Ethical Standards issued by IAASA
Before an audit engagement can be accepted the auditor must assess the firm’s compliance with the Ethical Standards to ensure that no relationships exist that would impair the independence of the auditor.
The following ethical standards apply to an independent audit engagement.
- Section 1 – General Requirements and Guidance
- Section 2 – Financial, Business, Employment and Personal Relationships
- Section 3 – Long Association with Engagements and with Entities Relevant to Engagements
- Section 4 – Fees, Remuneration and Evaluation Policies, Gifts and Hospitality, Litigation
- Section 5 – Non-Audit/Additional Services
- Section 6 – Provisions Available for Audits of Small Entities
Who issues the standards?
For the audit of financial statements of periods commencing on or after 17th June 2016, for which audit opinions are signed after 1st February 2017 the Standards are adopted by IAASA.
Do they apply to CPA audit firms?
Yes, all CPA audit firms must ensure that they are in full compliance with these standards.
Where can I find out more?
If you have any further queries in relation to these standards please submit
your query to the technical staff at the Institute.
Section 1 – General Requirements and Guidance
A statutory auditor or an audit firm must be able to demonstrate that they have;
- implemented and maintained, and/or complied with, effective systems and processes to enable meeting those outcomes.
- identified and reported relevant conditions and circumstances that threaten meeting those outcomes
- established and operated effective safeguards
- evaluated the threats and safeguards appropriately
- taken any additional steps that are appropriate in the circumstances to meet those outcomes
The firm, its partners and all staff shall behave with integrity and objectivity in all professional and business activities and relationships.
The firm and management shall instil the necessary culture and behaviours respectively throughout the firm and that business, so as to ensure that meeting the ethical outcomes of the overarching principles and supporting ethical provisions is paramount and overrides all commercial interests of the firm.
The firm shall establish and apply confidential whistle-blowing policies and procedures across the firm.
Integrity, Objectivity and Independence
- Integrity – being trustworthy, straightforward, honest, fair and candid; complying with the spirit as well as the letter of applicable ethical principles, laws and regulations; behaving so as to maintain the public’s trust in the auditing profession; and respecting confidentiality except where disclosure is in the public interest or is required to adhere to legal and professional responsibilities
- Objectivity – acting and making decisions and judgments impartially, fairly and on merit, without discrimination, bias or compromise because of commercial or personal self-interest, conflicts of interest or the undue influence of others, and having given due consideration to the best available evidence
- Independence – freedom from conditions and relationships which, in the context of an engagement would compromise the integrity or objectivity of the firm or covered persons
In relation to each engagement the firm and each covered person shall ensure that they are free from conditions and relationships which would make it probable that an objective, reasonable and informed third party would conclude the independence of the firm or any covered person is compromised.
The senior management of the firm shall establish appropriate policies, procedures and quality control and monitoring systems; dedicate appropriate resources and leadership to compliance with supporting ethical provisions and make appropriate arrangements with network firms to ensure compliance as necessary across the network. The firm shall ensure that such appropriate policies, procedures and quality control and monitoring systems are implemented and operated effectively.
Section 2 - Financial, business, employment and personal relationships
Firms, covered persons and persons closely associated with them shall not make a loan to, or guarantee the borrowings of, an entity relevant to the engagement, or the affiliates of such an entity, unless this represents a deposit made with a bank or similar deposit taking institution in the ordinary course of business and on normal business terms.
A business relationship between;
- The firm and or a covered person or persons closely associated with them
- Any entity relevant to the engagement or the entity’s affiliates or its management
involves the two parties having a common commercial interest. Business relationships may create self-interest, advocacy or intimidation threats to integrity or objectivity and independence may be compromised. Examples include;
- Joint ventures with the entity or with a director, officer or other individual who performs a management role for the entity
- Arrangements to combine one or more services or products of the firm with one or more services or products of the entity and to market the package with reference to both parties
- Distribution or marketing arrangements under which the firm acts as a distributor or marketer of any of the entity’s products or services, or the entity acts as a distributor or marketer of any of the products or services of the firm
- Other commercial transactions such as the firm leasing its office space from or to the entity.
