effective date of the merger or acquisition;
(b) Any individual who has such an interest or relationship, including one that has arisen
through performing a non-assurance service that would not be permitted by Section 600
and its subsections, will not be a member of the engagement team for the audit or the
individual responsible for the engagement quality control review; and
(c) Transitional measures will be applied, as necessary, and discussed with those charged
with governance.
400.73 A1 Examples of such transitional measures include:
93
THE CODE
Having a professional accountant review the audit or non-assurance work as
appropriate.
Having a professional accountant, who is not a member of the firm expressing the opinion
on the financial statements, perform a review that is equivalent to an engagement quality
control review.
Engaging another firm to evaluate the results of the non-assurance service or having
another firm re-perform the non-assurance service to the extent necessary to enable the
other firm to take responsibility for the service.
R400.74 The firm might have completed a significant amount of work on the audit prior to the effective
date of the merger or acquisition and might be able to complete the remaining audit procedures
within a short period of time. In such circumstances, if those charged with governance request
the firm to complete the audit while continuing with an interest or relationship identified in
paragraph 400.70 A1, the firm shall only do so if it:
(a) Has evaluated the level of the threat and discussed the results with those charged with
governance;
(b) Complies with the requirements of paragraph R400.73(a) to (c); and
(c) Ceases to be the auditor no later than the date that the audit report is issued.
If Objectivity Remains Compromised
R400.75 Even if all the requirements of paragraphs R400.71 to R400.74 could be met, the firm shall
determine whether the circumstances identified in paragraph 400.70 A1 create a threat that
cannot be addressed such that objectivity would be compromised. If so, the firm shall cease to
be the auditor.
Documentation
R400.76 The firm shall document:
(a) Any interests or relationships identified in paragraph 400.70 A1 that will not be ended by
the effective date of the merger or acquisition and the reasons why they will not be
ended;
(b) The transitional measures applied;
(c) The results of the discussion with those charged with governance; and
(d) The reasons why the previous and current interests and relationships do not create a
threat such that objectivity would be compromised.
Breach of an Independence Provision for Audit and Review Engagements
When a Firm Identifies a Breach
R400.80 Subject to the eligibility requirements of the auditor mentioned under Section 141 of the
Companies Act, 2013, if a firm concludes that a breach of a requirement in this Part has
occurred, the firm shall:
(a) End, suspend or eliminate the interest or relationship that created the breach and
address the consequences of the breach;
94
THE CODE
(b) Consider whether any legal or regulatory requirements apply to the breach and, if so:
(i) Comply with those requirements; and
(c) Promptly communicate the breach in accordance with its policies and procedures to:
(i) The engagement partner;
(ii) Those with responsibility for the policies and procedures relating to independence;
(iii) Other relevant personnel in the firm and, where appropriate, the network; and
(iv) Those subject to the independence requirements in Part 4A who need to take
appropriate action;
(d) Evaluate the significance of the breach and its impact on the firm's objectivity and ability
to issue an audit report; and
(e) Depending on the significance of the breach, determine:
(i) Whether to end the audit engagement; or
(ii) Whether it is possible to take action that satisfactorily addresses the consequences
of the breach and whether such action can be taken and is appropriate in the
circumstances.
In making this determination, the firm shall exercise professional judgment and take into
account whether a reasonable and informed third party would be likely to conclude that
the firm's objectivity would be compromised, and therefore, the firm would be unable to
issue an audit report.
400.80 A1 A breach of a provision of this Part might occur despite the firm having policies and procedures
designed to provide it with reasonable assurance that independence is maintained. It might be
necessary to end the audit engagement because of the breach.
400.80 A2 The significance and impact of a breach on the firm's objectivity and ability to issue an audit
report will depend on factors such as:
The nature and duration of the breach.
The number and nature of any previous breaches with respect to the current audit
engagement.
Whether an audit team member had knowledge of the interest or relationship that
created the breach.
Whether the individual who created the breach is an audit team member or another
individual for whom there are independence requirements.
If the breach relates to an audit team member, the role of that individual.
If the breach was created by providing a professional service, the impact of that service,
if any, on the accounting records or the amounts recorded in the financial statements on
which the firm will express an opinion.
The extent of the self-interest, advocacy, intimidation or other threats created by the
breach.
400.80 A3 Depending upon the significance of the breach, examples of actions that the firm might consider
to address the breach satisfactorily include:
95
THE CODE
Removing the relevant individual from the audit team.
Using different individuals to conduct an additional review of the affected audit work or
to re-perform that work to the extent necessary.
Recommending that the audit client engage another firm to review or re-perform the
affected audit work to the extent necessary.
If the breach relates to a non-assurance service that affects the accounting records or
an amount recorded in the financial statements, engaging another firm to evaluate the
results of the non-assurance service or having another firm re-perform the non-
assurance service to the extent necessary to enable the other firm to take responsibility
for the service.
R400.81 If the firm determines that action cannot be taken to address the consequences of the breach
satisfactorily, the firm shall inform those charged with governance as soon as possible and take
the steps necessary to end the audit engagement in compliance with any applicable legal or
regulatory requirements.
R400.82 If the firm determines that action can be taken to address the consequences of the breach
satisfactorily, the firm shall discuss with those charged with governance:
(a) The significance of the breach, including its nature and duration;
(b) How the breach occurred and how it was identified;
(c) The action proposed or taken and why the action will satisfactorily address the
consequences of the breach and enable the firm to issue an audit report;
(d) The conclusion that, in the firm's professional judgment, objectivity has not been
compromised and the rationale for that conclusion; and
(e) Any steps proposed or taken by the firm to reduce or avoid the risk of further breaches
occurring.
Such discussion shall take place as soon as possible unless an alternative timing is specified
by those charged with governance for reporting less significant breaches.
Communication of Breaches to Those Charged with Governance
400.83 A1 Paragraphs R300.9 and R300.10 set out requirements with respect to communicating with
those charged with governance.
R400.84 With respect to breaches, the firm shall communicate in writing to those charged with
governance:
(a) All matters discussed in accordance with paragraph R400.82 and obtain the concurrence
of those charged with governance that action can be, or has been, taken to satisfactorily
address the consequences of the breach; and
(b) A description of:
(i) The firm's policies and procedures relevant to the breach designed to provide it
with reasonable assurance that independence is maintained; and
(ii) Any steps that the firm has taken, or proposes to take, to reduce or avoid the risk
of further breaches occurring.
R400.85 If those charged with governance do not concur that the action proposed by the firm in
96
THE CODE
accordance with paragraph R400.80(e)(ii) satisfactorily addresses the consequences of the
breach, the firm shall take the steps necessary to end the audit engagement in accordance
with paragraph R400.81.
Breaches Before the Previous Audit Report Was Issued
R400.86 If the breach occurred prior to the issuance of the previous audit report, the firm shall comply
with the provisions of Part 4A in evaluating the significance of the breach and its impact on the
firm's objectivity and its ability to issue an audit report in the current period.
R400.87 The firm shall also:
(a) Consider the impact of the breach, if any, on the firm's objectivity in relation to any
previously issued audit reports, and the possibility of withdrawing such audit reports; and
(b) Discuss the matter with those charged with governance.
Documentation
R400.88 In complying with the requirements in paragraphs R400.80 to R400.87, the firm shall document:
(a) The breach;
(b) The actions taken;
(c) The key decisions made;
(d) All the matters discussed with those charged with governance; and
(e) Any discussions with a professional or regulatory body or oversight authority.
R400.89 If the firm continues with the audit engagement, it shall document:
(a) The conclusion that, in the firm's professional judgment, objectivity has not been
compromised; and
(b) The rationale for why the action taken satisfactorily addressed the consequences of the
breach so that the firm could issue an audit report.
97
THE CODE
SECTION 410
FEES
Introduction
410.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
410.2 The nature and level of fees or other types of remuneration might create a self-interest or
intimidation threat. This section sets out specific requirements and application material relevant
to applying the conceptual framework in such circumstances.
Requirements and Application Material
Fees Relative Size
All Audit Clients
410.3 A1 When the total fees generated from an audit client by the firm expressing the audit opinion
represent a large proportion of the total fees of that firm, the dependence on that client and
concern about losing the client create a self-interest or intimidation threat.
410.3 A2 Factors that are relevant in evaluating the level of such threats include:
The operating structure of the firm.
Whether the firm is well established or new.
The significance of the client qualitatively and/or quantitatively to the firm.
410.3 A3 An example of an action that might be a safeguard to address such a self-interest or
intimidation threat is increasing the client base in the firm to reduce dependence on the audit
client.
410.3 A4 A self-interest or intimidation threat is also created when the fees generated by a firm from an
audit client represent a large proportion of the revenue of one partner or one office of the firm.
410.3 A5 Factors that are relevant in evaluating the level of such threats include:
The significance of the client qualitatively and/or quantitatively to the partner or office.
The extent to which the compensation of the partner, or the partners in the office, is
dependent upon the fees generated from the client.
410.3 A6 Examples of actions that might be safeguards to address such self-interest or intimidation
threats include:
Increasing the client base of the partner or the office to reduce dependence on the audit
client.
Having an appropriate reviewer who did not take part in the audit engagement review
the work.
98
THE CODE
R410.4 Where an audit client is a public interest entity and, the total gross annual professional fees
("total fees) from the client and its related entities represent more than 15% of the total
fees received by the firm expressing the opinion on the financial statements of the client, the
firm shall:
(a) Disclose to those charged with governance of the audit client the fact that the total of
such fees represents more than 15% of the total fees received by the firm
Provided that no such ceiling on the total fees of the Firm would be applicable where
such fees do not exceed five lakhs of rupees in respect of a firm including fees
received by the frm for other services rendered through the medium of a different firm
or firms in which such member or firm may be a partner or proprietor.
Provided further that no such ceiling on the total fees of a Firm would be applicable in
the case of audit of government Companies, public undertakings, nationalised banks,
public financial institutions or where appointments of auditors are made by the
Government.; and
(b) Discuss whether either of the following actions might be a safeguard to address the
threat created by the total fees received by the firm from the client, and if so, apply it:
(i) Prior to the audit opinion being issued on the second year's financial statements,
a professional accountant, who is not a member of the firm expressing the opinion
on the financial statements, performs an engagement quality control review of that
engagement; or Quality Review Board performs a review of that engagement that
is equivalent to an engagement quality control review ("a pre-issuance review");
or
(ii) After the audit opinion on the second year's financial statements has been issued,
and before the audit opinion being issued on the third year's financial statements,
a professional accountant, who is not a member of the firm expressing the opinion
on the financial statements, or Quality Review Board performs a review of the second
year's audit that is equivalent to an engagement quality control review ("a post-
issuance review").
R410.5 When the total fees described in paragraph R410.4 significantly exceed 15%, the firm shall
determine whether the level of the threat is such that a post-issuance review would not reduce
the threat to an acceptable level. If so, the firm shall have a pre-issuance review performed.
R410.6 If the fees described in paragraph R410.4 continue to exceed 15%, the firm shall each year:
(a) Disclose to and discuss with those charged with governance the matters set out in
paragraph R410.4; and
(b) Comply with paragraphs R410.4(b) and R410.5.
Fees Overdue
410.7 A1 A self-interest threat might be created if a significant part of fees is not paid before the audit
report for the following year is issued. It is generally expected that the firm will require payment
of such fees before such audit report is issued. The requirements and application material set
out in Section 511 with respect to loans and guarantees might also apply to situations where
99
THE CODE
such unpaid fees exist.
410.7 A2 Examples of actions that might be safeguards to address such a self-interest threat include:
Obtaining partial payment of overdue fees.
Having an appropriate reviewer who did not take part in the audit engagement review
the work performed.
R410.8 When a significant part of fees due from an audit client remains unpaid for a long time, the firm
shall determine:
(a) Whether the overdue fees might be equivalent to a loan to the client; and
(b) Whether it is appropriate for the firm to be re-appointed or continue the audit
engagement.
Contingent Fees
410.9 A1 The fees which are based on a percentage of profits or which are contingent upon the
findings, or results of such work, is not allowed except in cases which are permitted under
Regulation 192 of The Chartered Accountants Regulations, 1988, given as under:-
(a) in the case of a receiver or a liquidator, the fees may be based on a percentage of the
realisation or disbursement of the assets;
(b) in the case of an auditor of a co-operative society, the fees may be based on a
percentage of the paid-up capital or the working capital or the gross or net income or
profits;
(c) in the case of a valuer for the purposes of direct taxes and duties, the fees may be based
on a percentage of the value of the property valued.
(d) in the case of certain management consultancy services as may be decided by the
resolution of the Council from time to time, the fees may be based on percentage basis
which may be contingent upon the findings, or results of such work;
(e) in the case of certain fund raising services, the fees may be based on a percentage of the
fund raised;
(f) in the case of debt recovery services, the fees may be based on a percentage of the debt
recovered;
(g) in the case of services related to cost optimisation, the fees may be based on a
percentage of the benefit derived; and
(h) any other service or audit as may be decided by the Council.
100
THE CODE
SECTION 411
COMPENSATION AND EVALUATION POLICIES
Introduction
411.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
411.2 A firm's evaluation or compensation policies might create a self-interest threat. This section
sets out specific requirements and application material relevant to applying the conceptual
framework in such circumstances.
Requirements and Application Material
General
411.3 A1 ` When an audit team member for a particular audit client is evaluated on or compensated for
selling non-assurance services to that audit client, the level of the self-interest threat will
depend on:
(a) What proportion of the compensation or evaluation is based on the sale of such services;
(b) The role of the individual on the audit team; and
(c) Whether the sale of such non-assurance services influences promotion decisions.
411.3 A2 Examples of actions that might eliminate such a self-interest threat include:
Revising the compensation plan or evaluation process for that individual.
Removing that individual from the audit team.
411.3 A3 ` An example of an action that might be a safeguard to address such a self-interest threat is
having an appropriate reviewer review the work of the audit team member.
R411.4 A firm shall not evaluate or compensate a key audit partner based on that partner's success in
selling non-assurance services to the partner's audit client. This requirement does not preclude
normal profit-sharing arrangements between partners of a firm.
101
THE CODE
SECTION 420
GIFTS AND HOSPITALITY
Introduction
420.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
420.2 Accepting gifts and hospitality from an audit client might create a self-interest, familiarity or
intimidation threat. Thi section sets out a specific requirement and application material
relevant to applying the conceptual framework in such circumstances.
Requirement and Application Material
R420.3 A firm, network firm or an audit team member shall not accept gifts and hospitality from an audit
client, unless the value is trivial and inconsequential.
420.3 A1 Where a firm, network firm or audit team member is offering or accepting an inducement to or
from an audit client, the requirements and application material set out in Section 340 apply and
non-compliance with these requirements might create threats to independence.
420.3 A2 The requirements set out in Section 340 relating to offering or accepting inducements do not
allow a firm, network firm or audit team member to accept gifts and hospitality where the intent
is to improperly influence behaviour even if the value is trivial and inconsequential.
102
THE CODE
SECTION 430
ACTUAL OR THREATENED LITIGATION
Introduction
430.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
430.2 When litigation with an audit client occurs, or appears likely, self-interest and intimidation
threats are created. This section sets out specific application material relevant to applying the
conceptual framework in such circumstances.
Application Material
General
430.3 A1 The relationship between client management and audit team members must be characterized
by complete candor and full disclosure regarding all aspects of a client's operations.
Adversarial positions might result from actual or threatened litigation between an audit client
and the firm, a network firm or an audit team member. Such adversarial positions might affect
management's willingness to make complete disclosures and create self-interest and
intimidation threats.
430.3 A2 Factors that are relevant in evaluating the level of such threats include:
The materiality of the litigation.
Whether the litigation relates to a prior audit engagement.
430.3 A3 If the litigation involves an audit team member, an example of an action that might eliminate
such self-interest and intimidation threats is removing that individual from the audit team.
430.3 A4 An example of an action that might be a safeguard to address such self-interest and
intimidation threats is to have an appropriate reviewer review the work performed.
103
THE CODE
SECTION 510
FINANCIAL INTERESTS
Introduction
510.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
510.2 Holding a financial interest in an audit client might create a self-interest threat. This section
sets out specific requirements and application material relevant to applying the conceptual
framework in such circumstances.
Requirements and Application Material
General
510.3 A1 A financial interest might be held directly or indirectly through an intermediary such as a
collective investment vehicle, an estate or a trust. When a beneficial owner has control over
the intermediary or ability to influence its investment decisions, the Code defines that financial
interest to be direct. Conversely, when a beneficial owner has no control over the intermediary
or ability to influence its investment decisions, the Code defines that financial interest to be
indirect.
510.3 A2 This section contains references to the "materiality" of a financial interest. In determining
whether such an interest is material to an individual, the combined net worth of the individual
and the individual's immediate family members may be taken into account.
510.3 A3 Factors that are relevant in evaluating the level of a self-interest threat created by holding a
financial interest in an audit client include:
The role of the individual holding the financial interest.
Whether the financial interest is direct or indirect.
The materiality of the financial interest.
Financial Interests Held by the Firm, a Network Firm, Audit Team Members and Others
R510.4 Subject to paragraph R510.5, a direct financial interest or a material indirect financial interest
in the audit client shall not be held by:
(a) The firm or a network firm;
(b) An audit team member, or any of that individual's immediate family
(c) Any other partner in the office in which an engagement partner practices in connection
with the audit engagement, or any of that other partner's immediate family; or
(d) Any other partner or managerial employee who provides non-audit services to the audit
client, except for any whose involvement is minimal, or any of that individual's immediate
family.
It may be noted that if the audit client is a statutory audit client under Companies Act, 2013, in
accordance with Section 141 (3)(d) (i) of the Companies Act, 2013, an individual practitioner,
sole proprietor or partner (as the case may be) or his relatives shall not hold any security of or
interest in such Company or its subsidiary, or of its holding or associate company or a
104
THE CODE
subsidiary of such holding company. However, the relative (who is not otherwise covered as
immediate family under any of the clauses specified in 510.4) may hold security or interest in
the company of face value not exceeding rupees one lakh, or such other sum as may be
prescribed from time to time;
510.4 A1 The office in which the engagement partner practices in connection with an audit engagement
is not necessarily the office to which that partner is assigned. When the engagement partner
is located in a different office from that of the other audit team members, professional judgment
is needed to determine the office in which the partner practices in connection with the
engagement.
R510.5 As an exception to paragraph R510.4, an immediate family member identified in
subparagraphs R510.4 (c) or (d) may hold a direct or material indirect financial interest in an
audit client, provided that:
(a) The family member received the financial interest because of employment rights, for
example through pension or share option plans, and, when necessary, the firm
addresses the threat created by the financial interest; and
(b) The family member disposes of or forfeits the financial interest as soon as practicable
when the family member has or obtains the right to do so, or in the case of a stock option,
when the family member obtains the right to exercise the option
The above is subject to any additional restrictions applicable to a relative under
Companies Act, 2013, where applicable.
Financial Interests in an Entity Controlling an Audit Client
R510.6 When an entity has a controlling interest in an audit client and the client is material to the
entity, neither the firm, nor a network firm, nor an audit team member, nor any of that
individual's immediate family shall hold a direct or material indirect financial interest in that
entity.
Where the audit client is subject to the provisions of the Companies Act, 2013, firm, individual
practitioner, sole proprietor or partner or his relatives are additionally restricted from holding
any security of or interest in the holding company. The relative (who is not otherwise covered
as immediate family) may hold security or interest in the company of face value not exceeding
rupees one hundred thousand or such other sum as may be prescribed from time to time
Financial Interests Held as Trustee
R510.7 Paragraph R510.4 shall also apply to a financial interest in an audit client held in a trust for
which the firm, network firm or individual acts as trustee, unless:
(a) None of the following is a beneficiary of the trust: the trustee, the audit team member or
any of that individual's immediate family, the firm or a network firm;
(b) The interest in the audit client held by the trust is not material to the trust;
(c) The trust is not able to exercise significant influence over the audit client; and
(d) None of the following can significantly influence any investment decision involving a
financial interest in the audit client: the trustee, the audit team member or any of that
individual's immediate family, the firm or a network firm.
105
THE CODE
Financial Interests in Common with the Audit Client
R510.8 (a) A firm, or a network firm, or an audit team member, or any of that individual's immediate
family shall not hold a financial interest in an entity when an audit client also has a
financial interest in that entity, unless:
(i) The financial interests are immaterial to the firm, the network firm, the audit team
member and that individual's immediate family member and the audit client, as
applicable; or
(ii) The audit client cannot exercise significant influence over the entity.
(b) Before an individual who has a financial interest described in paragraph R510.8(a) can
become an audit team member, the individual or that individual's immediate family
member shall either:
(i) Dispose of the interest; or
(ii) Dispose of enough of the interest so that the remaining interest is no longer
material.
Financial Interests Received Unintentionally
R510.9 If a firm, a network firm or a partner or employee of the firm or a network firm, or any of that
individual's immediate family, receives a direct financial interest or a material indirect financial
interest in an audit client by way of an inheritance, gift, as a result of a merger or in similar
circumstances and the interest would not otherwise be permitted to be held under this section,
then:
(a) If the interest is received by the firm or a network firm, or an audit team member or any
of that individual's immediate family, the financial interest shall be disposed of
immediately, or enough of an indirect financial interest shall be disposed of so that the
remaining interest is no longer material; or
(b) (i) If the interest is received by an individual who is not an audit team member, or by
any of that individual's immediate family, the financial interest shall be disposed of
as soon as possible, or enough of an indirect financial interest shall be disposed
of so that the remaining interest is no longer material; and
(ii) Pending the disposal of the financial interest, when necessary the firm shall
address the threat created.
The above is subject to additional restrictions under Companies Act, 2013, where applicable.
Financial Interests Other Circumstances
Immediate Family
510.10 A1 A self-interest, familiarity, or intimidation threat might be created if an audit team member, or
any of that individual's immediate family, or the firm or a network firm has a financial interest in
an entity when a director or officer or controlling owner of the audit client is also known to have
a financial interest in that entity.
510.10 A2 Factors that are relevant in evaluating the level of such threats include:
106
THE CODE
The role of the individual on the audit team.
Whether ownership of the entity is closely or widely held.
Whether the interest allows the investor to control or significantly influence the entity.
The materiality of the financial interest.
510.10 A3 An example of an action that might eliminate such a self-interest, familiarity, or intimidation
threat is removing the audit team member with the financial interest from the audit team.
510.10 A4 An example of an action that might be a safeguard to address such a self-interest threat is
having an appropriate reviewer review the work of the audit team member.
Close Family
510.10 A5 A self-interest threat might be created if an audit team member knows that a close family
member has a direct financial interest or a material indirect financial interest in the audit client.
A6 Factors that are relevant in evaluating the level of such a threat include:-The nature
of the relationship between the audit team member and the close family member.
Whether the financial interest is direct or indirect.
The materiality of the financial interest to the close family member.
510.10 A7 Examples of actions that might eliminate such a self-interest threat include:
Having the close family member dispose, as soon as practicable, of all of the financial
interest or dispose of enough of an indirect financial interest so that the remaining interest
is no longer material.
Removing the individual from the audit team.
510.10 A8 An example of an action that might be a safeguard to address such a self-interest threat is
having an appropriate reviewer review the work of the audit team member.
510.10A8.1 The above is subject to additional restrictions under Companies Act, 2013, where applicable.
Other Individuals
510.10 A9 A self-interest threat might be created if an audit team member knows that a financial interest
in the audit client is held by individuals such as:
Partners and professional employees of the firm or network firm, apart from those who
are specifically not permitted to hold such financial interests by paragraph R510.4, or
their immediate family members.
Individuals with a close personal relationship with an audit team member.
510.10 A10 Factors tha are relevant in evaluating the level of such a threat include:
The firm's organizational, operating and reporting structure.
The nature of the relationship between the individual and the audit team member.
510.10 A11 An example of an action that might eliminate such a self-interest threat is removing the audit
team member with the personal relationship from the audit team.
510.10 A12 Examples of actions that might be safeguards to address such a self-interest threat include:
Excluding the audit team member from any significant decision-making concerning the
107
THE CODE
audit engagement.
Having an appropriate reviewer review the work of the audit team member.
Retirement Benefit Plan of a Firm or Network Firm
510.10 A13 A self-interest threat might be created if a retirement benefit plan of a firm or a network firm
holds a direct or material indirect financial interest in an audit client.
108
THE CODE
SECTION 511
LOANS AND GUARANTEES
Introduction
511.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
511.2 A loan or a guarantee of a loan with an audit client might create a self-interest threat. This
section sets out specific requirements and application material relevant to applying the
conceptual framework in such circumstances.
Requirements and Application Material
General
511.3 A1 This section contains references to the "materiality" of a loan or guarantee. In determining
whether such a loan or guarantee is material to an individual, the combined net worth of the
individual and the individual's immediate family members may be taken into account.
Loans and Guarantees with an Audit Client
R511.4 A firm, a network firm, an audit team member, or any of that individual's immediate family shall
not make or guarantee a loan to an audit client unless the loan or guarantee is immaterial to:
(a) The firm, the network firm or the individual making the loan or guarantee, as applicable;
and
(b) The client.
The above is subject to the Council guidelines on indebtedness, issued from time to time and
the additional restrictions under the Companies Act, 2013, where applicable.
In accordance with Companies Act, 2013, a firm, an individual practitioner, sole proprietor or
partner (as the case may be) or relatives shall not accept a loan in excess of Rs 5 lakhs (or
such other limit as may be prescribed from time to time) from the Company, its subsidiary,
or its holding or associate company or subsidiary of such holding company or
provide guarantee or any security in connection with the indebtedness of any third person in
excess of rupees one lakh (or such other limit as may be prescribed from time to time), to the
Company its subsidiary, or its holding or associate company or subsidiary of
such holding company .
Loans and Guarantees with an Audit Client that is a Bank or Similar Institution
R511.5 A firm, a network firm, an audit team member, or any of that individual's immediate family shall
not accept a loan, or a guarantee of a loan, from an audit client that is a bank or a similar
institution unless the loan or guarantee is made under normal lending procedures, terms and
conditions,
511.5 A1 Examples of loans include mortgages, bank overdrafts, car loans, and credit card balances.
511.5 A2 Even if a firm or network firm receives a loan from an audit client that is a bank or similar
institution under normal lending procedures, terms and conditions, the loan might create a self-
interest threat if it is material to the audit client or firm receiving the loan.
109
THE CODE
5115 A3 An example of an action that might be a safeguard to address such a self-interest threat is
having the work reviewed by an appropriate reviewer, who is not an audit team member, from
a network firm that is not a beneficiary of the loan.
511.5 A4 The above is subject to the Council guidelines on indebtedness, issued from time to time and
additional restrictions under the Companies Act, 2013, where applicable.
In accordance with Companies Act, 2013, a firm, an individual practitioner, sole proprietor or
partner (as the case may be) or relatives shall not accept a loan in excess of Rs 5 lakhs (or
such other limit as may be prescribed from time to time) from the Company, its subsidiary,
or its holding or associate company or subsidiary of such holding company or
provide guarantee or any security in connection with the indebtedness of any third person in
excess of rupees one lakh (or such other limit as may be prescribed from time to time), to the
Company its subsidiary, or its holding or associate company or subsidiary of
such holding company .
However, where the audit client is a bank, as per the RBI regulations, a firm, an individual
practitioner, sole proprietor or partner and members of his family (as defined under the RBI
regulations) are restricted from being indebted to such banking audit client. Hence in such
cases, indebtedness limits specified above shall not apply.
Deposits or Brokerage Accounts
R511.6 A firm, a network firm, an audit team member, or any of that individual's immediate family shall
not have deposits or a brokerage account with an audit client that is a bank, broker or similar
institution, unless the deposit or account is held under normal commercial terms.
The above is subject to the Council guidelines on indebtedness, issued from time to time and
additional restrictions under the Companies Act, 2013, where applicable.
In accordance with Companies Act, 2013, a firm, an individual practitioner, sole proprietor or
partner (as the case may be) or relatives shall not be indebted in excess of Rs 5 lakhs (or
such other limit as may be prescribed from time to time), to the Company, its subsidiary, or its
holding or associate company or subsidiary of such holding company with respect to a
brokerage account.
However, where the audit client is a bank, as per the RBI regulations, a firm, an individual
practitioner, sole proprietor or partner and members of his family (as defined under the RBI
regulations) are restricted from being indebted to such banking audit client. Hence in such
cases, indebtedness limit specified above shall not apply.
Loans and Guarantees with an Audit Client that is Not a Bank or Similar Institution
R511.7 A firm, a network firm, an audit team member, or any of that individual's immediate family shall
not accept a loan from, or have a borrowing guaranteed by, an audit client that is not a bank or
similar institution, unless the loan or guarantee is immaterial to:
(a) The firm, the network firm, or the individual receiving the loan or guarantee, as
applicable; and
(b) The client.
110
THE CODE
The above is subject to the Council guidelines on indebtedness, issued from time to time and
additional restrictions under the Companies Act, 2013, where applicable.
In accordance with Companies Act, 2013, a firm, an individual practitioner, sole proprietor or
partner (as the case may be) or relatives shall not accept a loan in excess of Rs 5 lakhs (or
such other limit as may be prescribed from time to time) from the Company, its subsidiary, or
its holding or associate company or subsidiary of such holding company or provide guarantee
or any security in connection with the indebtedness of any third person in excess of rupees
one lakh (or such other limit as may be prescribed from time to time), to the Company its
subsidiary, or its holding or associate company or subsidiary of such holding company
111
THE CODE
SECTION 520
BUSINESS RELATIONSHIPS
Introduction
520.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
520.2 A close business relationship with an audit client or its management might create a self-interest
or intimidation threat. This section sets out specific requirements and application material
relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
520.3 A1 This section contains references to the "materiality" of a financial interest and the "significance"
of a business relationship. In determining whether such a financial interest is material to an
individual, the combined net worth of the individual and the individual's immediate family
members may be taken into account.
520.3 A2 Examples of a close business relationship arising from a commercial relationship or common
financial interest include:
Having a financial interest in a joint venture with either the client or a controlling owner,
director or officer or other individual who performs senior managerial activities for that
client.
Arrangements to combine one or more services or products of the firm or a network firm
with one or more services or products of the client and to market the package with
reference to both parties.
Firm, Network Firm, Audit Team Member or Immediate Family Business Relationships
R520.4 A firm, a network firm or an audit team member shall not have a close business relationship
with an audit client or its management unless any financial interest is immaterial and the
business relationship is insignificant to the client or its management and the firm, the network
firm or the audit team member, as applicable.
The above is subject to additional restrictions under Companies Act, 2013, where applicable.
As per section 141(3)(e) of Companies Act, 2013 read with Companies (Audit and Auditors)
Rules, 2014, a firm, an individual practitioner, sole proprietor or partner (as the case may be)
shall not, whether directly or indirectly, have business relationship with the company, or its
subsidiary, or its holding or associate company or subsidiary of such holding company or
associate company of such nature as may be prescribed.
The term "business relationship" shall be construed as any transaction entered into for a
commercial purpose, except -
(i) commercial transactions which are in the nature of professional services permitted to
be rendered by an auditor or audit firm under the Companies Act, 2013 and the
Chartered Accountants Act, 1949 and the rules or the regulations made under those
Acts;
112
THE CODE
(ii) commercial transactions which are in the ordinary course of business of the company
at arm's length price - like sale of products or services to the auditor, as customer, in
the ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses
520.4 A1 A self-interest or intimidation threat might be created if there is a close business relationship
between the audit client or its management and the immediate family of an audit team member.
Common Interests in Closely-Held Entities
R520.5 A firm, a network firm, an audit team member, or any of that individual's immediate family shall
not have a business relationship involving the holding of an interest in a closely-held entity
when an audit client or a director or officer of the client, or any group thereof, also holds an
interest in that entity, unless:
(a) The business relationship is insignificant to the firm, the network firm, or the individual
as applicable, and the client;
(b) The financial interest is immaterial to the investor or group of investors; and
(c) The financial interest does not give the investor, or group of investors, the ability to
control the closely-held entity.
Buying Goods or Services
520.6 A1 The purchase of goods and services from an audit client by a firm, a network firm, an audit
team member, or any of that individual's immediate family does not usually create a threat to
independence if the transaction is in the normal course of business and at arm's length.
However, such transactions might be of such a nature and magnitude that they create a self-
interest threat.
520.6 A2 Subject to the provisions of Companies Act, 2013, examples of actions that might eliminate
such a self-interest threat include:
Eliminating or reducing the magnitude of the transaction.
Removing the individual from the audit team.
113
THE CODE
SECTION 521
FAMILY AND PERSONAL RELATIONSHIPS
Introduction
521.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
521.2 Family or personal relationships with client personnel might create a self-interest, familiarity or
intimidation threat. This section sets out specific requirements and application material relevant
to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
521.3 A1 A self-interest, familiarity or intimidation threat might be created by family and personal
relationships between an audit team member and a director or officer or, depending on their
role, certain employees of the audit client.
521.3 A2 Factors that are relevant in evaluating the level of such threats include:
The individual's responsibilities on the audit team.
The role of the family member or other individual within the client, and the closeness of
the relationship.
Immediate Family of an Audit Team Member
521.4 A1 A self-interest, familiarity or intimidation threat is created when an immediate family member of
an audit team member is an employee in a position to exert significant influence over the
client's financial position, financial performance or cash flows.
521.4 A2 Factors that are relevant in evaluating the level of such threats include:
The position held by the immediate family member.
The role of the audit team member.
521.4 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation
threat is removing the individual from the audit team.
521.4 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity
or intimidation threat is structuring the responsibilities of the audit team so that the audit team
member does not deal with matters that are within the responsibility of the immediate family
member.
R521.5 An individual shall not participate as an audit team member when any of that individual's
immediate family:
(a) Is a director or officer of the audit client;
(b) Is an employee in a position to exert significant influence over the preparation of the
client's accounting records or the financial statements on which the firm will express an
opinion; or
114
THE CODE
(c) Was in such position during any period covered by the engagement or the financial
statements.
Additionally, under Companies Act, 2013, where applicable, as per Sec 141 (3)(f) of the
Companies Act, 2013, an individual practitioner, sole proprietor or the firm is ineligible from
being appointed as an auditor of a Company where relative of an individual practitioner, sole
proprietor or partner (as the case may be) is a director or is in the employment of the company
as a director or key managerial personnel as defined under the Companies Act, 2013.
Close Family of an Audit Team Member
521.6 A1 A self-interest, familiarity or intimidation threat is created when a close family member of an
audit team member is:
(a) A director or officer of the audit client; or
(b) An employee in a position to exert significant influence over the preparation of the client's
accounting records or the financial statements on which the firm will express an opinion.
521.6 A2 Factors that are relevant in evaluating the level of such threats include:
The nature of the relationship between the audit team member and the close family
member.
The position held by the close family member.
The role of the audit team member.
521.6 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation
threat is removing the individual from the audit team.
521.6 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity
or intimidation threat is structuring the responsibilities of the audit team so that the audit team
member does not deal with matters that are within the responsibility of the close family member.
521.6 A5 Additionally, under Companies Act, 2013, where applicable, as per Sec 141 (3)(f) of the
Companies Act, 2013, an individual practitioner, sole proprietor or the firm is ineligible from
being appointed as an auditor of a Company where relative of an individual practitioner, sole
proprietor or partner (as the case may be) is a director or is in the employment of the company
as a director or key managerial personnel as defined under the Companies Act, 2013.
Other Close Relationships of an Audit Team Member
R521.7 An audit team member shall consult in accordance with firm policies and procedures if the audit
team member has a close relationship with an individual who is not an immediate or close
family member, but who is:
(a) A director or officer of the audit client; or
(b) An employee in a position to exert significant influence over the preparation of the client's
accounting records or the financial statements on which the firm will express an opinion.
521.7 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat
created by such a relationship include:
The nature of the relationship between the individual and the audit team member.
115
THE CODE
The position the individual holds with the client.
The role of the audit team member.
521.7 A2 An example of an action that might eliminate such a self-interest, familiarity or intimidation
threat is removing the individual from the audit team.
521.7 A3 An example of an action that might be a safeguard to address such a self-interest, familiarity
or intimidation threat is structuring the responsibilities of the audit team so that the audit team
member does not deal with matters that are within the responsibility of the individual with whom
the audit team member has a close relationship.
521.7 A4 Additionally, under Companies Act, 2013, where applicable, as per Sec 141 (3)(f) of the
Companies Act, 2013, an individual practitioner, sole proprietor or the firm is ineligible from
being appointed as an auditor of a Company where relative of an individual practitioner, sole
proprietor or partner (as the case may be) is a director or is in the employment of the company
as a director or key managerial personnel as defined under the Companies Act, 2013
Relationships of Partners and Employees of the Firm
R521.8 Partners and employees of the firm shall consult in accordance with firm policies and
procedures if they are aware of a personal or family relationship between:
(a) A partner or employee of the firm or network firm who is not an audit team member; and
(b) A director or officer of the audit client or an employee of the audit client in a position to
exert significant influence over the preparation of the client's accounting records or the
financial statements on which the firm will express an opinion.
521.8 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat
created by such a relationship include:
The nature of the relationship between the partner or employee of the firm and the
director or officer or employee of the client.
The degree of interaction of the partner or employee of the firm with the audit team.
The position of the partner or employee within the firm.
The position the individual holds with the client.
521.8 A2 Examples of actions that might be safeguards to address such self-interest, familiarity or
intimidation threats include:
Structuring the partner's or employee's responsibilities to reduce any potential influence
over the audit engagement.
Having an appropriate reviewer review the relevant audit work performed.
116
THE CODE
SECTION 522
RECENT SERVICE WITH AN AUDIT CLIENT
Introduction
522.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
522.2 If an audit team member has recently served as a director or officer, or employee of the audit
client, a self-interest, self-review or familiarity threat might be created. This section sets out
specific requirements and application material relevant to applying the conceptual framework
in such circumstances.
Requirements and Application Material
Service During Period Covered by the Audit Report
R522.3 The audit team shall not include an individual who, during the period covered by the audit
report:
(a) Had served as a director or officer of the audit client; or
(b) Was an employee in a position to exert significant influence over the preparation of the
client's accounting records or the financial statements on which the firm will express an
opinion.
Service Prior to Period Covered by the Audit Report
522.4 A1 A self-interest, self-review or familiarity threat might be created if, before the period covered by
the audit report, an audit team member:
(a) Had served as a director or officer of the audit client; or
(b) Was an employee in a position to exert significant influence over the preparation of the
client's accounting records or financial statements on which the firm will express an
opinion.
For example, a threat would be created if a decision made or work performed by the individual
in the prior period, while employed by the client, is to be evaluated in the current period as part
of the current audit engagement.
522.4 A2 Factors that are relevant in evaluating the level of such threats include:
The position the individual held with the client.
The length of time since the individual left the client.
The role of the audit team member.
522.4 A3 An example of an action that might be a safeguard to address such a self-interest, self-review
or familiarity threat is having an appropriate reviewer review the work performed by the audit
team member.
117
THE CODE
SECTION 523
SERVING AS A DIRECTOR OR OFFICER OF AN AUDIT CLIENT
Introduction
523.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
523.2 Serving as a director or officer of an audit client creates self-review and self-interest threats.
This section sets out specific requirements and application material relevant to applying the
conceptual framework in such circumstances.
Requirements and Application Material
Service as Director or Officer
R523.3 A partner or employee of the firm or a network firm shall not serve as a director or officer of an
audit client of the firm.
Further, as per Section 141(3) (b) of the Companies Act, 2013, an officer or employee of the
company or a person who is a partner, or who is in the employment, of an officer or
employee of the company, shall not be eligible for appointment as an auditor of a company.
Service as Company Secretary
R523.4 A partner or employee of the firm or a network firm shall not serve as Company Secretary for
an audit client of the firm, unless:
(a) This practice is specifically permitted under local law, professional rules or practice;
(b) Management makes all relevant decisions; and
(c) The duties and activities performed are limited to those of a routine and administrative
nature, such as preparing minutes and maintaining statutory returns.
523.4 A1 Duties of Company Secretary might range from: administrative duties (such as personnel
management and the maintenance of company records and registers) to duties as diverse as
ensuring that the company complies with regulations or providing advice on corporate
governance matters. Usually this position is seen to imply a close association with the entity.
Therefore, a threat is created if a partner or employee of the firm or a network firm serves as
Company Secretary for an audit client. (More information on providing non-assurance
services to an audit client is set out in Section 600, Provision of Non-assurance Services to
an Audit Client.)
118
THE CODE
SECTION 524
EMPLOYMENT WITH AN AUDIT CLIENT
Introduction
524.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
524.2 Employment relationships with an audit client might create a self-interest, familiarity or
intimidation threat. This section sets out specific requirements and application material relevant
to applying the conceptual framework in such circumstances.
Requirements and Application Material
All Audit Clients
524.3 A1 A familiarity or intimidation threat might be created if any of the following individuals have been
an audit team member or partner of the firm or a network firm:
A director or officer of the audit client.
An employee in a position to exert significant influence over the preparation of the client's
accounting records or the financial statements on which the firm will express an opinion.
Former Partner or Audit Team Member Restrictions
R524.4 The firm shall ensure that no significant connection remains between the firm or a network firm
and:
(a) A former partner who has joined an audit client of the firm; or
(b) A former audit team member who has joined the audit client,
if either has joined the audit client as:
(i) A director or officer; or
(ii) An employee in a position to exert significant influence over the preparation of the client's
accounting records or the financial statements on which the firm will express an opinion.
A significant connection remains between the firm or a network firm and the individual, unless:
(a) The individual is not entitled to any benefits or payments from the firm or network firm
that are not made in accordance with fixed pre-determined arrangements;
(b) Any amount owed to the individual is not material to the firm or the network firm; and
(c) The individual does not continue to participate or appear to participate in the firm's or the
network firm's business or professional activities.
524.4 A1 Even if the requirements of paragraph R524.4 are met, a familiarity or intimidation threat might
still be created.
524.4 A2 A familiarity or intimidation threat might also be created if a former partner of the firm or network
firm has joined an entity in one of the positions described in paragraph 524.3 A1 and the entity
subsequently becomes an audit client of the firm.
119
THE CODE
524.4 A3 Factors that are relevant in evaluating the level of such threats include:
The position the individual has taken at the client.
Any involvement the individual will have with the audit team.
The length of time since the individual was an audit team member or partner of the firm
or network firm.
The former position of the individual within the audit team, firm or network firm. An
example is whether the individual was responsible for maintaining regular contact with
the client's management or those charged with governance.
524.4 A4 Examples of actions that might be safeguards to address such familiarity or intimidation threats
include:
Modifying the audit plan.
Assigning to the audit team individuals who have sufficient experience relative to the
individual who has joined the client.
Having an appropriate reviewer review the work of the former audit team member.
Audit Team Members Entering Employment with a Client
R524.5 A firm or network firm shall have policies and procedures that require audit team members to
notify the firm or network firm when entering employment negotiations with an audit client.
524.5 A1 A self-interest threat is created when an audit team member participates in the audit
engagement while knowing that the audit team member will, or might, join the client at some
time in the future.
524.5 A2 An example of an action that might eliminate such a self-interest threat is removing the
individual from the audit team.