Firms, covered persons and persons closely associated with them shall not enter into business relationships with any entity relevant to the engagement, or its management or its affiliates except where those relationships;
- Involve the purchase of goods or services from the firm or the entity in the ordinary course of business and on an arm’s length basis and which are not material to either party
- Would be inconsequential to either party in the view of an objective, reasonable and informed third party
Where a covered person becomes aware that a close family member has entered into a business relationship that could impair independence that person shall report the matter to the engagement partner to take appropriate action.
A statutory auditor or key audit partner for an entity subject to a statutory audit shall not take up;
- Any key management position
- Any position of the audit committee or such body as performs the equivalent functions to the audit committee
- A non-executive member position of the audited entity or a member’s position of that entity
Before the end of;
- Public interest entity – 2 years
- In any other case – 1 year
The firm or a partner or member of staff of the firm shall not accept appointment or perform a role;
- As an officer or member of the board of directors of an entity relevant to an engagement of the firm
- As a member of any subcommittee of that board
- In such a position in an entity which holds directly or indirectly more than 20% of the voting rights in the entity relevant to an engagement
Section 3 - Long association with engagements and with entities relevant to engagements
Where partners and staff in senior positions have a long association or extensive involvement with an entity relevant to the engagement, the firm shall assess the threats to integrity, objectivity and independence and shall;
- Apply safeguards to reduce the threats to a level where independence would not be compromised; and
- Disclose the engagements previously undertaken by the firm for an entity relevant to the engagement to those charged with governance and; where applicable any other persons or entities the firm is instructed to advise.
Where appropriate safeguards cannot be applied the firm shall not accept the engagement shall resign from the engagement or not stand for reappointment, as appropriate. Where the responsibility for the engagement is assigned by legislation or regulation and the firm cannot resign from the engagement the firm shall consider alternative safeguards that can be put in place.
Once the engagement partner has held this role for a continuous period of ten years, careful consideration is given as to whether it is probable that an objective, reasonable and informed third party would conclude the integrity, objectivity or independence of the firm or covered persons are compromised. Where the individual concerned is not rotated after ten years it is important that;
Safeguards other than rotation are applied namely;
1. appointing a partner who has no previous involvement with the entity as the engagement partner
2. removing (rotating) the partners and the other senior members of the engagement team after a pre-determined number of years
3. involving an additional partner who is not and has not recently been a member of the engagement team, to review the work done by the partners and other senior members of the engagement team and to advise as necessary
4. arranging an engagement quality control review of the engagement in question
The reasoning as to why the individual continues to participate in the engagement without any safeguards is documented; and
The facts are communicated to those charged with governance of the entity
Section 4 - Fees, remuneration and evaluation policies, gifts and hospitality, litigation
The engagement partner shall be able to demonstrate that the engagement has assigned to it sufficient partners and staff with appropriate time and skill to perform the engagement in accordance with applicable engagement and ethical standards, irrespective of the engagement fee charged.
Fees for engagements shall not be influenced or determined by the provision of non-audit/additional services to an entity relevant to the engagement.
The firm shall not provide non-audit /additional services in respect of an entity’s relevant to an engagement, wholly or partly on a contingent fee basis where;
- The contingent fee is material to the firm, or that part of the firm by reference to which the engagement partner’s profit share is calculated; or
- The amount of the fee is dependent on an outcome or result of those non-audit/additional services that is relevant to a future or contemporary judgment relating to a material matter in the financial statements
Examples of safeguards that might be applied to reduce self-interest threats arising from the provision of non-audit/additional services on a contingent fee basis to a level where independence is not compromised include;
- The provision of such non-audit/additional services by partners and staff who have no involvement in the engagement
- Review of the engagement by a partner with relevant expertise who is not involved in the engagement to ensure that the subject matter of the non-audit/additional service has been properly and effectively addressed in the context of the engagement
For a recurring engagement the actual amount of the engagement fee for the previous engagement and the arrangements for its payment shall be agreed with the entity before the firm formally accepts appointment for the engagement in respect of the following period.
Where fees for professional services from an entity are overdue and the amount cannot be regarded as trivial the engagement partner in consultation with the ethics partner shall consider whether the firm can accept or continue an engagement for the entity or whether it is necessary to resign.