524.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is
having an appropriate reviewer review any significant judgments made by that individual while
on the team.
Audit Clients that are Public Interest Entities
Key Audit Partners
R524.6 Subject to paragraph R524.8, if an individual who was a key audit partner with respect to an
audit client that is a public interest entity joins the client as:
(a) A director or officer; or
(b) An employee in a position to exert significant influence over the preparation of the client's
accounting records or the financial statements on which the firm will express an opinion,
independence is compromised unless, subsequent to the individual ceasing to be a key audit
partner:
(i) The audit client has issued audited financial statements covering a period of not less
than twelve months; and
120
THE CODE
(ii) The individual was not an audit team member with respect to the audit of those financial
statements.
Senior or Managing Partner (Chief Executive or Equivalent) of the Firm
R524.7 Subject to paragraph R524.8, if an individual who was the Senior or Managing Partner (Chief
Executive or equivalent) of the firm joins an audit client that is a public interest entity as:
(a) A director or officer; or
(b) An employee in a position to exert significant influence over the preparation of the client's
accounting records or the financial statements on which the firm will express an opinion,
independence is compromised, unless twelve months have passed since the individual
was the Senior or Managing Partner (Chief Executive or equivalent) of the firm.
Business Combinations
R524.8 As an exception to paragraphs R524.6 and R524.7, independence is not compromised if the
circumstances set out in those paragraphs arise as a result of a business combination and:
(a) The position was not taken in contemplation of the business combination;
(b) Any benefits or payments due to the former partner from the firm or a network firm have
been settled in full, unless made in accordance with fixed pre-determined arrangements
and any amount owed to the partner is not material to the firm or network firm as
applicable;
(c) The former partner does not continue to participate or appear to participate in the firm's
or network firm's business or professional activities; and
(d) The firm discusses the former partner's position held with the audit client with those
charged with governance.
121
THE CODE
SECTION 525
TEMPORARY PERSONNEL ASSIGNMENTS
Introduction
525.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
525.2 The loan of personnel to an audit client might create a self-review, advocacy or familiarity
threat. This section sets out specific requirements and application material relevant to applying
the conceptual framework in such circumstances.
Requirements and Application Material
General
525.3 A1 Examples of actions that might be safeguards to address threats created by the loan of
personnel by a firm or a network firm to an audit client include:
Conducting an additional review of the work performed by the loaned personnel might
address a self-review threat.
Not including the loaned personnel as an audit team member might address a familiarity
or advocacy threat.
Not giving the loaned personnel audit responsibility for any function or activity that the
personnel performed during the loaned personnel assignment might address a self-
review threat.
525.3 A2 When familiarity and advocacy threats are created by the loan of personnel by a firm or a
network firm to an audit client, such that the firm or the network firm becomes too closely
aligned with the views and interests of management, safeguards are often not available.
R525.4 A firm or network firm shall not loan personnel to an audit client unless:
(a) Such assistance is provided only for a short period of time;
(b) The personnel are not involved in providing non-assurance services that would not be
permitted under Section 600 and its subsections; and
(c) The personnel do not assume management responsibilities and the audit client is
responsible for directing and supervising the activities of the personnel.
122
THE CODE
SECTION 540
LONG ASSOCIATION OF PERSONNEL (INCLUDING PARTNER ROTATION) WITH AN
AUDIT CLIENT
Introduction
540.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
540.2 When an individual is involved in an audit engagement over a long period of time, familiarity and
self-interest threats might be created. This section sets out requirements and application material
relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
All Audit Clients
540.3 A1 Although an understanding of an audit client and its environment is fundamental to audit
quality, a familiarity threat might be created as a result of an individual's long association as an
audit team member with:
(a) The audit client and its operations;
(b) The audit client's senior management; or
(c) The financial statements on which the firm will express an opinion or the financial
information which forms the basis of the financial statements.
540.3 A2 A self-interest threat might be created as a result of an individual's concern about losing a
longstanding client or an interest in maintaining a close personal relationship with a member of
senior management or those charged with governance. Such a threat might influence the
individual's judgment inappropriately.
540.3 A3 Factors that are relevant to evaluating the level of such familiarity or self-interest threats
include:
(a) In relation to the individual:
The overall length of the individual's relationship with the client, including if such
relationship existed while the individual was at a prior firm.
How long the individual has been an engagement team member, and the nature
of the roles performed.
The extent to which the work of the individual is directed, reviewed and supervised
by more senior personnel.
The extent to which the individual, due to the individual's seniority, has the ability
to influence the outcome of the audit, for example, by making key decisions or
directing the work of other engagement team members.
The closeness of the individual's personal relationship with senior management or
those charged with governance.
123
THE CODE
The nature, frequency and extent of the interaction between the individual and
senior management or those charged with governance.
(b) In relation to the audit client:
The nature or complexity of the client's accounting and financial reporting issues
and whether they have changed.
Whether there have been any recent changes in senior management or those
charged with governance.
Whether there have been any structural changes in the client's organization which
impact the nature, frequency and extent of interactions the individual might have
with senior management or those charged with governance.
540.3 A4 The combination of two or more factors might increase or reduce the level of the threats. For
example, familiarity threats created over time by the increasingly close relationship between an
individual and a member of the client's senior management would be reduced by the departure of
that member of the client's senior management.
540.3 A5 An example of an action that might eliminate the familiarity and self-interest threats created by
an individual being involved in an audit engagement over a long period of time would be rotating
the individual off the audit team.
540.3 A6 Examples of actions that might be safeguards to address such familiarity or self-interest threats
include:
Changing the role of the individual on the audit team or the nature and extent of the tasks
the individual performs.
Having an appropriate reviewer who was not an audit team member review the work of
the individual.
Performing regular independent internal or external quality reviews of the engagement.
R540.4 If a firm decides that the level of the threats created can only be addressed by rotating the individual
off the audit team, the firm shall determine an appropriate period during which the individual shall
not:
(a) Be a member of the engagement team for the audit engagement;
(b) Provide quality control for the audit engagement; or
(c) Exert direct influence on the outcome of the audit engagement.
The period shall be of sufficient duration to allow the familiarity and self-interest threats to be
addressed. In the case of a public interest entity, paragraphs R540.5 to R540.20 also apply.
Audit Clients that are Public Interest Entities
R540.5 Subject to paragraphs R540.7 to R540.9, in respect of an audit of a public interest entity, an
individual shall not act in any of the following roles, or a combination of such roles, for a period
of more than seven cumulative years (the "time-on" period):
(a) The engagement partner;
(b) The individual appointed as responsible for the engagement quality control review; or
(c) Any other key audit partner role.
124
THE CODE
After the time-on period, the individual shall serve a "cooling-off" period in accordance with the
provisions in paragraphs R540.11 to R540.19.
R540.6 In calculating the time-on period, the count of years shall not be restarted unless the individual
ceases to act in any one of the roles in paragraph R540.5(a) to (c) for a minimum period. This
minimum period is a consecutive period equal to at least the cooling-off period determined in
accordance with paragraphs R540.11 to R540.13 as applicable to the role in which the
individual served in the year immediately before ceasing such involvement.
540.6 A1 For example, an individual who served as engagement partner for four years followed by three
years off can only act thereafter as a key audit partner on the same audit engagement for three
further years (making a total of seven cumulative years). Thereafter, that individual is required
to cool off in accordance with paragraph R540.14.
R540.7 As an exception to paragraph R540.5, key audit partners whose continuity is especially important
to audit quality may, in rare cases due to unforeseen circumstances outside the firm's control, and
with the concurrence of those charged with governance, be permitted to serve an additional year
as a key audit partner as long as the threat to independence can be eliminated or reduced to an
acceptable level.
540.7 A1 For example, a key audit partner may remain in that role on the audit team for up to one additional
year in circumstances where, due to unforeseen events, a required rotation was not possible, as
might be the case due to serious illness of the intended engagement partner. In such
circumstances, this will involve the firm discussing with those charged with governance the reasons
why the planned rotation cannot take place and the need for any safeguards to reduce any threat
created.
R540.8 If an audit client becomes a public interest entity, a firm shall take into account the length of
time an individual has served the audit client as a key audit partner before the client becomes
a public interest entity in determining the timing of the rotation. If the individual has served the
audit client as a key audit partner for a period of five cumulative years or less when the client
becomes a public interest entity, the number of years the individual may continue to serve the
client in that capacity before rotating off the engagement is seven years less the number of
years already served. As an exception to paragraph R540.5, if the individual has served the
audit client as a key audit partner for a period of six or more cumulative years when the client
becomes a public interest entity, the individual may continue to serve in that capacity with the
concurrence of those charged with governance for a maximum of two additional years before
rotating off the engagement.
R540.9 When a firm has only a few people with the necessary knowledge and experience to serve as a
key audit partner on the audit of a public interest entity, rotation of key audit partners might not
be possible. In these circumstances the firm should apply other safeguards to reduce the threat
to an acceptable level. Such safeguards would include involving an additional professional
accountant who was not otherwise associated with the audit team to review the work done or
otherwise advise as necessary. This individual could be someone from outside the firm or
someone within the firm who was not otherwise associated with the audit team.
125
THE CODE
Other Considerations Relating to the Time-on Period
R540.10 In evaluating the threats created by an individual's long association with an audit engagement,
a firm shall give particular consideration to the roles undertaken and the length of an individual's
association with the audit engagement prior to the individual becoming a key audit partner.
540.10 A1 There might be situations where the firm, in applying the conceptual framework, concludes that
it is not appropriate for an individual who is a key audit partner to continue in that role even
though the length of time served as a key audit partner is less than seven years.
Cooling-off Period
R540.11 If the individual acted as the engagement partner for seven cumulative years, the cooling-off
period shall be five consecutive years.
R540.12 Where the individual has been appointed as responsible for the engagement quality control review
and has acted in that capacity for seven cumulative years, the cooling-off period shall be three
consecutive years.
R540.13 If the individual has acted as a key audit partner other than in the capacities set out in paragraphs
R540.11 and R540.12 for seven cumulative years, the cooling-off period shall be two consecutive
years.
Service in a combination of key audit partner roles
R540.14 If the individual acted in a combination of key audit partner roles and served as the engagement
partner for four or more cumulative years, the cooling-off period shall be five consecutive years.
R540.15 Subject to paragraph R540.16(a), if the individual acted in a combination of key audit partner
roles and served as the key audit partner responsible for the engagement quality control review
for four or more cumulative years, the cooling-off period shall be three consecutive years.
R540.16 If an individual has acted in a combination of engagement partner and engagement quality control
review roles for four or more cumulative years during the time-on period, the cooling-off period
shall:
(a) As an exception to paragraph R540.15, be five consecutive years where the individual has
been the engagement partner for three or more years; or
(b) Be three consecutive years in the case of any other combination.
R540.17 If the individual acted in any combination of key audit partner roles other than those addressed in
paragraphs R540.14 to R540.16, the cooling-off period shall be two consecutive years.
Service at a Prior Firm
R540.18 In determining the number of years that an individual has been a key audit partner as set out
in paragraph R540.5, the length of the relationship shall, where relevant, include time while the
individual was a key audit partner on that engagement at a prior firm.
126
THE CODE
Shorter Cooling-off Period Established by Law or Regulation
R540.19 Where a legislative or regulatory body (or organization authorized or recognized by such
legislative or regulatory body) has established a cooling-off period for an engagement partner
of less than five consecutive years, the higher of that period or three years may be substituted
for the cooling-off period of five consecutive years specified in paragraphs R540.11, R540.14
and R540.16(a) provided that the applicable time-on period does not exceed seven years.
Restrictions on Activities During the Cooling-off Period
R540.20 For the duration of the relevant cooling-off period, the individual shall not:
(a) Be an engagement team member or provide quality control for the audit engagement;
(b) Consult with the engagement team or the client regarding technical or industry-specific
issues, transactions or events affecting the audit engagement (other than discussions with
the engagement team limited to work undertaken or conclusions reached in the last year of
the individual's time-on period where this remains relevant to the audit);
(c) Be responsible for leading or coordinating the professional services provided by the firm
or a network firm to the audit client, or overseeing the relationship of the firm or a network
firm with the audit client; or
(d) Undertake any other role or activity not referred to above with respect to the audit client,
including the provision of non-assurance services that would result in the individual:
(i) Having significant or frequent interaction with senior management or those
charged with governance; or
(ii) Exerting direct influence on the outcome of the audit engagement.
540.20 A1 The provisions of paragraph R540.20 are not intended to prevent the individual from assuming
a leadership role in the firm or a network firm, such as that of the Senior or Managing Partner
(Chief Executive or equivalent).
Provisions applicable to audit clients under other regulations
540.21 In case of an audit client being a company, in accordance with the Companies, Act, 2013, the
members of a company may resolve to provide that in the Firm appointed by them, the
auditing partner and its team shall be rotated at such intervals as may be resolved by the
members. If they resolve to provide shorter time on period, such shorter period will prevail.
R540.22 Additional rotation requirements are prescribed by certain regulators such as Reserve Bank of
India for certain NBFCs5, National Housing Board for Housing Finance Companies6, and any
5 In accordance with the Non-Banking Financial Companies Corporate Governance (Reserve Bank) Directions, 2015,
issued by the Reserve Bank of India vide Notification No.DNBR. 019/CGM (CDS)-2015 dated April 10, 2015, the rotation
requirements are as follows:
Extent of the Directions
(i) These Directions shall apply to every non-deposit accepting Non-Banking Financial Company with asset size of
Rs.500 crore and above (NBFCs-ND-SI), as per its last audited balance sheet, and all deposit accepting Non-Banking
Financial Companies (NBFCs-D), henceforth called as Applicable NBFCs.
(ii) The provisions of these Directions shall not apply to a Systemically Important Core Investment Company as
defined in the Core Investment Companies (Reserve Bank) Directions, 2011.
127
THE CODE
other, subject to amendments as may be made from time to time.
Rotation of partners of the Statutory Auditors Audit Firm
All Applicable NBFCs shall rotate the partner/s of the Chartered Accountant firm conducting the audit, every three
years so that same partner does not conduct audit of the company continuously for more than a period of three
years. However, the partner so rotated will be eligible for conducting the audit of the NBFC after an interval of three
years, if the NBFC, so decides. NBFCs shall incorporate appropriate terms in the letter of appointment of the firm of
auditors and ensure its compliance.
6
In accordance with the "Housing Finance Companies Corporate Governance (National Housing Bank) Directions,
2016 Directions issued vide Notification No. NHB.HFC.CG-DIR.1/MD&CEO/2016 dated 9 February 2017, the rotation
requirements are as follows:
Extent of the Directions
These Directions shall apply to every non-public deposit accepting Housing Finance Company (HFC) with assets size of
50 crore and above, as per the last audited balance sheet, and all public deposit accepting / holding Housing Finance
Companies (HFCs), henceforth called Applicable HFCs.
Rotation of partners of the Statutory Auditors Audit Firm
Rotation of partners of the Statutory Auditors Audit Firm All Applicable HFCs shall rotate the partner/s of the
Chartered Accountant firm conducting the audit, every three years so that same partner does not conduct audit of
the company continuously for more than a period of three years. However, the partner so rotated will be eligible for
conducting the audit of the HFC after an interval of three years, if the HFC, so decides. HFCs shall incorporate
appropriate terms in the letter of appointment of the firm of auditors and ensure its compliance.
128
THE CODE
SECTION 550
AUDITOR ROTATION
Introduction
Auditor rotation requirements prescribed under various regulations are set out below. This is not an
exhaustive list. Members shall comply with requirements stipulated by any other regulator not covered
hereunder. Further, these regulations are subject to amendments, as may be made from time to time.
Auditor rotation requirements under the Companies Act, 2013
In accordance with Section 139(2) of the Companies Act, 2013, no listed company or a company
belonging to such class or classes of companies as may be prescribed7, shall appoint or re-appoint--
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:
8
[Provided that--
(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as
auditor in the same company for five years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common partner or partners to
the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall
be appointed as auditor of the same company for a period of five years:
Provided also that every company, existing on or before the commencement of this Act which is required
to comply with the provisions of this sub-section, shall comply with requirements of this sub-section within
a period which shall not be later than the date of the first annual general meeting of the company held,
within the period specified under sub-section (1) of section 96, after three years from the date of
commencement of this Act.
Provided also that, nothing contained in this sub-section shall prejudice the right of the company to
remove an auditor or the right of the auditor to resign from such office of the company
For detailed provisions, please refer to the complete Section 139 of the Companies Act 2013
Auditor rotation requirements for stock brokers
In accordance with the SEBI circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 issued dated 26 September
2016, the prescribed rotation requirements are as under:
5.3. No stock broker shall appoint or re-appoint--
7
For the purposes of sub-section (2) of section 139, the class of companies shall mean the following classes
of companies excluding one person companies and small companies:-
(a) all unlisted public companies having paid up share capital of rupees ten crore or more;
(b) all private limited companies having paid up share capital of rupees fifty crore or more
(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but
having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.
8
In case of Specified IFSC Private Company- All provisos to sub section (2) of section 139 shall not apply. - Notification
Dated 4th January 2017.
129
THE CODE
a) an individual as statutory auditor for more than one term of five consecutive years;
b) an audit firm as statutory auditor for more than two terms of five consecutive years:
Provided that--
5.4. An individual statutory auditor who has completed his term under clause 5.3 (a) above shall not be
eligible for re-appointment as statutory auditor in the same stock broker for five years from the completion of
his term.
5.5. An statutory audit firm which has completed its term under clause 5.3 (b) above, shall not be eligible for
re-appointment as statutory auditor in the same stock broker for five years from the completion of such term:
5.6. Provided further that as on the date of appointment no statutory audit firm having a common partner or
partners to the other audit firm, whose tenure has expired in a stock broker immediately preceding the
financial year, shall be appointed as statutory auditor of the same stock broker for a period of five years:
5.7. The above provisions shall be applicable from April 01, 2017
Auditor rotation requirements for utual funds
In accordance with Para B(2) of the SEBI circular SEBI/HO/IMD/DF2/CIR/P/2017/125 issued dated 30
November 2017, the prescribed rotation requirements are as under:
With respect to appointment of auditors in terms of Regulation 55 (1) of SEBI (MFs) Regulation, 1996, it has
been decided that:
i No mutual fund shall appoint an auditor for more than 2 terms of maximum five consecutive years. Such
auditor may be re-appointed after cooling off period of 5 years.
ii. Further, during the cooling-off period of five years, the incoming auditor may not include:
a. Any firm that has common partner(s) with the outgoing audit firm
b. Any associate / affiliate firm(s) of the outgoing audit firm which are under the same network of audit
firms wherein the term "same network" includes the firms operating or functioning, hitherto or in future,
under the same brand name, trade name or common control
iii. Existing auditors may be appointed for a maximum of 10 years (including all preceding years for which an
auditor has been appointed in terms of Regulation 55 (1) of SEBI (Mutual Funds) Regulation, 1996). In
this respect, the following may be noted:
a. Auditors who have conducted audit of the Mutual Fund for less than 9 years (as on date of issuance of
this circular) may continue for the residual period of service.
b. Auditors who have conducted audit of the Mutual Fund for 9 years or more (as on date of issuance of
this circular) may continue for a maximum of 1 year from date of issuance of this circular.
c. Such auditors shall subsequently be eligible for re-appointment after a cooling-off period of 5 years, in
terms of Para B (2) (i) and Para B (2) (ii) above.
Statutory Central Auditors (SCA) rotation requirements for Indian Private Sector Banks/ All Foreign
Banks operating in India
In accordance with the RBI circular DBS.ARS.BC.04/08.91.001/2017-18 issued dated 27 July 2017, an audit
firm, subject to its fulfilling the prescribed eligibility norms will be allowed to continue as the SCA for a
particular bank for a period of four years and, thereafter, after completing its four year tenure in a particular
private/foreign bank, will not be eligible for appointment as SCA of the same bank for a period of six years.
130
THE CODE
Auditor rotation requirements for appointed under Employees' provident funds scheme,
1952
As per paragraph 24(c) of the Employees' provident funds scheme, 1952, the same auditors should not be
appointed for two consecutive years and not more than two years in a block of six years.
131
THE CODE
SECTION 600
PROVISION OF NON-ASSURANCE SERVICES TO AN AUDIT CLIENT
Introduction
600.1 Firms are required to comply with the fundamental principles, be independent, and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
600.2 Firms and network firms might provide a range of non-assurance services to their audit clients,
consistent with their skills and expertise. Providing non-assurance services to audit clients
might create threats to compliance with the fundamental principles and threats to
independence.
600.3 This section sets out requirements and application material relevant to applying the conceptual
framework to identify, evaluate and address threats to independence when providing non-
assurance services to audit clients. The subsections that follow set out specific requirements
and application material relevant when a firm or network firm provides certain non-assurance
services to audit clients and indicate the types of threats that might be created as a result.
Some of the subsections include requirements that expressly prohibit a firm or network firm
from providing certain services to an audit client in certain circumstances because the threats
created cannot be addressed by applying safeguards.
Requirements and Application Material
General
R600.4 Before a firm or a network firm accepts an engagement to provide a non-assurance service to
an audit client, the firm shall determine whether providing such a service might create a threat
to independence.
600.4 A1 The requirements and application material in this section assist the firm in analyzing certain
types of non-assurance services and the related threats that might be created if a firm or
network firm provides non-assurance services to an audit client.
Additionally, Section 141(3) (i) of the Companies Act, 2013 provides that a person who,
directly or indirectly, renders any service referred to in section 144 to the company or its
holding company or its subsidiary company shall not be eligible for appointment as an auditor
of a company,
As per Section 144 of the Companies Act, 2013, an auditor appointed under the Companies
Act 2013 shall provide to the company only such other services as are approved by the
Board of Directors or the audit committee, as the case may be, but which shall not include
any of the following services (whether such services are rendered directly or indirectly to the
company or its holding company or subsidiary company), namely:--
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
132
THE CODE
(i) any other kind of services as may be prescribed:
Explanation.--For the purposes of this sub-section, the term "directly or indirectly" shall include
rendering of services by the auditor,--
(i) in case of auditor being an individual, either himself or through his relative or any other
person connected or associated with such individual or through any other entity, whatsoever,
in which such individual has significant influence or control, or whose name or trade mark or
brand is used by such individual;
(ii) in case of auditor being a firm, either itself or through any of its partners or through its
parent, subsidiary or associate entity or through any other entity, whatsoever, in which the
firm or any partner of the firm has significant influence or control, or whose name or trade
mark or brand is used by the firm or any of its partners.
600.4 A2 New business practices, the evolution of financial markets and changes in information
technology, are among the developments that make it impossible to draw up an all-inclusive
list of non-assurance services that might be provided to an audit client. As a result, the Code
does not include an exhaustive list of all non-assurance services that might be provided to an
audit client.
Evaluating Threats
600.5 A1 Factors that are relevant in evaluating the level of threats created by providing a non-assurance
service to an audit client include:
The nature, scope and purpose of the service.
The degree of reliance that will be placed on the outcome of the service as part of the
audit.
The legal and regulatory environment in which the service is provided.
Whether the outcome of the service will affect matters reflected in the financial
statements on which the firm will express an opinion, and, if so:
o The extent to which the outcome of the service will have a material effect on the
financial statements.
o The degree of subjectivity involved in determining the appropriate amounts or
treatment for those matters reflected in the financial statements.
The level of expertise of the client's management and employees with respect to the type
of service provided.
The extent of the client's involvement in determining significant matters of judgment.
The nature and extent of the impact of the service, if any, on the systems that generate
information that forms a significant part of the client's:
o Accounting records or financial statements on which the firm will express an
opinion.
o Internal controls over financial reporting.
Whether the client is a public interest entity. For example, providing a non-assurance
service to an audit client that is a public interest entity might be perceived to result in a
higher level of a threat.
133
THE CODE
600.5 A2 Subsections 601 to 610 include examples of additional factors that are relevant in evaluating
the level of threats created by providing the non-assurance services set out in those
subsections.
Materiality in Relation to Financial Statements
600.5 A3 Subsections 601 to 610 refer to materiality in relation to an audit client's financial statements.
The concept of materiality in relation to an audit is addressed in SA 320, Materiality in Planning
and Performing an Audit, and in relation to a review in SRE 2400 (Revised), Engagements to
Review Historical Financial Statements. The determination of materiality involves the exercise
of professional judgment and is impacted by both quantitative and qualitative factors. It is also
affected by perceptions of the financial information needs of users.
Multiple Non-assurance Services Provided to the Same Audit Client
600.5 A4 A firm or network firm might provide multiple non-assurance services to an audit client. In these
circumstances the consideration of the combined effect of threats created by providing those
services is relevant to the firm's evaluation of threats.
Addressing Threats
600.6 A1 Subsections 601 to 610 include examples of actions, including safeguards, that might address
threats to independence created by providing those non-assurance services when threats are
not at an acceptable level. Those examples are not exhaustive.
600.6 A2 Some of the subsections include requirements that expressly prohibit a firm or network firm
from providing certain services to an audit client in certain circumstances because the threats
created cannot be addressed by applying safeguards.
600.6 A3 Paragraph 120.10 A2 includes a description of safeguards. In relation to providing non-
assurance services to audit clients, safeguards are actions, individually or in combination, that
the firm takes that effectively reduce threats to independence to an acceptable level. In some
situations, when a threat is created by providing a non-assurance service to an audit client,
safeguards might not be available. In such situations, the application of the conceptual
framework set out in Section 120 requires the firm to decline or end the non-assurance service
or the audit engagement.
Prohibition on Assuming Management Responsibilities
R600.7 A firm or a network firm shall not assume a management responsibility for an audit client.
Further, under Section 144 of the Companies Act, 2013, where applicable, the restriction also
applies to the holding company and subsidiary company of such audit client.
600.7 A1 Management responsibilities involve controlling, leading and directing an entity, including
making decisions regarding the acquisition, deployment and control of human, financial,
technological, physical and intangible resources.
600.7 A2 Providing a non-assurance service to an audit client creates self-review and self-interest
threats if the firm or network firm assumes a management responsibility when performing the
service. Assuming a management responsibility also creates a familiarity threat and might
create an advocacy threat because the firm or network firm becomes too closely aligned with
the views and interests of management.
600.7 A3 Determining whether an activity is a management responsibility depends on the circumstances
and requires the exercise of professional judgment. Examples of activities that would be
134
THE CODE
considered a management responsibility include:
Setting policies and strategic direction.
Hiring or dismissing employees.
Directing and taking responsibility for the actions of employees in relation to the
employees' work for the entity.
Authorizing transactions.
Controlling or managing bank accounts or investments.
Deciding which recommendations of the firm or network firm or other third parties to
implement.
Reporting to those charged with governance on behalf of management.
Taking responsibility for:
o The preparation and fair presentation of the financial statements in accordance
with the applicable financial reporting framework.
o Designing, implementing, monitoring or maintaining internal control.
600.7 A4 Providing advice and recommendations to assist the management of an audit client in
discharging its responsibilities is not assuming a management responsibility. (Ref: Para.
R600.7 to 600.7 A3).
R600.8 Subject to applicable restrictions under Companies Act, 2013, to avoid assuming a
management responsibility when providing any non-assurance service to an audit client, the
firm shall be satisfied that client management makes all judgments and decisions that are
the proper responsibility of management. This includes ensuring that the client's
management:
|
(a) Designates an individual who possesses suitable skill, knowledge and experience to be
responsible at all times for the client's decisions and to oversee the services. Such an
individual, preferably within senior management, would understand:
(i) The objectives, nature and results of the services; and
(ii) The respective client and firm or network firm responsibilities.
However, the individual is not required to possess the expertise to perform or re-perform
the services.
(b) Provides oversight of the services and evaluates the adequacy of the results of the
service performed for the client's purpose.
(c) Accepts responsibility for the actions, if any, to be taken arising from the results of the
services.
Providing Non-Assurance Services to an Audit Client that Later Becomes a Public Interest Entity
R600.9 A non-assurance service provided, either currently or previously, by a firm or a network firm to
an audit client compromises the firm's independence when the client becomes a public interest
entity unless:
(a) The previous non-assurance service complies with the provisions of this section that
relate to audit clients that are not public interest entities;
135
THE CODE
(b) Non-assurance services currently in progress that are not permitted under this section
for audit clients that are public interest entities are ended before, or as soon as
practicable after, the client becomes a public interest entity; and
(c) The firm addresses threats that are created that are not at an acceptable level.
Considerations for Certain Related Entities
R600.10 This section includes requirements that prohibit firms and network firms from assuming
management responsibilities or providing certain non-assurance services to audit clients. As
an exception to those requirements, a firm or network firm may assume management
responsibilities or provide certain non-assurance services that would otherwise be prohibited
to the following related entities of the client on whose financial statements the firm will express
an opinion:
(a) An entity that has direct or indirect control over the client (other than an engagement to
which Companies Act, 2013 applies);
(b) 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; or
(c) An entity which is under common control with the client,
provided that all of the following conditions are met:
(i) The firm or a network firm does not express an opinion on the financial statements of the
related entity;
(ii) The firm or a network firm does not assume a management responsibility, directly or
indirectly, for the entity on whose financial statements the firm will express an opinion;
(iii) The services do not create a self-review threat because the results of the services will
not be subject to audit procedures; and
(iv) The firm addresses other threats created by providing such services that are not at an
acceptable level.
SUBSECTION 601 ACCOUNTING AND BOOKKEEPING SERVICES
601.1 A1 Accounting and bookkeeping services comprise a broad range of services including:
Preparing accounting records and financial statements.
Recording transactions.
Payroll services.
601.1 A2 Management is responsible for the preparation and fair presentation of the financial statements
in accordance with the applicable financial reporting framework. These responsibilities include:
Determining accounting policies and the accounting treatment in accordance with those
policies.
Preparing or changing source documents or originating data, in electronic or other form,
evidencing the occurrence of a transaction. Examples include:
o Purchase orders
o Payroll time records
o Customer orders
Originating or changing journal entries.
Determining or approving the account classifications of transactions.
601.1 A3 The audit process necessitates dialogue between the firm and the management of the audit
client, which might involve:
Applying accounting standards or policies and financial statement disclosure
136
THE CODE
requirements.
Assessing the appropriateness of financial and accounting control and the methods used in
determining the stated amounts of assets and liabilities.
Proposing adjusting journal entries.
These activities are considered to be a normal part of the audit process and do not usually
create threats as long as the client is responsible for making decisions in the preparation of
accounting records and financial statements.
601.1 A4 Similarly, the client might request technical assistance on matters such as resolving account
reconciliation problems or analyzing and accumulating information for regulatory reporting. In
addition, the client might request technical advice on accounting issues such as the conversion
of existing financial statements from one financial reporting framework to another. Examples
include:
Complying with group accounting policies.
Transitioning to a different financial reporting framework such as International Financial
Reporting Standards.
Such services do not usually create threats provided neither the firm nor network firm assumes a
management responsibility for the client.
R. 601.2 As per the provisions of the Guidance Note on Independence of Auditors, it is not permitted to do
the book keeping work of the Audit client. Further, under Companies Act, 2013, where applicable,
the restriction also applies to the subsidiary company or holding Company of the audit client
SUBSECTION 602 ADMINISTRATIVE SERVICES
Introduction
602.1 Providing administrative services to an audit client does not usually create a threat.
602.2 In addition to the specific application material in this subsection, the requirements and
application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual
framework when providing administrative services.
Application Material
All Audit Clients
602.3 A1 Administrative services involve assisting clients with their routine or mechanical tasks within
the normal course of operations. Such services require little to no professional judgment and
are clerical in nature.
602.3 A2 Examples of administrative services include:
Word processing services.
Preparing administrative or statutory forms for client approval.
Submitting such forms as instructed by the client.
Monitoring statutory filing dates, and advising an audit client of those dates.
SUBSECTION 603 VALUATION SERVICES
Introduction
603.1 Providing valuation services to an audit client might create a self-review or advocacy threat.
137
THE CODE
603.2 In addition to the specific requirements and application material in this subsection, the
requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying
the conceptual framework when providing valuation services to an audit client. This subsection
includes requirements that prohibit firms and network firms from providing certain valuation
services to audit clients in some circumstances because the threats created cannot be
addressed by applying safeguards.
Requirements and Application Material
All Audit Clients
603.3 A1 A valuation comprises the making of assumptions with regard to future developments, the
application of appropriate methodologies and techniques, and the combination of both to
compute a certain value, or range of values, for an asset, a liability or for a business as a whole.
603.3 A2 If a firm or network firm is requested to perform a valuation to assist an audit client with its tax
reporting obligations or for tax planning purposes and the results of the valuation will not have
a direct effect on the financial statements, the application material set out in paragraphs 604.9
A1 to 604.9 A5, relating to such services, applies.
603.3 A3 Factors that are relevant in evaluating the level of self-review or advocacy threats created by
providing valuation services to an audit client include:
The use and purpose of the valuation report.
Whether the valuation report will be made public.
The extent of the client's involvement in determining and approving the valuation
methodology and other significant matters of judgment.
The degree of subjectivity inherent in the item for valuations involving standard or
established methodologies.
Whether the valuation will have a material effect on the financial statements.
The extent and clarity of the disclosures related to the valuation in the financial
statements.
The degree of dependence on future events of a nature that might create significant
volatility inherent in the amounts involved.
603.3 A4 Examples of actions that might be safeguards to address threats include:
Using professionals who are not audit team members to perform the service might
address self-review or advocacy threats.
Having an appropriate reviewer who was not involved in providing the service review the
audit work or service performed might address a self-review threat.
Audit Clients that are Not Public Interest Entities
R603.4 A firm or a network firm shall not provide a valuation service to an audit client that is not a public
interest entity if:
(a) The valuation involves a significant degree of subjectivity; and
(b) The valuation will have a material effect on the financial statements on which the firm will
express an opinion.
138
THE CODE
603.4 A1 Certain valuations do not involve a significant degree of subjectivity. This is likely to be the case
when the underlying assumptions are either established by law or regulation, or are widely
accepted and when the techniques and methodologies to be used are based on generally
accepted standards or prescribed by law or regulation. In such circumstances, the results of a
valuation performed by two or more parties are not likely to be materially different.
Audit Clients that are Public Interest Entities
R603.5 A firm or a network firm shall not provide a valuation service to an audit client that is a public
interest entity if the valuation service would have a material effect, individually or in the
aggregate, on the financial statements on which the firm will express an opinion.
SUBSECTION 604 TAX SERVICES
Introduction
604.1 Providing tax services to an audit client might create a self-review or advocacy threat.
604.2 In addition to the specific requirements and application material in this subsection, the
requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying
the conceptual framework when providing a tax service to an audit client. This subsection
includes requirements that prohibit firms and network firms from providing certain tax services
to audit clients in some circumstances because the threats created cannot be addressed by
applying safeguards.
Requirements and Application Material
All Audit Clients
604.3 A1 Tax services comprise a broad range of services, including activities such as:
Tax return preparation.
Tax calculations for the purpose of preparing the accounting entries.
Tax planning and other tax advisory services.
Tax services involving valuations.
Assistance in the resolution of tax disputes.
While this subsection deals with each type of tax service listed above under separate headings,
in practice, the activities involved in providing tax services are often inter-related.
604.3 A2 Factors that are relevant in evaluating the level of threats created by providing any tax service
to an audit client include:
The particular characteristics of the engagement.
The level of tax expertise of the client's employees.
The system by which the tax authorities assess and administer the tax in question and
the role of the firm or network firm in that process.
The complexity of the relevant tax regime and the degree of judgment necessary in
applying it.
Tax Return Preparation
139
THE CODE
All Audit Clients
604.4 A1 Providing tax return preparation services does not usually create a threat.
604.4 A2 Tax return preparation services involve:
Assisting clients with their tax reporting obligations by drafting and compiling information,
including the amount of tax due (usually on standardized forms) required to be submitted
to the applicable tax authorities.
Advising on the tax return treatment of past transactions and responding on behalf of the
audit client to the tax authorities' requests for additional information and analysis (for
example, providing explanations of and technical support for the approach being taken).
604.4 A3 Tax return preparation services are usually based on historical information and principally
involve analysis and presentation of such historical information under existing tax law, including
precedents and established practice. Further, the tax returns are subject to whatever review or
approval process the tax authority considers appropriate.
Tax Calculations for the Purpose of Preparing Accounting Entries
All Audit Clients
604.5 A1 Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for
the purpose of preparing accounting entries that will be sbsequently audited by the firm
creates a self-review threat.
604.5 A2 In addition to the factors in paragraph 604.3 A2, a factor that is relevant in evaluating the level
of the threat created when preparing such calculations for an audit client is whether the
calculation might have a material effect on the financial statements on which the firm will
express an opinion.
Audit Clients that are Not Public Interest Entities
604.5 A3 Examples of actions that might be safeguards to address such a self-review threat when the
audit client is not a public interest entity include:
Using professionals who are not audit team members to perform the service.
Having an appropriate reviewer who was not involved in providing the service review the
audit work or service performed.
Audit Clients that are Public Interest Entities
R604.6 A firm or a network firm shall not prepare tax calculations of current and deferred tax liabilities
(or assets) for an audit client that is a public interest entity for the purpose of preparing
accounting entries that are material to the financial statements on which the firm will express
an opinion.
604.6 A1 The examples of actions that might be safeguards in paragraph 604.5 A3 to address self-review
threats are also applicable when preparing tax calculations of current and deferred tax liabilities
(or assets) to an audit client that is a public interest entity that are immaterial to the financial
statements on which the firm will express an opinion.
Tax Planning and Other Tax Advisory Services
All Audit Clients
140
THE CODE
604.7 A1 Providing tax planning and other tax advisory services might create a self-review or advocacy
threat.
604.7 A2 Tax planning or other tax advisory services comprise a broad range of services, such as
advising the client how to structure its affairs in a tax efficient manner or advising on the
application of a new tax law or regulation.
604.7 A3 In addition to paragraph 604.3 A2, factors that are relevant in evaluating the level of self-review
or advocacy threats created by providing tax planning and other tax advisory services to audit
clients include:
The degree of subjectivity involved in determining the appropriate treatment for the tax
advice in the financial statements.
Whether the tax treatment is supported by a private ruling or has otherwise been cleared
by the tax authority before the preparation of the financial statements.
For example, whether the advice provided as a result of the tax planning and other tax
advisory services:
o Is clearly supported by a tax authority or other precedent.
o Is an established practice.
o Has a basis in tax law that is likely to prevail.
The extent to which the outcome of the tax advice will have a material effect on the
financial statements.
Whether the effectiveness of the tax advice depends on the accounting treatment or
presentation in the financial statements and there is doubt as to the appropriateness of
the accounting treatment or presentation under the relevant financial reporting
framework.
604.7 A4 Examples of actions that might be safeguards to address such threats include:
Using professionals who are not audit team members to perform the service might
address self-review or advocacy threats.
Having an appropriate reviewer, who was not involved in providing the service review
the audit work or service performed might address a self-review threat.
Obtaining pre-clearance from the tax authorities might address self-review or advocacy
threats.
When Effectiveness of Tax Advice Is Dependent on a Particular Accounting Treatment or Presentation
R604.8 A firm or a network firm shall not provide tax planning and other tax advisory services to an
audit client when the effectiveness of the tax advice depends on a particular accounting
treatment or presentation in the financial statements and:
(a) The audit team has reasonable doubt as to the appropriateness of the related accounting
treatment or presentation under the relevant financial reporting framework; and
(b) The outcome or consequences of the tax advice will have a material effect on the
financial statements on which the firm will express an opinion.
Tax Services Involving Valuations
141
THE CODE
All Audit Clients
604.9 A1 Providing tax valuation services to an audit client might create a self-review or advocacy threat.
604.9 A2 A firm or a network firm might perform a valuation for tax purposes only, where the result of the
valuation will not have a direct effect on the financial statements (that is, the financial
statements are only affected through accounting entries related to tax). This would not usually
create threats if the effect on the financial statements is immaterial or the valuation is subject
to external review by a tax authority or similar regulatory authority.
604.9 A3 If the valuation that is performed for tax purposes is not subject to an external review and the
effect is material to the financial statements, in addition to paragraph 604.3 A2, the following
factors are relevant in evaluating the level of self-review or advocacy threats created by
providing those services to an audit client:
The extent to which the valuation methodology is supported by tax law or regulation,
other precedent or established practice.
The degree of subjectivity inherent in the valuation.
The reliability and extent of the underlying data.
604.9 A4 Examples of actions that might be safeguards to address threats include:
Using professionals who are not audit team members to perform the service might
address self-review or advocacy threats.
Having an appropriate reviewer who was not involved in providing the service review the
audit work or service performed might address a self-review threat.
Obtaining pre-clearance from the tax authorities might address self-review or advocacy
threats.
604.9 A5 A firm or network firm might also perform a tax valuation to assist an audit client with its tax
reporting obligations or for tax planning purposes where the result of the valuation will have a
direct effect on the financial statements. In such situations, the requirements and application
material set out in Subsection 603 relating to valuation services apply.
Assistance in the Resolution of Tax Disputes
All Audit Clients
604.10 A1 Providing assistance in the resolution of tax disputes to an audit client might create a self-
review or advocacy threat.
604.10 A2 A tax dispute might reach a point when the tax authorities have notified an audit client that
arguments on a particular issue have been rejected and either the tax authority or the client
refers the matter for determination in a formal proceeding, for example, before an Income Tax
tribunal or court.
604.10 A3 In addition to paragraph 604.3 A2, factors that are relevant in evaluating the level of self-review
or advocacy threats created by assisting an audit client in the resolution of tax disputes include:
The role management plays in the resolution of the dispute.
The extent to which the outcome of the dispute will have a material effect on the financial
statements on which the firm will express an opinion.
Whether the advice that was provided is the subject of the tax dispute.
142
THE CODE
The extent to which the matter is supported by tax law or regulation, other precedent, or
established practice.
Whether the proceedings are conducted in public.
604.10 A4 Examples of actions that might be safeguards to address threats include:
Using professionals who are not audit team members to perform the service might
address self-review or advocacy threats.
Having an appropriate reviewer who was not involved in providing the service review the
audit work or the service performed might address a self-review threat.
Resolution of Tax Matters Involving Acting as An Advocate
R604.11 A firm or a network firm shall not provide tax services that involve assisting in the resolution of
tax disputes to an audit client if:
(a) The services involve acting as an advocate for the audit client before an Income Tax
tribunal or court in the resolution of a tax matter; and
(b) The amounts involved are material to the financial statements on which the firm will
express an opinion.
604.11 A1 Paragraph R604.11 does not preclude a firm or network firm from having a continuing advisory
role in relation to the matter that is being heard before an Income Tax tribunal or court, for
example:
Responding to specific requests for information.
Providing factual accounts or testimony about the work performed.
Assisting the client in analyzing the tax issues related to the matter.
604.11 A2 What constitutes an "Income Tax tribunal or court" depends on how tax proceedings are heard
in India.
143
THE CODE
SUBSECTION 605 INTERNAL AUDIT SERVICES
Requirements and Application Material
All Audit Clients
605.1 A1 Internal audit services involve assisting the audit client in the performance of its internal audit
activities. Internal audit activities might include:
Monitoring of internal control reviewing controls, monitoring their operation and
recommending improvements to them.
Examining financial and operating information by:
o Reviewing the means used to identify, measure, classify and report financial and
operating information.
o Inquiring specifically into individual items including detailed testing of transactions,
balances and procedures.
Reviewing the economy, efficiency and effectiveness of operating activities including
non-financial activities of an entity.
Reviewing compliance with:
o Laws, regulations and other external requirements.
o Management policies, directives and other internal requirements.
605.2 A2 The scope and objectives of internal audit activities vary widely and depend on the size and
structure of the entity and the requirements of management and those charged with
governance.
R605. 3 A statutory auditor of an entity cannot be its internal auditor as it will not be possible for him to
give an independent and objective opinion. Further, under Companies Act, 2013, where
applicable, the restriction also applies to the subsidiary company or holding Company of the audit
client.
SUBSECTION 606 INFORMATION TECHNOLOGY SYSTEMS SERVICES
Introduction
606.1 Providing information technology (IT) systems services to an audit client might create a self-
review threat.
606.2 In addition to the specific requirements and application material in this subsection, the
requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying
the conceptual framework when providing an IT systems service to an audit client. This
subsection includes requirements that prohibit firms and network firms from providing certain
IT systems services to audit clients in some circumstances because the threats created cannot
be addressed by applying safeguards.
The provisions stated below are subject to the restrictions under Companies Act, 2013,
where applicable, which prohibit services related to design and implementation of any
financial information system to the Company, its holding company and subsidiary company.
144
THE CODE
Requirements and Application Material
All Audit Clients
606.3 A1 Services related to IT systems include the design or implementation of hardware or software
systems. The IT systems might:
(a) Aggregate source data;
(b) Form part of the internal control over financial reporting; or
(c) Generate information that affects the accounting records or financial statements,
including related disclosures.
However, the IT systems might also involve matters that are unrelated to the audit client's
accounting records or the internal control over financial reporting or financial statements.
606.3 A2 Paragraph R600.7 precludes a firm or a network firm from assuming a management
responsibility. Providing the following IT systems services to an audit client does not usually
create a threat as long as personnel of the firm or network firm do not assume a management
responsibility:
(a) Designing or implementing IT systems that are unrelated to internal control over financial
reporting;
(b) Designing or implementing IT systems that do not generate information forming a
significant part of the accounting records or financial statements;
(c) Implementing "off-the-shelf" accounting or financial information reporting software that
was not developed by the firm or network firm, if the customization required to meet the
client's needs is not significant; and
(d) Evaluating and making recommendations with respect to an IT system designed,
implemented or operated by another service provider or the client.
R606.4 When providing IT systems services to an audit client the firm or network firm shall be satisfied
that:
(a) The client acknowledges its responsibility for establishing and monitoring a system of
iternal controls;
(b) The client assigns the responsibility to make all management decisions with respect to
the design and implementation of the hardware or software system to a competent
employee, preferably within senior management;
(c) The client makes all management decisions with respect to the design and
implementation process;
(d) The client evaluates the adequacy and results of the design and implementation of the
system; and
(e) The client is responsible for operating the system (hardware or software) and for the data
it uses or generates.
606.4 A1 Factors that are relevant in evaluating the level of a self-review threat created by providing IT
systems services to an audit client include:
The nature of the service.
145
THE CODE
The nature of IT systems and the extent to which they impact or interact with the client's
accounting records or financial statements.
The degree of reliance that will be placed on the particular IT systems as part of the
audit.
606.4 A2 An example of an action that might be a safeguard to address such a self-review threat is using
professionals who are not audit team members to perform the service.
Audit Clients that are Public Interest Entities
R606.5 A firm or a network firm shall not provide IT systems services to an audit client that is a public
interest entity if the services involve designing or implementing IT systems that:
(a) Form a significant part of the internal control over financial reporting; or
(b) Generate information that is significant to the client's accounting records or financial
statements on which the firm will express an opinion.
146
THE CODE
SUBSECTION 607 LITIGATION SUPPORT SERVICES
Introduction
607.1 Providing certain litigation support services to an audit client might create a self-review or
advocacy threat.
607.2 In addition to the specific application material in this subsection, the requirements and
application material in paragraphs 600.1 to R600.10 are relevant to applying the conceptual
framework when providing a litigation support service to an audit client.
Application Material
All Audit Clients
607.3 A1 Litigation support services might include activities such as:
Assisting with document management and retrieval.
Acting as a witness, including an expert witness.
Calculating estimated damages or other amounts that might become receivable or
payable as the result of litigation or other legal dispute.
607.3 A2 Factors that are relevant in evaluating the level of self-review or advocacy threats created by
providing litigation support services to an audit client include:
The legal and regulatory environment in which the service is provided, for example,
whether an expert witness is chosen and appointed by a court.
The nature and characteristics of the service.
The extent to which the outcome of the litigation support service will have a material
effect on the financial statements on which the firm will express an opinion.
607.3 A3 An example of an action that might be a safeguard to address such a self-review or advocacy
threat is using a professional who was not an audit team member to perform the service.
607.3 A4 If a firm or a network firm provides a litigation support service to an audit client and the service
involves estimating damages or other amounts that affect the financial statements on which
the firm will express an opinion, the requirements and application material set out in Subsection
603 related to valuation services apply.
SUBSECTION 608 LEGAL SERVICES
Introduction
608.1 Providing legal services to an audit client might create a self-review or advocacy threat.
608.2 In addition to the specific requirements and application material in this subsection, the
requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying
the conceptual framework when providing a legal service to an audit client. This subsection
includes requirements that prohibit firms and network firms from providing certain legal services
to audit clients in some circumstances because the threats cannot be addressed by applying
safeguards.
Requirements and Application Material
147
THE CODE
All Audit Clients
608.3 A1 Legal services are defined as any services for which the individual providing the services must
either:
(a) Have the required legal training to practice law; or
(b) Be admitted to practice law before the courts of India.
Acting in an Advisory Role
608.4 A1 Legal advisory services might include a wide and diversified range of service areas
including both corporate and commercial services to audit clients, such as:
Contract support.
Supporting an audit client in executing a transaction.
Mergers and acquisitions.
Supporting and assisting an audit client's internal legal department.
Legal due diligence and restructuring.
608.4 A2 Factors that are relevant in evaluating the level of self-review or advocacy threats created by
providing legal advisory services to an audit client include:
The materiality of the specific matter in relation to the client's financial statements.
The complexity of the legal matter and the degree of judgment necessary to provide the
service.
608.4 A3 Examples of actions that might be safeguards to address threats include:
Using professionals who are not audit team members to perform the service might
address a self-review or advocacy threat.
Having an appropriate reviewer who was not involved in providing the service review the
audit work or the service performed might address a self-review threat.
Acting as General Counsel
R608.5 A partner or employee of the firm or the network firm shall not serve as General Counsel for
legal affairs of an audit client.
608.5 A1 The position of General Counsel is usually a senior management position with broad
responsibility for the legal affairs of a company.
Acting in an Advocacy Role
R608.6 A firm or a network firm shall not act in an advocacy role for an audit client in resolving a dispute
or litigation when the amounts involved are material to the financial statements on which the
firm will express an opinion.
608.6 A1 Examples of actions that might be safeguards to address a self-review threat created when
acting in an advocacy role for an audit client when the amounts involved are not material to the
financial statements on which the firm will express an opinion include:
Using professionas who are not audit team members to perform the service.
Having an appropriate reviewer who was not involved in providing the service review the
148
THE CODE
audit work or the service performed.
SUBSECTION 609 RECRUITING SERVICES
Introduction
609.1 Providing recruiting services to an audit client might create a self-interest, familiarity or
intimidation threat.
609.2 In addition to the specific requirements and application material in this subsection, the
requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying
the conceptual framework when providing a recruiting service to an audit client. This subsection
includes requirements that prohibit firms and network firms from providing certain types of
recruiting services to audit clients in some circumstances because the threats created cannot
be addressed by applying safeguards.
Requirements and Application Material
All Audit Clients
609.3 A1 Recruiting services might include activities such as:
Developing a job description.
Developing a process for identifying and selecting potential candidates.
Searching for or seeking out candidates.
Screening potential candidates for the role by:
o Reviewing the professional qualifications or competence of applicants and
determining their suitability for the position.
o Undertaking reference checks of prospective candidates.
o Interviewing and selecting suitable candidates and advising on candidates'
competence.
Determining employment terms and negotiating details, such as salary, hours and other
compensation.
609.3 A2 Paragraph R600.7 precludes a firm or a network firm from assuming a management
responsibility. Providing the following services does not usually create a threat as long as
personnel of the firm or network firm does not assume a management responsibility:
Reviewing the professional qualifications of a number of applicants and providing advice
on their suitability for the position.
Interviewing candidates and advising on a candidate's competence for financial
accounting, administrative or control positions.
R609.4 When a firm or network firm provides recruiting services to an audit client, the firm shall be
satisfied that:
(a) The client assigns the responsibility to make all management decisions with respect to
hiring the candidate for the position to a competent employee, preferably within senior
management; and
(b) The client makes all management decisions with respect to the hiring process, including:
149
THE CODE
Determining the suitability of prospective candidates and selecting suitable
candidates for the position.
Determining employment terms and negotiating details, such as salary, hours and
other compensation.
609.5 A1 Factors that are relevant in evaluating the level of self-interest, familiarity or intimidation threats
created by providing recruiting services to an audit client include:
The nature of the requested assistance.
The role of the individual to be recruited.
Any conflicts of interest or relationships that might exist between the candidates and the
firm providing the advice or service.
609.5 A2 An example of an action that might be a safeguard to address such a self-interest, familiarity
or intimidation threat is using professionals who are not audit team members to perform the
service.
Recruiting Services that are Prohibited
R609.6 When providing recruiting services to an audit client, the firm or the network firm shall not act
as a negotiator on the client's behalf.
R609.7 A firm or a network firm shall not provide a recruiting service to an audit client if the service
relates to:
(a) Searching for or seeking out candidates; or
(b) Undertaking reference checks of prospective candidates,
with respect to the following positions:
(i) A director or officer of the entity; or
(ii) A member of senior management in a position to exert significant influence over the
preparation of the client's accounting records or the financial statements on which the
firm will express an opinion.
SUBSECTION 610 CORPORATE FINANCE SERVICES
Introduction
610.1 Providing corporate finance services to an audit client might create a self-review or advocacy
threat.
610.2 In addition to the specific requirements and application material in this subsection, the
requirements and application material in paragraphs 600.1 to R600.10 are relevant to applying
the conceptual framework when providing a corporate finance service to an audit client. This
subsection includes requirements that prohibit firms and network firms from providing certain
corporate finance services in some circumstances to audit clients because the threats created
cannot be addressed by applying safeguards.
The provisions stated below are subject to restrictions under Companies Act, 2013, where
applicable, which apply to the Company including its holding company and subsidiary
company.
150
THE CODE
Requirements and Application Material
All Audit Clients
610.3 A1 Examples of corporate finance services that might create a self-review or advocacy threat
include:
Assisting an audit client in developing corporate strategies.
Identifying possible targets for the audit client to acquire.
Advising on disposal transactions.
Assisting in finance raising transactions.
Providing structuring advice.
Providing advice on the structuring of a corporate finance transaction or on financing
arrangements that will directly affect amounts that will be reported in the financial
statements on which the firm will express an opinion.
610.3 A2 Factors that are relevant in evaluating the level of such threats created by providing corporate
finance services to an audit client include:
The degree of subjectivity involved in determining the appropriate treatment for the
outcome or consequences of the corporate finance advice in the financial statements.
The extent to which:
o The outcome of the corporate finance advice will directly affect amounts recorded
in the financial statements.
o The amounts are material to the financial statements.
Whether the effectiveness of the corporate finance advice depends on a particular
accountin treatment or presentation in the financial statements and there is doubt as to
the appropriateness of the related accounting treatment or presentation under the
relevant financial reporting framework.
610.3 A3 Examples of actions that might be safeguards to address threats include:
Using professionals who are not audit team members to perform the service might address
self-review or advocacy threats.
Having an appropriate reviewer who was not involved in providing the service review the
audit work or service performed might address a self-review threat.
Corporate Finance Services that are Prohibited
R610.4 A firm or a network firm shall not provide corporate finance services to an audit client that
involve promoting, dealing in, or underwriting the audit client's shares.
R610.5 A Firm or a network Firm shall not provide corporate finance advice to an audit client where
the effectiveness of such advice depends on a particular accounting treatment or
presentation in the financial statements on which the firm will express an opinion and
(a) The audit team has reasonable doubt as to the appropriateness of the related accounting
treatment or presentation under the relevant financial reporting framework; and
(b) The outcome or consequences of the corporate finance advice will have a material effect
151
THE CODE
on the financial statements on which the firm will express an opinion.
152
THE CODE
SECTION 800
REPORTS ON SPECIAL PURPOSE FINANCIAL STATEMENTS THAT INCLUDE A
RESTRICTION ON USE AND DISTRIBUTION (AUDIT AND REVIEW ENGAGEMENTS)
Introduction
800.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
800.2 This section sets out certain modifications to Part 4A which are permitted in certain
circumstances involving audits of special purpose financial statements where the report
includes a restriction on use and distribution. In this section, an engagement to issue a
restricted use and distribution report in the circumstances set out in paragraph R800.3 is
referred to as an "eligible audit engagement."
Requirements and Application Material
General
R800.3 When a firm intends to issue a report on an audit of special purpose financial statements which
includes a restriction on use and distribution, the independence requirements set out in Part
4A shall be eligible for the modifications that are permitted by this section, but only if:
(a) The firm communicates with the intended users of the report regarding the modified
independence requirements that are to be applied in providing the service; and
(b) The intended users of the report understand the purpose and limitations of the report and
explicitly agree to the application of the modifications.
800.3 A1 The intended users of the report might obtain an understanding of the purpose and limitations
of the report by participating, either directly, or indirectly through a representative who has
authority to act for the intended users, in establishing the nature and scope of the engagement.
In either case, this participation helps the firm to communicate with intended users about
independence matters, including the circumstances that are relevant to applying the
conceptual framework. It also allows the firm to obtain the agreement of the intended users to
the modified independence requirements.
R800.4 Where the intended users are a class of users who are not specifically identifiable by name at
the time the engagement terms are established, the firm shall subsequently make such users
aware of the modified independence requirements agreed to by their representative.
800.4 A1 For example, where the intended users are a class of users such as lenders in a syndicated
loan arrangement, the firm might describe the modified independence requirements in an
engagement letter to the representative of the lenders. The representative might then make
the firm's engagement letter available to the members of the group of lenders to meet the
requirement for the firm to make such users aware of the modified independence requirements
agreed to by the representative.
R800.5 When the firm performs an eligible audit engagement, any modifications to Part 4A shall be
limited to those set out in paragraphs R800.7 to R800.14. The firm shall not apply these
modifications when an audit of financial statements is required by law or regulation.
153
THE CODE
R800.6 If the firm also issues an audit report that does not include a restriction on use and distribution
for the same client, the firm shall apply Part 4A to that audit engagement.
Public Interest Entities
R800.7 When the firm performs an eligible audit engagement, the firm does not need to apply the
independence requirements set out in Part 4A that apply only to public interest entity audit
engagements.
Related Entities
R800.8 When the firm performs an eligible audit engagement, references to "audit client" in Part 4A do
not need to include its related entities. However, when the audit team knows or has reason to
believe that a relationship or circumstance involving a related entity of the client is relevant to
the evaluation of the firm's independence of the client, the audit team shall include that related
entity when identifying, evaluating and addressing threats to independence.
.Financial Interests, Loans and Guarantees, Close Business Relationships, and Family and Personal
Relationships
R800.10 When the firm performs an eligible audit engagement:
(a) The relevant provisions set out in Sections 510, 511, 520, 521, 522, 524 and 525 need
apply only to the members of the engagement team, their immediate family members
and, where applicable, close family members;
(b) The firm shall identify, evaluate and address any threats to independence created by
interests and relationships, as set out in Sections 510, 511, 520, 521, 522, 524 and 525,
between the audit client and the following audit team members:
(i) Those who provide consultation regarding technical or industry specific issues,
transactions or events; and
(ii) Those who provide quality control for the engagement, including those who
perform the engagement quality control review; and
(c) The firm shall evaluate and address any threats that the engagement team has reason
to believe are created by interests and relationships between the audit client and others
within the firm who can directly influence the outcome of the audit engagement.
800.10 A1 Others within a firm who can directly influence the outcome of the audit engagement include
those who recommend the compensation, or who provide direct supervisory, management or
other oversight, of the audit engagement partner in connection with the performance of the
audit engagement including those at all successively senior levels above the engagement partner
through to the individual who is the firm's Senior or Managing Partner (Chief Executive or
equivalent).
R800.11 When the firm performs an eligible audit engagement, the firm shall evaluate and address any
threats that the engagement team has reason to believe are created by financial interests in
the audit client held by individuals, as set out in paragraphs R510.4(c) and (d), R510.5, R510.7
and 510.10 A5 and A9.
R800.12 When the firm performs an eligible audit engagement, the firm, in applying the provisions set
out in paragraphs R510.4(a), R510.6 and R510.7 to interests of the firm, shall not hold a
154
THE CODE
material direct or a material indirect financial interest in the audit client.
Employment with an Audit Client
R800.13 When the firm performs an eligible audit engagement, the firm shall evaluate and address any
threats created by any employment relationships as set out in paragraphs 524.3 A1 to 524.5
A3.
Providing Non-Assurance Services
R800.14 If the firm performs an eligible audit engagement and provides a non-assurance service to the
audit client, the firm shall comply with Sections 410 to 430 and Section 600, including its
subsections, subject to paragraphs R800.7 to R800.9.
155
THE CODE
PART 4B INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER
THAN AUDIT AND REVIEW ENGAGEMENTS ......................................................
Section 900 Applying the Conceptual Framework to Independence for Assurance
Engagements Other than Audit and Review Engagements.....................................
Section 905 Fees ..................................................................................................................
Section 906 [Reserved for Gifts and Hospitality] ..................................................................
Section 907 Actual or Threatened Litigation .........................................................................
Section 910 Financial Interests .............................................................................................
Section 911 Loans and Guarantees......................................................................................
Section 920 Business Relationships .....................................................................................
Section 921 Family and Personal Relationships...................................................................
Section 922 Recent Service with an Assurance Client .........................................................
Section 923 Serving as a Director or Officer of an Assurance Client ...................................
Section 924 Employment with an Assurance Client .............................................................
Section 940 Long Association of Personnel with an Assurance Client .................................
Section 950 Provision of Non-Assurance Services to Assurance Clients Other than
Audit and Review Engagement Clients....................................................................
Section 990 Reports that Include a Restriction on Use and Distribution (Assurance
Engagements Other than Audit and Review Engagements) ...................................
156
THE CODE
PART 4B INDEPENDENCE FOR ASSURANCE ENGAGEMENTS
OTHER THAN AUDIT AND REVIEW ENGAGEMENTS
SECTION 900
APPLYING THE CONCEPTUAL FRAMEWORK TO INDEPENDENCE FOR
ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS
Introduction
General
900.1 This Part applies to assurance engagements other than audit and review engagements
(referred to as "assurance engagements" in this Part). Examples of such engagements include:
An audit of specific elements, accounts or items of a financial statement.
Performance assurance on a company's key performance indicators.
Report in Form No. 3CEB under Section 92E of the Income tax Act, 1961 and such
other assurance services required to be performed by an "accountant" within the
meaning of the Explanation provided below sub-section (2) of section 288 of the Income
Tax Act, 1961 (`tax assurance services')
900.2 In this Part, the term "professional accountant" refers to individual professional accountants in
public practice and their firms.
900.3 SQC 1 requires a firm to establish policies and procedures designed to provide it with
reasonable assurance that the firm, its personnel and, where applicable, others subject to
independence requirements maintain independence where required by relevant ethics
standards. SAEs establish responsibilities for engagement partners and engagement teams
at the level of the engagement. The allocation of responsibilities within a firm will depend on its
size, structure and organization. Many of the provisions of Part 4B do not prescribe the specific
responsibility of individuals within the firm for actions related to independence, instead referring
to "firm" for ease of reference. Firms assign responsibility for a particular action to an individual
or a group of individuals (such as an assurance team) in accordance with SQC 1. In addition,
an individual professional accountant remains responsible for compliance with any provisions
that apply to that accountant's activities, interests or relationships.
900.4 Independence is linked to the principles of objectivity and integrity. It comprises:
(a) 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.
(b) 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 that a
firm's or an assurance team member's integrity, objectivity or professional skepticism
has been compromised.
In this Part, references to an individual or firm being "independent" mean that the individual or
firm has complied with the provisions of this Part.
900.5 When performing assurance engagements, the Code requires firms to comply with the
fundamental principles and be independent. This Part sets out specific requirements and
157
THE CODE
application material on how to apply the conceptual framework to maintain independence when
performing such engagements. The conceptual framework set out in Section 120 applies to
independence as it does to the fundamental principles set out in Section 110.
900.6 This Part describes:
(a) Facts and circumstances, including professional activities, inteests and relationships,
that create or might create threats to independence;
(b) Potential actions, including safeguards, that might be appropriate to address any such
threats; and
(c) Some situations where the threats cannot be eliminated or there can be no safeguards
to reduce the threats to an acceptable level.
Description of Other Assurance Engagements
900.7 Assurance engagements are designed to enhance intended users' degree of confidence about
the outcome of the evaluation or measurement of a subject matter against criteria. In an
assurance engagement, the firm expresses a conclusion designed to enhance the degree of
confidence of the intended users (other than the responsible party) about the outcome of the
evaluation or measurement of a subject matter against criteria. The Assurance Framework
describes the elements and objectives of an assurance engagement and identifies
engagements to which SAEs apply. For a description of the elements and objectives of an
assurance engagement, refer to the Assurance Framework.
900.8 The outcome of the evaluation or measurement of a subject matter is the information that
results from applying the criteria to the subject matter. The term "subject matter information" is
used to mean the outcome of the evaluation or measurement of a subject matter.
900.9 Assurance engagements might be assertion-based or direct reporting. In either case, they
involve three separate parties: a firm, a responsible party and intended users.
900.10 In an assertion-based assurance engagement, the evaluation or measurement of the subject
matter is performed by the responsible party. The subject matter information is in the form of
an assertion by the responsible party that is made available to the intended users.
900.11 In a direct reporting assurance engagement, the firm:
(a) Directly performs the evaluation or measurement of the subject matter; or
(b) Obtains a representation from the responsible party that has performed the evaluation
or measurement that is not available to the intended users. The subject matter
information is provided to the intended users in the assurance report.
Reports that Include a Restriction on Use and Distribution
900.12 An assurance report might include a restriction on use and distribution. If it does and the
conditions set out in Section 990 are met, then the independence requirements in this Part may
be modified as provided in Section 990.
Audit and Review Engagements
900.13 Independence standards for audit and review engagements are set out in Part 4A
Independence for Audit and Review Engagements. If a firm performs both an assurance
engagement and an audit or review engagement for the same client, the requirements in Part
158
THE CODE
4A continue to apply to the firm, a network firm and the audit or review team members.
Requirements and Application Material
General
R900.14 A firm performing an assurance engagement shall be independent.
R900.15 A firm shall apply the conceptual framework set out in Section 120 to identify, evaluate and
address threats to independence in relation to an assurance engagement.
The Firm shall comply with the additional restrictions apply under the Income Tax,
1961 to an "accountant".
The term "accountant" shall have the same meaning as in the Explanation below sub-section
(2) of section 288 of the Income Tax Act, 1961. It reads as under:
"Accountant" means a chartered accountant as defined in clause (b) of sub-section (1) of section
2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-
section (1) of section 6 of that Act, but does not include except for the purposes of representing
the assessee under sub-section (1) -
(a) in case of an assessee, being a company, the person who is not eligible for appointment as
an auditor of the said company in accordance with the provisions of sub-section (3) of section
141 of the Companies Act, 2013 (18 of 2013); or
(b) in any other case,--
(i) the assessee himself or in case of the assessee, being a firm or association of persons or
Hindu undivided family, any partner of the firm, or member of the association or the family;
(ii) in case of the assessee, being a trust or institution, any person referred to in clauses (a), (b),
(c) and (cc) of sub-section (3) of section 13;
(iii) in case of any person other than persons referred to in sub-clauses (i) and (ii), the person
who is competent to verify the return under section 139 in accordance with the provisions of
section 140;
(iv) any relative of any of the persons referred to in sub-clauses (i), (ii) and (iii);
(v) an officer or employee of the assessee;
(vi) an individual who is a partner, or who is in the employment, of an officer or employee of the
assessee;
(vii) an individual who, or his relative or partner--
(i) is holding any security of, or interest in, the assessee:
Provided that the relative may hold security or interest in the assessee of the face value not
exceeding one hundred thousand rupees;
(ii) is indebted to the assessee:
Provided that the relative may be indebted to the assessee for an amount not exceeding one
hundred thousand rupees;
(iii) has given a guarantee or provided any security in connection with the indebtedness of
any third person to the assessee:
Provided that the relative may give guarantee or provide any security in connection with the
indebtedness of any third person to the assessee for an amount not exceeding one hundred
thousand rupees;
(viii) a person who, whether directly or indirectly, has business relationship with the assessee of
such nature as may be prescribed;
(ix) a person who has been convicted by a court of an offence involving fraud and a period of
ten years has not elapsed from the date of such conviction.
Network firms
R900.16 When a firm has reason to believe that interests and relationships of a network firm create a
threat to the firm's independence, the firm shall evaluate and address any such threat.
900.16 A1 Network firms are discussed in paragraphs 400.50 A1 to 400.54 A1.
159
THE CODE
Related Entities
R900.17 When the assurance team knows or has reason to believe that a relationship or circumstance
involving a related entity of the assurance client is relevant to the evaluation of the firm's
independence from the client, the assurance team shall include that related entity when
identifying, evaluating and addressing threats to independence.
Types of Assurance Engagements
Assertion-based Assurance Engagements
R900.18 When performing an assertion-based assurance engagement:
(a) The assurance team members and the firm shall be independent of the assurance client
(the party responsible for the subject matter informaion, and which might be responsible
for the subject matter) as set out in this Part. The independence requirements set out in
this Part prohibit certain relationships between assurance team members and (i)
directors or officers, and (ii) individuals at the client in a position to exert significant
influence over the subject matter information;
(b) The firm shall apply the conceptual framework set out in Section 120 to relationships
with individuals at the client in a position to exert significant influence over the subject
matter of the engagement; and
(c) The firm shall evaluate and address any threats that the firm has reason to believe are
created by network firm interests and relationships.
R900.19 When performing an assertion-based assurance engagement where the responsible party is
responsible for the subject matter information but not the subject matter:
(a) The assurance team members and the firm shall be independent of the party responsible
for the subject matter information (the assurance client); and
(b) The firm shall evaluate and address any threats the firm has reason to believe are
created by interests and relationships between an assurance team member, the firm, a
network firm and the party responsible for the subject matter.
900.19 A1 In the majority of assertion-based assurance engagements, the responsible party is
responsible for both the subject matter information and the subject matter. However, in some
engagements, the responsible party might not be responsible for the subject matter. An
example might be when a firm is engaged to perform an assurance engagement regarding a
report that an environmental consultant has prepared about a company's sustainability
practices for distribution to intended users. In this case, the environmental consultant is the
responsible party for the subject matter information but the company is responsible for the
subject matter (the sustainability practices).
Direct Reporting Assurance Engagements
R900.20 When performing a direct reporting assurance engagement:
(a) The assurance team members and the firm shall be independent of the assurance client
(the party responsible for the subject matter); and
(b) The firm shall evaluate and address any threats to independence the firm has reason to
believe are created by network firm interests and relationships.
160
THE CODE
Multiple Responsible Parties
900.21 A1 In some assurance engagements, whether assertion-based or direct reporting, there might be
several responsible parties. In determining whether it is necessary to apply the provisions in
this Part to each responsible party in such engagements, the firm may take into account certain
matters. These matters include whether an interest or relationship between the firm, or an
assurance team member, and a particular responsible party would create a threat to
independence that is not trivial and inconsequential in the context of the subject matter
information. This determination will take into account factors such as:
(a) The materiality of the subject matter information (or of the subject matter) for which the
particular responsible party is responsible.
(b) The degree of public interest associated with the engagement.
If the firm determines that the threat created by any such interest or relationship with a
particular responsible party would be trivial and inconsequential, it might not be necessary to
apply all of the provisions of this section to that responsible party.
Period During which Independence is Required
R900.30 Independence, as required by this Part, shall be maintained during both:
(a) The engagement period; and
(b) The period covered by the subject matter information.
900.30 A1 The engagement period starts when the assurance team begins to perform assurance services
with respect to the particular engagement. The engagement period ends when the assurance
report is issued. When the engagement is of a recurring nature, it ends at the later of the
notification by either party that the professional relationship has ended or the issuance of the
final assurance report.
R900.31 If an entity becomes an assurance client during or after the period covered by the subject
matter information on which the firm will express a conclusion, the firm shall determine whether
any threats to independence are created by:
(a) Financial or business relationships with the assurance client during or after the period
covered by the subject matter information but before accepting the assurance
engagement; or
(b) Previous services provided to the assurance client.
R900.32 Threats to independence are created if a non-assurance service was provided to the assurance
client during, or after the period covered by the subject matter information, but before the
assurance team begins to perform assurance services, and the service would not be permitted
during the engagement period. In such circumstances, the firm shall evaluate and address any
threat to independence created by the service. If the threats are not at an acceptable level, the
firm shall only accept the assurance engagement if the threats are reduced to an acceptable
level.
900.32 A1 Examples of actions that might be safeguards to address such threats include:
Using professionals who are not assurance team members to perform the service.
Having an appropriate reviewer review the assurance and non-assurance work as
161
THE CODE
appropriate.
R900.33 Subject to the applicable restrictions stated under Section R900.15, if a non-assurance service
that would not be permitted during the engagement period has not been completed and it is
not practical to complete or end the service before the commencement of professional
services in connection with the assurance engagement, the firm shall only accept the
assurance engagement if:
(a) The firm is satisfied that:
(i) The non-assurance service will be completed within a short period of time; or
(ii) The client has arrangements in place to transition the service to another provider
within a short period of time;
(b) The firm applies safeguards when necessary during the service period; and
(c) The firm discusses the matter with those charged with governance.
General Documentation of Independence for Assurance Engagements Other than Audit and Review
Engagements
R900.40 A firm shall document conclusions regarding compliance with this Part, and the substance of
any relevant discussions that support those conclusions. In particular:
(a) When safeguards are applied to address a threat, the firm shall document the nature of
the threat and the safeguards in place or applied; and
(b) When a threat required significant analysis and the firm concluded that the threat was
already at an acceptable level, the firm shall document the nature of the threat and the
rationale for the conclusion.
900.40 A1 Documentation provides evidence of the firm's judgments in forming conclusions regarding
compliance with this Part. However, a lack of documentation does not determine whether a
firm considered a particular matter or whether the firm is independent.
Breach of an Independence Provision for Assurance Engagements Other than Audit and Review
Engagements
When a Firm Identifies a Breach
R900.50 Subject to the additional restrictions under Section R900.15 of the code, if a firm concludes that
a breach of a requirement in this Part has occurred, the firm shall:
(a) End, suspend or eliminate the interest or relationship that created the breach;
(b) Evaluate the significance of the breach and its impact on the firm's objectivity and ability
to issue an assurance report; and
(c) Determine whether action can be taken that satisfactorily addresses the consequences
of the breach.
In making this determination, the firm shall exercise professional judgment and take into
account whether a reasonable and informed third party would be likely to conclude that the
firm's objectivity would be compromised, and therefore, the firm would be unable to issue an
assurance report.
162
THE CODE
R900.51 If the firm determines that action cannot be taken to address the consequences of the breach
satisfactorily, the firm shall, as soon as possible, inform the party that engaged the firm or those
charged with governance, as appropriate. The firm shall also take the steps necessary to end
the assurance engagement in compliance with any applicable legal or regulatory requirements
relevant to ending the assurance engagement.
R900.52 Subject to the additional restrictions under Section R900.15 of the code, if the firm determines
that action can be taken to address the consequences of the breach satisfactorily, the firm
shall discuss the breach and the action it has taken or proposes to take with the party that
engaged the firm or those charged with governance, as appropriate. The firm shall discuss
the breach and the proposed action on a timely basis, taking into account the
circumstances of the engagement and the breach.
R900.53 If the party that engaged the firm does not, or those charged with governance do not concur
that the action proposed by the firm in accordance with paragraph R900.50(c) satisfactorily
addresses the consequences of the breach, the firm shall take the steps necessary to end the
assurance engagement in compliance with any applicable legal or regulatory requirements
relevant to ending the assurance engagement.
Documentation
R900.54 In complying with the requirements in paragraphs R900.50 to R900.53, the firm shall
document:
(a) The breach;
(b) The actions taken;
(c) The key decisions made; and
(d) All the matters discussed with the party that engaged the firm or those charged with
governance.
R900.55 If the firm continues with the assurance engagement, it shall document:
(a) The conclusion that, in the firm's professional judgment, objectivity has not been
compromised; and
(b) The rationale for why the action taken satisfactorily addressed the consequences of the
breach so that the firm could issue an assurance report.
163
THE CODE
SECTION 905
FEES
Introduction
905.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
905.2 The nature and level of fees or other types of remuneration might create a self-interest or
intimidation threat. This section sets out specific requirements and application material relevant
to applying the conceptual framework in such circumstances.
Requirements and Application Material
FeesRelative Size
905.3 A1 When the total fees generated from an assurance client by the firm expressing the conclusion
in an assurance engagement represent a large proportion of the total fees of that firm, the
dependence on that client and concern about losing the client create a self-interest or
intimidation threat.
905.3 A2 Factors that are relevant in evaluating the level of such threats include:
The operating structure of the firm.
Whether the firm is well established or new.
The significance of the client qualitatively and/or quantitatively to the firm.
905.3 A3 An example of an action that might be a safeguard to address such a self-interest or
intimidation threat is increasing the client base in the firm to reduce dependence on the
assurance client.
905.3 A4 A self-interest or intimidation threat is also created when the fees generated by the firm from
an assurance client represent a large proportion of the revenue from an individual partner's
clients.
905.3 A5 Examples of actions that might be safeguards to address such a self-interest or intimidation
threat include:
Increasing the client base of the partner to reduce dependence on the assurance client.
Having an appropriate reviewer who was not an assurance team member review the
work.
FeesOverdue
905.4 A1 A self-interest threat might be created if a significant part of fees is not paid before the
assurance report, if any, for the following period is issued. It is generally expected that the firm
will require payment of such fees before any such report is issued. The requirements and
application material set out in Section 911 with respect to loans and guarantees might also
apply to situations where such unpaid fees exist.
905.4 A2 Examples of actions that might be safeguards to address such a self-interest threat include:
164
THE CODE
Obtaining partial payment of overdue fees.
Having an appropriate reviewer who did not take part in the assurance engagement
review the work performed.
R905.5 When a significant part of fees due from an assurance client remains unpaid for a long time,
the firm shall determine:
(a) Whether the overdue fees might be equivalent to a loan to the client; and
(b) Whether it is appropriate for the firm to be re-appointed or continue the assurance
engagement.
Contingent Fees
905.6 A1 The fees which are based on a percentage of profits or which are contingent upon the
findings, or results of such work, is not allowed except in cases which are permitted under
Regulation 192 of The Chartered Accountants Regulations, 1988, mentioned in Para 410.9
A1.
165
THE CODE
SECTION 906
GIFTS AND HOSPITALITY
Introduction
906.1 Firms are required to comply with the fundamental principles, be independent and apply
the conceptual framework set out in Section 120 to identify, evaluate and address
threats to independence.
906.2 Accepting gifts and hospitality from an assurance client might create a self-interest,
familiarity or intimidation threat. This section sets out a specific requirement and
application material relevant to applying the conceptual framework in such
circumstances.
Requirement and Application Material
R906.3 A firm or an assurance team member shall not accept gifts and hospitality from an
assurance client, unless the value is trivial and inconsequential.
906.3A1 Where a firm or assurance team member is offering or accepting an inducement to or
from an assurance client, the requirements and application material set out in Section
340 apply and non-compliance with these requirements might create threats to
independence.
906.3 A2 The requirements set out in Section 340 relating to offering or accepting inducements
do not allow a firm or assurance team member to accept gifts and hospitality where the
intent is to improperly influence behaviour even if the value is trivial and
inconsequential.
166
THE CODE
SECTION 907
ACTUAL OR THREATENED LITIGATION
Introduction
907.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
907.2 When litigation with an assurance client occurs, or appears likely, self-interest and intimidation
threats are created. This section sets out specific application material relevant to applying the
conceptual framework in such circumstances.
Application Material
General
907.3 A1 The relationship between client management and assurance team members must be
characterized by complete candor and full disclosure regarding all aspects of a client's
operations. Adversarial positions might result from actual or threatened litigation between an
assurance client and the firm or an assurance team member. Such adversarial positions might
affect management's willingness to make complete disclosures and create self-interest and
intimidation threats.
907.3 A2 Factors that are relevant in evaluating the level of such threats include:
The materiality of the litigation.
Whether the litigation relates to a prior assurance engagement.
907.3 A3 If the litigation involves an assurance team member, an example of an action that might
eliminate such self-interest and intimidation threats is removing that individual from the
assurance team.
907.3 A4 An example of an action that might be a safeguard to address such self-interest and
intimidation threats is having an appropriate reviewer review the work performed.
167
THE CODE
SECTION 910
FINANCIAL INTERESTS
Introduction
910.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
910.2 Holding a financial interest in an assurance client might create a self-interest threat. This
section sets out specific requirements and application material relevant to applying the
conceptual framework in such circumstances.
Requirements and Application Material
General
910.3 A1 A financial interest might be held directly or indirectly through an intermediary such as a
collective investment vehicle, an estate or a trust. When a beneficial owner has control over
the intermediary or ability to influence its investment decisions, the Code defines that financial
interest to be direct. Conversely, when a beneficial owner has no control over the intermediary
or ability to influence its investment decisions, the Code defines that financial interest to be
indirect.
910.3 A2 This section contains references to the "materiality" of a financial interest. In determining
whether such an interest is material to an individual, the combined net worth of the individual
and the individual's immediate family members may be taken into account.
910.3 A3 Factors that are relevant in evaluating the level of a self-interest threat created by holding a
financial interest in an assurance client include:
The role of the individual holding the financial interest.
Whether the financial interest is direct or indirect.
The materiality of the financial interest.
Financial Interests Held by the Firm, Assurance Team Members and Immediate Family
R910.4 A direct financial interest or a material indirect financial interest in the assurance client shall
not be held by:
(a) The firm; or
(b) An assurance team member or any of that individual's immediate family.
Additional restrictions apply in case of tax assurance services under the Income Tax Act,
1961(reference may be made to para 900.15);
Financial Interests in an Entity Controlling an Assurance Client
R910.5 When an entity has a controlling interest in the assurance client and the client is material to the
entity, neither the firm, nor an assurance team member, nor any of that individual's immediate
family shall hold a direct or material indirect financial interest in that entity.
Additional restrictions apply in case of tax assurance services under the Income Tax Act, 1961
168
THE CODE
(reference may be made to para 900.15)
Financial Interests Held as Trustee
R910.6 Paragraph R910.4 shall also apply to a financial interest in an assurance client held in a trust
for which the firm or individual acts as trustee unless:
(a) None of the following is a beneficiary of the trust: the trustee, the assurance team
member or any of that individual's immediate family, or the firm;
(b) The interest in the assurance client held by the trust is not material to the trust;
(c) The trust is not able to exercise significant influence over the assurance client; and
(d) None of the following can significantly influence any investment decision involving a
financial interest in the assurance client: the trustee, the assurance team member or any
of that individual's immediate family, or the firm.
Additional restrictions apply in case of tax assurance services under the Income Tax Act,
1961 (reference may be made to para 900.15)
Financial Interests Received Unintentionally
R910.7 If a firm, an assurance team member, or any of that individual's immediate family, receives a
direct financial interest or a material indirect financial interest in an assurance client by way of
an inheritance, gift, as a result of a merger, or in similar circumstances and the interest would
not otherwise be permitted to be held under this section, then:
(a) If the interest is received by the firm, the financial interest shall be disposed of
immediately, or enough of an indirect financial interest shall be disposed of so that the
remaining interest is no longer material; or
(b) If the interest is received by an assurance team member, or by any of that individual's
immediate family, the individual who received the financial interest shall immediately
dispose of the financial interest, or dispose of enough of an indirect financial interest so
that the remaining interest is no longer material.
Additional restrictions apply in case of tax assurance services under the Income Tax Act, 1961
(reference may be made to para 900.15)
Financial Interests Other Circumstances
Close Family
910.8 A1 A self-interest threat might be created if an assurance team member knows that a close family
member has a direct financial interest or a material indirect financial interest in the assurance
client.
910.8 A2 Factors that are relevant in evaluating the level of such a threat include:
The nature of the relationship between the assurance team member and the close family
member.
Whether the financial interest is direct or indirect.
The materiality of the financial interest to the close family member.
910.8 A3 Examples of actions that might eliminate such a self-interest threat include:
Having the close family member dispose, as soon as practicable, of all of the financial
169
THE CODE
interest or dispose of enough of an indirect financial interest so that the remaining
interest is no longer material.
Removing the individual from the assurance team.
910.8 A4 An example of an action that might be a safeguard to address such a self-interest threat is
having an appropriate reviewer review the work of the assurance team member.
Additional restrictions apply in case of tax assurance services under the Income Tax Act,
1961 (reference may be made to para 900.15)
Other Individuals
910.8 A5 A self-interest threat might be created if an assurance team member knows that a financial
interest is held in the assurance client by individuals such as:
Partners and professional employees of the firm, apart from those who are specifically
not permitted to hold such financial interests by paragraph R910.4, or their immediate
family members.
Individuals with a close personal relationship with an assurance team member.
910.8 A6 An example of an action that might eliminate such a self-interest threat is removing the
assurance team member with the personal relationship from the assurance team.
910.8 A7 Examples of actions that might be safeguards to address such a self-interest threat include:
Excluding the assurance team member from any significant decision-making concerning
the assurance engagement.
Having an appropriate reviewer review the work of the assurance team member.
170
THE CODE
SECTION 911
LOANS AND GUARANTEES
Introduction
911.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
911.2 A loan or a guarantee of a loan with an assurance client might create a self-interest threat. This
section sets out specific requirements and application material relevant to applying the
conceptual framework in such circumstances.
Requirements and Application Material
General
911.3 A1 This section contains references to the "materiality" of a loan or guarantee. In determining
whether such a loan or guarantee is material to an individual, the combined net worth of the
individual and the individual's immediate family members may be taken into account.
Loans and Guarantees with an Assurance Client
R911.4 A firm, an assurance team member, or any of that individual's immediate family shall not make
or guarantee a loan to an assurance client unless the loan or guarantee is immaterial to both:
(a) The firm or the individual making the loan or guarantee, as applicable; and
(b) The client.
The above is subject to restrictions applicable to a tax assurance client (reference may be made to para
900.15)
Loans and Guarantees with an Assurance Client that is a Bank or Similar Institution
R911.5 A firm, an assurance team member, or any of that individual's immediate family shall not accept
a loan, or a guarantee of a loan, from an assurance client that is a bank or a similar institution
unless the loan or guarantee is made under normal lending procedures, terms and conditions.
911.5 A1 Examples of loans include mortgages, bank overdrafts, car loans and credit card balances.
911.5 A2 Even if a firm receives a loan from an assurance client that is a bank or similar institution under
normal lending procedures, terms and conditions, the loan might create a self-interest threat if
it is material to the assurance client or firm receiving the loan.
911.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is
having the work reviewed by an appropriate reviewer, who is not an assurance team member,
from a network firm that is not a beneficiary of the loan.
The above is subject to restrictions applicable to a tax assurance client (reference may be made to para
900.15)
Deposit or Brokerage Accounts
R911.6 A firm, an assurance team member, or any of that individual's immediate family shall not have
deposits or a brokerage account with an assurance client that is a bank, broker, or similar
171
THE CODE
institution, unless the deposit or account is held under normal commercial terms.
The above is subject to restrictions applicable to a tax assurance client (reference may be made to para
900.15)
Loans and Guarantees with an Assurance Client that is not a Bank or Similar Institution
R911.7 A firm or an assurance team member, or any of that individual's immediate family, shall not
accept a loan from, or have a borrowing guaranteed by, an assurance client that is not a bank
or similar institution, unless the loan or guarantee is immaterial to both:
(a) The firm, or the individual receiving the loan or guarantee, as applicable; and
(b) The client.
The above is subject to applicable restrictions applicable to a tax assurance client (reference may be made
to para 900.15)
172
THE CODE
SECTION 920
BUSINESS RELATIONSHIPS
Introduction
920.1 Firms are requied to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
920.2 A close business relationship with an assurance client or its management might create a self-
interest or intimidation threat. This section sets out specific requirements and application
material relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
920.3 A1 This section contains references to the "materiality" of a financial interest and the "significance"
of a business relationship. In determining whether such a financial interest is material to an
individual, the combined net worth of the individual and the individual's immediate family
members may be taken into account.
920.3 A2 Examples of a close business relationship arising from a commercial relationship or common
financial interest include:
Having a financial interest in a joint venture with either the client or a controlling owner,
director or officer or other individual who performs senior managerial activities for that
client.
Arrangements to combine one or more services or products of the firm with one or more
services or products of the client and to market the package with reference to both
parties.
Distribution or marketing arrangements under which the firm distributes or markets the
client's products or services, or the client distributes or markets the firm's products or
services.
Firm, Assurance Team Member or Immediate Family Business Relationships
R920.4 A firm or an assurance team member shall not have a close business relationship with an
assurance client or its management unless any financial interest is immaterial and the business
relationship is insignificant to the client or its management and the firm or the assurance team
member, as applicable.
920.4 A1 A self-interest or intimidation threat might be created if there is a close business relationship
between the assurance client or its management and the immediate family of an assurance
team member.
The above is subject to restrictions applicable to a tax assurance client (reference may be made to 900.15)
Buying Goods or Services
920.5 A1 The purchase of goods and services from an assurance client by a firm, or an assurance team
member, or any of that individual's immediate family does not usually create a threat to
independence if the transaction is in the normal course of business and at arm's length.
However, such transactions might be of such a nature and magnitude that they create a self-
173
THE CODE
interest threat.
The above is subject to applicable restrictions applicable to a tax assurance client (reference
may be made to 900.15)
920.5 A2 Examples of actions that might eliminate such a self-interest threat include:
Eliminating or reducing the magnitude of the transaction.
Removing the individual from the assurance team.
The above is subject to applicable restrictions applicable to a tax assurance client (reference
may be made to 900.15)
174
THE CODE
SECTION 921
FAMILY AND PERSONAL RELATIONSHIPS
Introduction
921.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
921.2 Family or personal relationships with client personnel might create a self-interest, familiarity or
intimidation threat. This section sets out specific requirements and application material relevant
to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
921.3 A1 A self-interest, familiarity or intimidation threat might be created by family and personal
relationships between an assurance team member and a director or officer or, depending on
their role, certain employees of the assurance client.
921.3 A2 Factors that are relevant in evaluating the level of such threats include:
The individual's responsibilities on the assurance team.
The role of the family member or other individual within the client, and the closeness of
the relationship.
Immediate Family of an Assurance Team Member
921.4 A1 A self-interest, familiarity or intimidation threat is created when an immediate family member
of an assurance team member is an employee in a position to exert significant influence over
the subject matter of the engagement.
921.4 A2 Factors that are relevant in evaluating the level of such threats include:
The position held by the immediate family member.
The role of the assurance team member.
921.4 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation
threat is removing the individual from the assurance team.
921.4 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity
or intimidation threat is structuring the responsibilities of the assurance team so that the
assurance team member does not deal with matters that are within the responsibility of the
immediate family member.
R921.5 An individual shall not participate as an assurance team member when any of that individual's
immediate family:
(a) Is a director or officer of the assurance client;
(b) Is an employee in a position to exert significant influence over the subject matter
information of the assurance engagement; or
(c) Was in such a position during any period covered by the engagement or the subject
matter information.
175
THE CODE
The above is subject to applicable restrictions applicable to a tax assurance client (reference may be
made to 900.15)
Close Family of an Assurance Team Member
921.6 A1 A self-interest, familiarity or intimidation threat is created when a close family member of an
assurance team member is:
(a) A director or officer of the assurance client; or
(b) An employee in a position to exert significant influence over the subject matter
information of the assurance engagement.
921.6 A2 Factors that are relevant in evaluating the level of such threats include:
The nature of the relationship between the assurance team member and the close
family member.
The position held by the close family member.
The role of the assurance team member.
921.6 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation
threat is removing the individual from the assurance team.
921.6 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity
or intimidation threat is structuring the responsibilities of the assurance team so that the
assurance team member does not deal with matters that are within the responsibility of the
close family member.
The above is subject to applicable restrictions applicable to a tax assurance client (reference may be
made to 900.15)
Other Close Relationships of an Assurance Team Member
R921.7 An assurance team member shall consult in accordance with firm policies and procedures if
the assurance team member has a close relationship with an individual who is not an
immediate or close family member, but who is:
(a) A director or officer of the assurance client; or
(b) An employee in a position to exert significant influence over the subject matter
information of the assurance engagement.
921.7 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat
created by such relationships include:
The nature of the relationship between the individual and the assurance team member.
The position the individual holds with the client.
The role of the assurance team member.
921.7 A2 An example of an action that might eliminate such a self-interest, familiarity or intimidation
threat is removing the individual from the assurance team.
921.7 A3 An example of an action that might be a safeguard to address such a self-interest, familiarity
176
THE CODE
or intimidation threat is structuring the responsibilities of the assurance team so that the
assurance team member does not deal with matters that are within the responsibility of the
individual with whom the assurance team member has a close relationship.
Relationships of Partners and Employees of the Firm
921.8 A1 A self-interest, familiarity or intimidation threat might be created by a personal or family
relationship between:
(a) A partner or employee of the firm who is not an assurance team member; and
(b) A director or officer of the assurance client or an employee in a position to exert
significant influence over the subject matter information of the assurance engagement.
921.8 A2 Factors that are relevant in evaluating the level of such threats include:
The nature of the relationship between the partner or employee of the firm and the
director or officer or employee of the client.
The degree of interaction of the partner or employee of the firm with the assurance team.
The position of the partner or employee within the firm.
The role of the individual within the client.
921.8 A3 Examples of actions that might be safeguards to address such self-interest, familiarity or
intimidation threats include:
Structuring the partner's or employee's responsibilities to reduce any potential influence
over the assurance engagement.
Having an appropriate reviewer review the relevant assurance work performed.
The above is subject to applicable restrictions applicable to a tax assurance client (reference may be
made to 900.15)
177
THE CODE
SECTION 922
RECENT SERVICE WITH AN ASSURANCE CLIENT
Introduction
922.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
922.2 If an assurance team member has recently served as a director or officer or employee of the
assurance client, a self-interest, self-review or familiarity threat might be created. This section
sets out specific requirements and application material relevant to applying the conceptual
framework in such circumstances.
Requirements and Application Material
Service During the Period Covered by the Assurance Report
R922.3 The assurance team shall not include an individual who, during the period covered by the
assurance report:
(a) Had served as a director or officer of the assurance client; or
(b) Was an employee in a position to exert significant influence over the subject matter
information of the assurance engagement.
Service Prior to the Period Covered by the Assurance Report
922.4 A1 A self-interest, self-review or familiarity threat might be created if, before the period covered by
the assurance report, an assurance team member:
(a) Had served as a director or officer of the assurance client; or
(b) Was an employee in a position to exert significant influence over the subject matter
information of the assurance engagement.
For example, a threat would be created if a decision made or work performed by the individual
in the prior period, while employed by the client, is to be evaluated in the current period as part
of the current assurance engagement.
922.4 A2 Factors that are relevant in evaluating the level of such threats include:
The position the individual held with the client.
The length of time since the individual left the client.
The role of the assurance team member.
922.4 A3 An example of an action that might be a safeguard to address such a self-interest, self-review
or familiarity threat is having an appropriate reviewer review the work performed by the
assurance team member.
178
THE CODE
SECTION 923
SERVING AS A DIRECTOR OR OFFICER OF AN ASSURANCE CLIENT
Introduction
923.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
923.2 Serving as a director or officer of an assurance client creates self-review and self-interest
threats. This section sets out specific requirements and application material relevant to
applying the conceptual framework in such circumstances.
Requirements and Application Material
Service as Director or Officer
R923.3 A partner or employee of the firm shall not serve as a director or officer of an assurance client
of the firm.
The above is subject to applicable restrictions applicable to a tax assurance client (reference
may be made to 900.15)
Service as Company Secretary
R923.4 A partner or employee of the firm shall not serve as Company Secretary for an assurance client
of the firm unless:
(a) This practice is specifically permitted under local law, professional rules or practice;
(b) Management makes all decisions; and
(c) The duties and activities performed are limited to those of a routine and administrative
nature, such as preparing minutes and maintaining statutory returns.
923.4 A1 Duties of Company Secretary might range from: administrative duties (such as personnel
management and the maintenance of company records and registers) to duties as diverse as
ensuring that the company complies with regulations or providing advice on corporate
governance matters. Usually this position is seen to imply a close association with the entity.
Therefore, a threat is created if a partner or employee of the firm serves as Company
Secretary for an assurance client. (More information on providing non-assurance services to
an assurance client is set out in Section 950, Provision of Non-assurances Services to an
Assurance Client.)
179
THE CODE
SECTION 924
EMPLOYMENT WITH AN ASSURANCE CLIENT
Introduction
924.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
924.2 Employment relationships with an assurance client might create a self-interest, familiarity or
intimidation threat. This section sets out specific requirements and application material relevant
to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
924.3 A1 A familiarity or intimidation threat might be created if any of the following individuals have been
an assurance team member or partner of the firm:
A director or officer of the assurance client.
An employee who is in a position to exert significant influence over the subject matter
information of the assurance engagement.
Former Partner or Assurance Team Member Restrictions
R924.4 If a former partner has joined an assurance client of the firm or a former assurance team
member has joined the assurance client as:
(a) A director or officer; or
(b) An employee in a position to exert significant influence over the subject matter
information of the assurance engagement,
the individual shall not continue to participate in the firm's business or professional activities.
924.4 A1 Even if one of the individuals described in paragraph R924.4 has joined the assurance client
in such a position and does not continue to participate in the firm's business or professional
activities, a familiarity or intimidation threat might still be created.
924.4 A2 A familiarity or intimidation threat might also be created if a former partner of the firm has joined
an entity in one of the positions described in paragraph 924.3 A1 and the entity subsequently
becomes an assurance client of the firm.
924.4 A3 Factors that are relevant in evaluating the level of such threats include:
The position the individual has taken at the client.
Any involvement the individual will have with the assurance team.
The length of time since the individual was an assurance team member or partner of the
firm.
The former position of the individual within the assurance team or firm. An example is
whether the individual was responsible for maintaining regular contact with the client's
management or those charged with governance.
180
THE CODE
924.4 A4 Examples of actions that might be safeguards to address such a familiarity or intimidation threat
include:
Making arrangements such that the individual is not entitled to any benefits or payments
from the firm, unless made in accordance with fixed pre-determined arrangements.
Making arrangements such that any amount owed to the individual is not material to the
firm.
Modifying the plan for the assurance engagement.
Assigning to the assurance team individuals who have sufficient experience relative to
the individual who has joined the client.
Having an appropriate reviewer review the work of the former assurance team member.
Assurance Team Members Entering Employment Negotiations with a Client
R924.5 A firm shall have policies and procedures that require assurance team members to notify the
firm when entering employment negotiations with an assurance client.
924.5 A1 A self-interest threat is created when an assurance team member participates in the assurance
engagement while knowing that the assurance team member will, or might, join the client
sometime in the future.
924.5 A2 An example of an action that might eliminate such a self-interest threat is removing the
individual from the assurance engagement.
924.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is
having an appropriate reviewer review any significant judgments made by that assurance team
member while on the team.
181
THE CODE
SECTION 940
LONG ASSOCIATION OF PERSONNEL WITH AN ASSURANCE CLIENT
Introduction
940.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
940.2 When an individual is involved in an assurance engagement of a recurring nature over a long
period of time, familiarity and self-interest threats might be created. This section sets out
requirements and application material relevant to applying the conceptual framework in such
circumstances.
Requirements and Application Material
General
940.3 A1 A familiarity threat might be created as a result of an individual's long association with:
(a) The assurance client;
(b) The assurance client's senior management; or
(c) The subject matter and subject matter information of the assurance engagement.
940.3 A2 A self-interest threat might be created as a result of an individual's concern about losing a
longstanding assurance client or an interest in maintaining a close personal relationship with a
member of senior management or those charged with governance. Such a threat might
influence the individual's judgment inappropriately.
940.3 A3 Factors that are relevant to evaluating the level of such familiarity or self-interest threats
include:
The nature of the assurance engagement.
How long the individual has been an assurance team member, the individual's seniority
on the team, and the nature of the roles performed, including if such a relationship
existed while the individual was at a prior firm.
The extent to which the work of the individual is directed, reviewed and supervised by
more senior personnel.
The extent to which the individual, due to the individual's seniority, has the ability to
influence the outcome of the assurance engagement, for example, by making key
decisions or directing the work of other engagement team members.
The closeness of the individual's personal relationship with the assurance client or, if
relevant, senior management.
The nature, frequency and extent of interaction between the individual and the assurance
client.
Whether the nature or complexity of the subject matter or subject matter information has
changed.
182
THE CODE
Whether there have been any recent changes in the individual or individuals who are the
responsible party or, if relevant, senior management.
940.3 A4 The combination of two or more factors might increase or reduce the level of the threats. For
example, familiarity threats created over time by the increasingly close relationship between
an individual and the assurance client would be reduced by the departure of the individual who
is the responsible party.
940.3 A5 An example of an action that might eliminate the familiarity and self-interest threats in relation
to a specific engagement would be rotating the individual off the assurance team.
940.3 A6 Examples of actions that might be safeguards to address such familiarity or self-interest threats
include:
Changing the role of the individual on the assurance team or the nature and extent of
the tasks the individual performs.
Having an appropriate reviewer who was not an assurance team member review the
work of the individual.
Performing regular independent internal or external quality reviews of the engagement.
R940.4 If a firm decides that the level of the threats created can only be addressed by rotating the
individual off the assurance team, the firm shall determine an appropriate period during which
the individual shall not:
(a) Be a member of the engagement team for the assurance engagement;
(b) Provide quality control for the assurance engagement; or
(c) Exert direct influence on the outcome of the assurance engagement.
The period shall be of sufficient duration to allow the familiarity and self-interest threats to be
addressed.
183
THE CODE
SECTION 950
PROVISION OF NON-ASSURANCE SERVICES TO ASSURANCE CLIENTS OTHER
THAN AUDIT AND REVIEW ENGAGEMENT CLIENTS
Introduction
950.1 Firms are required to comply with the fundamental principles, be independent, and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
950.2 Firms might provide a range of non-assurance services to their assurance clients, consistent
with their skills and expertise. Providing certain non-assurance services to assurance clients
might create threats to compliance with the fundamental principles and threats to
independence. This section sets out specific requirements and application material relevant to
applying the conceptual framework in such circumstances.
Requirements and Application Material
General
R950.3 Before a firm accepts an engagement to provide a non-assurance service to an assurance
client, the firm shall determine whether providing such a service might create a threat to
independence.
950.3 A1 The requirements and application material in this section assist firms in analyzing certain types
of non-assurance services and the related threats that might be created when a firm accepts
or provides non-assurance services to an assurance client.
950.3 A2 New business practices, the evolution of financial markets and changes in information
technology are among the developments that make it impossible to draw up an all-inclusive list
of non-assurance services that might be provided to an assurance client. As a result, the Code
does not include an exhaustive listing of all non-assurance services that might be provided to
an assurance client.
Additional restrictions apply to a tax assurance client (reference may be made to para
900.15).
Evaluating Threats
950.4 A1 Factors that are relevant in evaluating the level of threats created by providing a non-assurance
service to an assurance client include:
The nature, scope and purpose of the service.
The degree of reliance that will be placed on the outcome of the service as part of the
assurance engagement.
The legal and regulatory environment in which the service is provided.
Whether the outcome of the service will affect matters reflected in the subject matter or
subject matter information of the assurance engagement, and, if so:
o The extent to which the outcome of the service will have a material or significant
effect on the subject matter of the assurance engagement.
o The extent of the assurance client's involvement in determining significant matters
of judgment.
184
THE CODE
The level of expertise of the client's management and employees with respect to the type
of service provided.
Materiality in Relation to an Assurance Client's Information
950.4 A2 The concept of materiality in relation to an assurance client's information is addressed in
Standard on Assurance Engagements (SAE) 3000 (Revised), Assurance Engagements
other than Audits or Reviews of Historical Financial Information. The determination of
materiality involves the exercise of professional judgment and is impacted by both
quantitative and qualitative factors. It is also affected by perceptions of the financial or
other information needs of users.
Multiple Non-assurance Services Provided to the Same Assurance Client
950.4 A3 A firm might provide multiple non-assurance services to an assurance client. In these
circumstances the combined effect of threats created by providing those services is relevant
to the firm's evaluation of threats.
Addressing Threats
950.5 A1 Paragraph 120.10 A2 includes a description of safeguards. In relation to providing non-
assurance services to assurance clients, safeguards are actions, individually or in combination,
that the firm takes that effectively reduce threats to independence to an acceptable level. In
some situations, when a threat is created by providing a service to an assurance client,
safeguards might not be available. In such situations, the application of the conceptual
framework set out in Section 120 requires the firm to decline or end the non-assurance service
or the assurance engagement.
Prohibition on Assuming Management Responsibilities
R950.6 A firm shall not assume a management responsibility related to the subject matter or subject
matter information of an assurance engagement provided by the firm. If the firm assumes a
management responsibility as part of any other service provided to the assurance client, the
firm shall ensure that the responsibility is not related to the subject matter or subject matter
information of the assurance engagement provided by the firm.
950.6 A1 Management responsibilities involve controlling, leading and directing an entity, including
making decisions regarding the acquisition, deployment and control of human, financial,
technological, physical and intangible resources.
950.6 A2 Providing a non-assurance service to an assurance client creates self-review and self-interest
threats if the firm assumes a management responsibility when performing the service. In
relation to providing a service related to the subject matter or subject matter information of an
assurance engagement provided by the firm, assuming a management responsibility also
creates a familiarity threat and might create an advocacy threat because the firm becomes too
closely aligned with the views and interests of management.
950.6 A3 Determining whether an activity is a management responsibility depends on the circumstances
and requires the exercise of professional judgment. Examples of activities that would be
considered a management responsibility include:
Setting policies and strategic direction.
Hiring or dismissing employees.
185
THE CODE
Directing and taking responsibility for the actions of employees in relation to the
employees' work for the entity.
Authorizing transactions.
Controlling or managing bank accounts or investments.
Deciding which recommendations of the firm or other third parties to implement.
Reporting to those charged with governance on behalf of management.
Taking responsibility for designing, implementing, monitoring and maintaining internal
control.
950.6 A4 Providing advice and recommendations to assist the management of an assurance client in
discharging its responsibilities is not assuming a management responsibility. (Ref: Paras.
R950.6 to 950.6 A3).
R950.7 o avoid assuming a management responsibility when providing non-assurance services to an
assurance client that are related to the subject matter or subject matter information of the
assurance engagement, the firm shall be satisfied that client management makes all related
judgments and decisions that are the proper responsibility of management. This includes
ensuring that the client's management:
(a) Designates an individual who possesses suitable skill, knowledge and experience to be
responsible at all times for the client's decisions and to oversee the services. Such an
individual, preferably within senior management, would understand:
(i) The objectives, nature and results of the services; and
(ii) The respective client and firm responsibilities.
However, the individual is not required to possess the expertise to perform or re-perform
the services.
(b) Provides oversight of the services and evaluates the adequacy of the results of the
service performed for the client's purpose; and
(c) Accepts responsibility for the actions, if any, to be taken arising from the results of the
services.
Additional restrictions apply to a tax assurance client (reference may be made to para
900.15).
Other Considerations Related to Providing Specific Non-Assurance Services
950.8 A1 A self-review threat might be created if the firm is involved in the preparation of subject matter
information which is subsequently the subject matter information of an assurance engagement.
Examples of non-assurance services that might create such self-review threats when providing
services related to the subject matter information of an assurance engagement include:
(a) Developing and preparing prospective information and subsequently providing
assurance on this information.
(b) Performing a valuation that forms part of the subject matter information of an assurance
engagement.
186
THE CODE
SECTION 990
REPORTS THAT INCLUDE A RESTRICTION ON USE AND DISTRIBUTION
(ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW
ENGAGEMENTS)
Introduction
990.1 Firms are required to comply with the fundamental principles, be independent and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
990.2 This section sets out certain modifications to Part 4B which are permitted in certain
circumstances involving assurance engagements where the report includes a restriction on
use and distribution. In this section, an engagement to issue a restricted use and distribution
assurance report in the circumstances set out in paragraph R990.3 is referred to as an "eligible
assurance engagement."
Requirements and Application Material
General
R990.3 When a firm intends to issue a report on an assurance engagement which includes a restriction
on use and distribution, the independence requirements set out in Part 4B shall be eligible for
the modifications that are permitted by this section, but only if:
(a) The firm communicates with the intended users of the report regarding the modified
independence requirements that are to be applied in providing the service; and
(b) The intended users of the report understand the purpose, subject matter information and
limitations of the report and explicitly agree to the application of the modifications.
990.3 A1 The intended users of the report might obtain an understanding of the purpose, subject matter
information, and limitations of the report by participating, either directly, or indirectly through a
representative who has authority to act for the intended users, in establishing the nature and
scope of the engagement. In either case, this participation helps the firm to communicate with
intended users about independence matters, including the circumstances that are relevant to
applying the conceptual framework. It also allows the firm to obtain the agreement of the
intended users to the modified independence requirements.
R990.4 Where the intended users are a class of users who are not specifically identifiable by name at
the time the engagement terms are established, the firm shall subsequently make such users
aware of the modified independence requirements agreed to by their representative.
990.4 A1 For example, where the intended users are a class of users such as lenders in a syndicated
loan arrangement, the firm might describe the modified independence requirements in an
engagement letter to the representative of the lenders. The representative might then make
the firm's engagement letter available to the members of the group of lenders to meet the
requirement for the firm to make such users aware of the modified independence requirements
agreed to by the representative.
R990.5 When the firm performs an eligible assurance engagement, any modifications to Part 4B shall
be limited to those modifications set out in paragraphs R990.7 and R990.8.
187
THE CODE
R990.6 If the firm also issues an assurance report that does not include a restriction on use and
distribution for the same client, the firm shall apply Part 4B to that assurance engagement.
Financial Interests, Loans and Guarantees, Close Business, Family and Personal Relationships
R990.7 When the firm performs an eligible assurance engagement:
(a) The relevant provisions set out in Sections 910, 911, 920, 921, 922 and 924 need apply
only to the members of the engagement team, and their immediate and close family
members;
(b) The firm shall identify, evaluate and address any threats to independence created by
interests and relationships, as set out in Sections 910, 911, 920, 921, 922 and 924,
between the assurance client and the following assurance team members;
(i) Those who provide consultation regarding technical or industry specific issues,
transactions or events; and
(ii) Those who provide quality control for the engagement, including those who
perform the engagement quality control review; and
(c) The firm shall evaluate and address any threats that the engagement team has reason
to believe are created by interests and relationships between the assurance client and
others within the firm who can directly influence the outcome of the assurance
engagement, as set out in Sections 910, 911, 920, 921, 922 and 924.
990.7 A1 Others within the firm who can directly influence the outcome of the assurance engagement
include those who recommend the compensation, or who provide direct supervisory,
management or other oversight, of the assurance engagement partner in connection with the
performance of the assurance engagement.
R990.8 When the firm performs an eligible assurance engagement, the firm shall not hold a material
direct or a material indirect financial interest in the assurance client.
188
THE CODE
GLOSSARY, INCLUDING LISTS OF ABBREVIATIONS
In the Code of Ethics for Professional Accountants (including Independence Standards), the
singular shall be construed as including the plural as well as the reverse, and the terms below
have the following meanings assigned to them.
In this Glossary, explanations of defined terms are shown in regular font; italics are used for
explanations of described terms which have a specific meaning in certain parts of the Code or for
additional explanations of defined terms. References are also provided to terms described in the
Code.
Act The Chartered Accountants Act, 1949
Acceptable level A level at which a professional accountant using the reasonable and informed
third party test would likely conclude that the accountant complies with the
fundamental principles.
Advertising The communication to the public of information as to the services or skills
provided by professional accountants in public practice with a view to procuring
professional business.
Appropriate reviewer An appropriate reviewer is a professional with the necessary knowledge, skills,
experience and authority to review, in an objective manner, the relevant work
performed or service provided. Such an individual might be a professional
accountant.
This term is described in paragraph 300.8 A4.
Assurance client The responsible party that is the person (or persons) who:
(a) In a direct reporting engagement, is responsible for the subject matter; or
(b) In an assertion-based engagement, is responsible for the subject matter
information and might be responsible for the subject matter.
Assurance engagement An engagement in which a professional accountant in public practice expresses
a conclusion designed to enhance the degree of confidence of the intended
users other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria.
(For guidance on assurance engagements, see the Framework for Assurance
Engagements issued by the Auditing and Assurance Standards Board. The
Framework for Assurance Engagements describes the elements and
objectives of an assurance engagement and identifies engagements to
which Standards on Auditing (SAs), Standards on Review Engagements
(SREs) and Standards on Assurance Engagements (SAEs) apply.)
189
THE CODE
Assurance team (a) All members of the engagement team for the assurance engagement;
(b) All others within a firm who can directly influence the outcome of the
assurance engagement, including:
(i) Those who recommend the compensation of, or who provide direct
supervisory, management or other oversight of the assurance
engagement partner in connection with the performance of the
assurance engagement;
(ii) Those who provide consultation regarding technical or industry specific
issues, transactions or events for the assurance engagement; and
(iii) Those who provide quality control for the assurance engagement,
including those who perform the engagement quality control review for
the assurance engagement.
Audit In Part 4A, the term "audit" applies equally to "review."
Audit client An entity in respect of which a firm conducts an audit engagement. When the client
is a listed entity, audit client will always include its related entities. When the audit
client is not a listed entity, audit client includes those related entities over which the
client has direct or indirect control. (See also paragraph R400.20.)
In Part 4A, the term "audit client" applies equally to "review client."
Audit engagement A reasonable assurance engagement in which a professional accountant in public
practice expresses an opinion whether financial statements are prepared, in all
material respects (or give a true and fair view or are presented fairly, in all material
respects), in accordance with an applicable financial reporting framework, such as
an engagement conducted in accordance with Standards on Auditing. This
includes a Statutory Audit, which is an audit required by legislation or other
regulation.
In Part 4A, the term "audit engagement" applies equally to "review engagement."
Audit report In Part 4A, the term "audit report" applies equally to "review report."
Audit team (a) All members of the engagement team for the audit engagement;
(b) All others within a firm who can directly influence the outcome of the audit
engagement, including:
(i) Those who recommend the compensation of, or who provide direct
supervisory, management or other oversight of the engagement
partner in connection with the performance of the audit engagement,
including those at all successively senior levels above the
engagement partner through to the individual who is the firm's Senior
or Managing Partner (Chief Executive or equivalent);
(ii) Those who provide consultation regarding technical or industry-
specific issues, transactions or events for the engagement; and
190
THE CODE
(iii) Those who provide quality control for the engagement, including those
who perform the engagement quality control review for the
engagement; and
(c) All those within a network firm who can directly influence the outcome of the
audit engagement.
In Part 4A, the term "audit team" applies equally to "review team."
Close family A parent, child or sibling who is not an immediate family member.
Conceptual framework This term is described in Section 120.
Contingent fee A fee calculated on a predetermined basis relating to the outcome of a transaction
or the result of the services performed by the firm. A fee that is established by a
court or other public authority is not a contingent fee.
Cooling-off period This term is described in paragraph R540.5 for the purposes of paragraphs
R540.11 to R540.19.
Council The Governing body of the Institute constituted under the Act for the
management of the affairs of the Institute and for discharging the functions
assigned to it under the Act.
Direct financial interest A financial interest:
(a) Owned directly by and under the control of an individual or entity (including
those managed on a discretionary basis by others); or
(b) Beneficially owned through a collective investment vehicle, estate, trust or
other intermediary over which the individual or entity has control, or the ability
to influence investment decisions.
Director or officer Those charged with the governance of an entity, or acting in an equivalent capacity,
regardless of their title which might vary from jurisdiction to jurisdiction. In case of a
Company, as defined under Sections 2(34) and 2(59) of the Companies Act, 2013
Eligible audit This term is described in paragraph 800.2 for the purposes of Section 800.
engagement
Eligible assurance This term is described in paragraph 990.2 for the purposes of Section 990.
engagement
Engagement partner The partner or other person in the firm who is responsible for the engagement and
its performance, and for the report that is issued on behalf of the firm, and who,
where required, has the appropriate authority from a professional, legal or
regulatory body.
191
THE CODE
The engagement period starts when the audit team begins to perform the audit.
The engagement period ends when the audit report is issued. When the
Engagement period engagement is of a recurring nature, it ends at the later of the notification by either
party that the professional relationship has ended or the issuance of the final audit
(Audit and Review)
report. Where the audit client is a statutory audit client under Companies Act,
2013, the engagement period shall be determined in accordance with the
provisions contained in the Companies Act, 2013
192
THE CODE
Engagement The engagement period starts when the assurance team begins to perform
period assurance services with respect to the particular engagement. The
(Assurance
engagement period ends when the assurance report is issued. When the
Engagements
Other than engagement is of a recurring nature, it ends at the later of the notification by
either party that the professional relationship has ended or the issuance of the
Audit and Review
final assurance report.
Engagements)
Engagement quality A process designed to provide an objective evaluation, on or before the report is
control review issued, of the significant judgments the engagement team made and the
conclusions it reached in formulating the report.
Engagement team All partners and staff performing the engagement, and any individuals engaged by
the firm or a network firm who perform assurance procedures on the engagement.
This excludes external experts engaged by the firm or by a network firm.
The term "engagement team" also excludes individuals within the client's internal
audit function who provide direct assistance on an audit engagement when the
external auditor complies with the requirements of SA 610 (Revised), Using the
Work of Internal Auditors.
Existing accountant A professional accountant in public practice currently holding an audit
appointment or carrying out accounting, tax, consulting or similar professional
services for a client.
External expert An individual (who is not a partner or a member of the professional staff,
including temporary staff, of the firm or a network firm) or organization
possessing skills, knowledge and experience in a field other than accounting or
auditing, whose work in that field is used to assist the professional accountant
in obtaining sufficient appropriate evidence.
Financial interest An interest in an equity or other security, debenture, loan or other debt instrument
of an entity, including rights and obligations to acquire such an interest and
derivatives directly related to such interest.
Financial statements A structured representation of historical financial information, including related
notes, intended to communicate an entity's economic resources or obligations at a
point in time or the changes therein for a period of time in accordance with a
financial reporting framework. The related notes ordinarily comprise a summary of
significant accounting policies and other explanatory information. The term can
relate to a complete set of financial statements, but it can also refer to a single
financial statement, for example, a balance sheet, or a statement of revenues and
expenses, and related explanatory notes.
Financial statements on In the case of a single entity, the financial statements of that entity. In the case
which the firm will of consolidated financial statements, also referred to as group financial
express an opinion statements, the consolidated financial statements.
193
THE CODE
Firm A sole practitioner, partnership including limited liability partnership or
any such entity of professional accountants, as may be permitted by law;
Paragraphs 400.4 and 900.3 explain how the word "firm" is used to address the
responsibility of professional accountants and firms for compliance with Parts
4A and 4B, respectively.
Fundamental principles This term is described in paragraph 110.1 A1.Each of the fundamental principles
is, in turn, described in the following paragraphs:
Integrity R111.1
Objectivity R112.1
Professional competence and due care R113.1
Confidentiality R114.1
Professional behaviour R115.1
Historical financial Information expressed in financial terms in relation to a particular entity, derived
information primarily from that entity's accounting system, about economic events occurring in
past time periods or about economic conditions or circumstances at points in time
in the past.
194
THE CODE
Immediate family A spouse (or equivalent) or dependent.
Independence Independence comprises:
(a) 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.
(b) 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 that a firm's, or an audit or assurance team
member's, integrity, objectivity or professional skepticism has been
compromised.
As set out in paragraphs 400.5 and 900.4, references to an individual or firm
being "independent" mean that the individual or firm has complied with Parts
4A and 4B, as applicable.
Indirect financial interest A financial interest beneficially owned through a collective investment vehicle,
estate, trust or other intermediary over which the individual or entity has no
control or ability to influence investment decisions.
Institute The Institute of Chartered Accountants of India constituted under the provisions
of The Chartered Accountants Act, 1949.
Key audit partner The engagement partner, the individual responsible for the engagement quality
control review, and other audit partners, if any, on the engagement team who make
key decisions or judgments on significant matters with respect to the audit of the
financial statements on which the firm will express an opinion. Depending upon the
circumstances and the role of the individuals on the audit, "other audit partners"
might include, for example, audit partners responsible for significant subsidiaries or
divisions.
Listed entity An entity whose shares, stock or debt are quoted or listed on a recognized stock
exchange, or are marketed under the regulations of a recognized stock exchange
or other equivalent body.
May This term is used in the Code to denote permission to take a particular action
in certain circumstances, including as an exception to a requirement. It is not
used to denote possibility.
Might This term is used in the Code to denote the possibility of a matter arising, an
event occurring or a course of action being taken. The term does not ascribe
any particular level of possibility or likelihood when used in conjunction with a
threat, as the evaluation of the level of a threat depends on the facts and
circumstances of any particular matter, event or course of action.
195
THE CODE
Network firm A firm or entity that belongs to a network in accordance with the networking
guidelines issued by ICAI
Non-compliance with Non-compliance with laws and regulations ("non-compliance") comprises acts
laws and regulations of omission or commission, intentional or unintentional, which are contrary to
the prevailing laws or regulations committed by the following parties:
(Professional
Accountants in Service) (a) The professional accountant's employing organization;
(b) Those charged with governance of the employing organization;
(c) Management of the employing organization; or
(d) Other individuals working for or under the direction of the employing
organization.
This term is described in paragraph 260.5 A1.
Non-compliance with Non-compliance with laws and regulations ("non-compliance") comprises acts
laws and regulations of omission or commission, intentional or unintentional, which are contrary to
(Professional the prevailing laws or regulations committed by the following parties:
Accountants in Public (a) A client;
Practice)
(b) Those charged with governance of a client;
(c) Management of a client; or
(d) Other individuals working for or under the direction of a client. This term is
described in paragraph 360.5 A1.
196
THE CODE
Office A distinct sub-group, whether organized on geographical or practice lines.
Predecessor accountant A professional accountant in public practice being the immediately preceding
accountant who has held same or similar assignment comprising same /similar
scope of work
Professional accountant An individual who is a member of the Institute of Chartered Accountants of
India.
In Part 1, the term "professional accountant" refers to individual professional
accountants in service and to professional accountants in public practice and their
firms.
In Part 2, the term "professional accountant" refers to professional accountants in
service.
In Parts 3, 4A and 4B, the term "professional accountant" refers to professional
accountants in public practice and their firms.
Professional accountant A professional accountant working in areas such as commerce, industry,
in service service, the public sector, education, the not-for-profit sector, or in regulatory or
professional bodies, who might be an employee, contractor director
(executive or non-executive), owner-manager or volunteer.
Professional accountant Member of the Institute of Chartered Accountants of India who is in practice in
terms of section 2 of The Chartered Accountants Act, 1949...
in public practice
The term "professional accountant in public practice" is also used to refer to a
firm of professional accountants in public practice.
197
THE CODE
Professional activity An activity requiring accountancy or related skills undertaken by a
professional accountant, including accounting, auditing, tax, management
consulting, and financial management.
Professional services Professional activities performed for clients.
Proposed accountant A professional accountant in public practice who is considering accepting an
audit appointment or an engagement to perform accounting, tax, consulting or
similar professional services for a prospective client (or in some cases, an
existing client).
Public interest entity (a) A listed entity; or
(b) An entity:
(i) Defined by regulation or legislation as a public interest entity; or
(ii) 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. Such regulation might be
promulgated by any relevant regulator, including an audit regulator.
For purpose of this definition, it may be noted that Banks and Insurance
Companies are to be considered as Public Interest Entities.
Other entities might also be considered by the Firms to be public interest
entities, as set out in paragraph 400.8.
Quality Review Board constituted vide Notification GSR. 448 (E) dated 28th June, 2007 by the
Board Government of India in the exercise of the powers conferred by Sec. 28A of
the Chartered Accountants Act, 1949, consequent to the Chartered
Accountants (Amendment) Act, 2006
The reasonable and informed third party test is a consideration by the
Reasonable and
professional accountant about whether the same conclusions would likely be
informed third party
reached by another party. Such consideration is made from the perspective of
Reasonable and a reasonable and informed third party, who weighs all the relevant facts and
informed third party test circumstances that the accountant knows, or could reasonably be expected to
know, at the time that the conclusions are made. The reasonable and informed
third party does not need to be an accountant, but would possess the relevant
knowledge and experience to understand and evaluate the appropriateness of
the accountant's conclusions in an impartial manner.
These terms are described in paragraph R120.5 A4.
Related entity An entity that has any of the following relationships with the client:
(a) An entity that has direct or indirect control over the client if the client is
material to such entity;
(b) 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
198
THE CODE
to such entity;
(c) An entity over which the client has direct or indirect control;
(d) An entity in which the client, or an entity related to the client under (c)
above, 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
in (c); and
(e) 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 sister entity.
Relative As per Sub-section (77) of section 2 of Companies Act, 2013 read with
rule 4 of the Companies (Specification of definitions details) Rules, 2014.,
"relative``, with reference to any person, means any one who is related to
another, if--
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed
List of relatives in terms of clause (77) of section 2.- A person shall be
deemed to be the relative of another, if he or she is related to another in
the following manner, namely:-
(1) Father:
Provided that the term Father includes step-father.
(2) Mother:
Provided that the term Mother includes the step-mother.
(3) Son:
Provided that the term Son includes the step-son.
(4) Son`s wife.
(5) Daughter.
(6) Daughter`s husband.
(7) Brother:
Provided that the term Brother includes the step-brother;
(8) Sister:
Provided that the term Sister includes the step-sister.
Review client An entity in respect of which a firm conducts a review engagement.
Review engagement An assurance engagement, conducted in accordance with Standards on Review
Engagements or equivalent, in which a professional accountant in public practice
expresses a conclusion on whether, on the basis of the procedures which do not
provide all the evidence that would be required in an audit, anything has come
to the accountant's attention that causes the accountant to believe that the
financial statements are not prepared, in all material respects, in accordance with
an applicable financial reporting framework.
Review team (a) All members of the engagement team for the review engagement; and
199
THE CODE
(b) All others within a firm who can directly influence the outcome of the
review engagement, including:
(i) Those who recommend the compensation of, or who provide direct
supervisory, management or other oversight of the engagement
partner in connection with the performance of the review engagement,
including those at all successively senior levels above the
engagement partner through to the individual who is the firm's Senior
or Managing Partner (Chief Executive or equivalent);
(ii) Those who provide consultation regarding technical or industry
specific issues, transactions or events for the engagement; and
(iii) Those who provide quality control for the engagement, including those
who perform the engagement quality control review for the
engagement; and
(c) All those within a network firm who can directly influence the outcome of
the review engagement.
Safeguards Safeguards are actions, individually or in combination, that the professional
accountant takes that effectively reduce threats to compliance with the
fundamental principles to an acceptable level.
This term is described in paragraph 120.10 A2.
Senior professional Senior professional accountants in service are directors, officers or senior
accountant in service employees able to exert significant influence over, and make decisions
regarding, the acquisition, deployment and control of the employing
organization's human, financial, technological, physical and intangible
resources.
This term is described in paragraph 260.11 A1.
Substantial harm This term is described in paragraphs 260.5 A3 and 360.5 A3.
Special purpose financial Financial statements prepared in accordance with a financial reporting
statements framework designed to meet the financial information needs of specified users.
Those charged with The person(s) or organization(s) (for example, a corporate trustee) with
governance responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity. This includes overseeing the financial
reporting process. For some entities, those charged with governance might
include management personnel, for example, executive members of a
governance board of a private or public sector entity, or an owner- manager.
Threats This term is described in paragraph 120.6 A3 and includes the following
categories:
200
THE CODE
Self interest 120.6 A3(a)
Self-review 120.6 A3(b)
Advocacy 120.6 A3(c)
Familiarity 120.6 A3(d)
Intimidation 120.6 A3(e)
Time-on period This term is described in paragraph R540.5.
201
THE CODE
LISTS OF ABBREVIATIONS AND STANDARDS REFERRED TO IN THE CODE
LIST OF ABBREVIATIONS
Abbreviation Explanation
Assurance Framework Framework for Assurance Engagements
AASB Auditing and Assurance Standards Board
IFAC International Federation of Accountants
SAs Standards on Auditing
SAEs Standards on Assurance Engagements
SQCs Standards on Quality Control
SREs Standards on Review Engagements
LIST OF STANDARDS REFERRED TO IN THE CODE
Standard Full Title
SA 320 Materiality In Planning and Performing an Audit
SA 610 (Revised) Using the Work of Internal Auditors
SAE 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical
Financial Information
SQC 1 Quality Control for Firms that Perform Audits and Reviews of
Financial Statements, and Other Assurance and Related Services
Engagements
SRE 2400 (Revised) Engagements to Review Historical Financial Statements
202
EFFECTIVE DATE
The restructured Code will be effective as of April 1, 2019.
|