Where it is expected that total fees for services receivable from a non-listed entity that is not a public interest entity and its subsidiaries relevant to a recurring engagement by the firm will regularly exceed 15% of the annual fee income of the firm or, where profits are not shared on a firm wide basis of the part of the firm by reference to which the engagement partner’s profit share is calculated the firm shall not act as the provider of the engagement for that entity and shall either resign or not stand for re-appointment.
Where it is expected that the total fees for services receivable from a public interest entity or other listed entity and its subsidiaries relevant to a recurring engagement by the firm will regularly exceed 10% of the annual fee income of the firm or where profits are not shared on a firm wide basis of the part of the firm by reference to which the engagement partner’s profit share is calculated the firm shall not act as the provider of the engagement for that entity and shall either resign or not stand for re-appointment.
Gifts and Hospitality
A statutory auditor or an audit firm its partners and any covered person and persons closely associated with them shall not solicit or accept pecuniary and non-pecuniary gifts or favours including hospitality from an entity relevant to the engagement or any other entity related to that entity unless an objective reasonable and informed third party would consider the value thereof as trivial or inconsequential.
The firm shall establish policies on the nature and value of gifts, favours and hospitality that may be accepted from and offered to an entity relevant to an engagement or any other entity related to that entity their directors, officers and employees and shall issue guidance to assist partners and staff to comply with such policies.
Section 5 – Non-audit/Additional Services
ISAs (Ireland) require that auditors exercise professional judgment and maintain professional scepticism throughout the planning and performance of the audit and;
- Identify and assess risks of material misstatement whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal controls
- Obtain sufficient appropriate audit evidence about whether material misstatements exist through designing and implementing appropriate responses to the assessed risks
- Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained.
Identification and Assessment of Threats and Safeguards
Before the firm accepts to provide a non-audit/additional service to an entity relevant to the engagement, the engagement partner shall;
- Identify and assess the significance of any related threats to the integrity or objectivity of the firm and covered persons, including whether independence would be compromised;
- Identify and assess the effectiveness of the available safeguards to eliminate the threats or reduce them to a level where independence would not be compromised
- Consider whether it is probable that an objective, reasonable and informed third party having regard to the threats and safeguards, would conclude that the proposed non-audit/additional service would not impair integrity or objectivity and compromise the independence of the firm or covered persons
- Not accept or shall withdraw from the engagement as appropriate
Threats to Objectivity and Independence
Principal threats include;
- Self-interest threat
- Self-review threat
- Management threat
- Advocacy threat
- Familiarity threat
- Intimidation threat
- Non-audit/additional services are provided by a separate team from the engagement team
- The engagement quality control reviewer or another partner of sufficient relevant experience and seniority who is and is seen to be an effective challenge to both the engagement partner and the partner leading the non-audit/additional services reviews the work and conclusions of the engagement team.
The engagement partner shall ensure that the reasoning for a decision to provide non-audit/additional services and any safeguards adopted and why they are effective is appropriately documented.
Section 6 – Provisions available for audits of small entities
Provisions available for audits of small entities provides alternative provisions for statutory auditors of small entities that are not public interest entities, to apply in respect ot the threats arising from economic dependence and where tax or accounting services are provided and allows the option for taking advantage of exemptions for a small entity audit engagement.
Self-Review Threat – Non-Audit Services
When undertaking non-audit services for a small audited entity the audit firm is not required to apply safeguards to address the self-review threat provided;
- The audited entity has “informed management”
- The audit firm extends the cyclical inspection of completed audit engagements that is performed for quality control purposes
Management Threat – Non - Audit Services
When undertaking non-audit services for small entities the audit firm is not required to adhere to the prohibitions relating to providing non- audit services that involve the audit firm undertaking part of the role of management provided that;
- It discusses objectivity and independence issues related to the provision of non-audit services with those charged with governance, confirming that management accept responsibility for any decisions taken
- It discloses the fact that it has applied the IAASA’s ethical standard – Provisions Available for Audits of Small Entities
Where the audit firm has taken advantage of these exemptions the engagement partner shall ensure that;
- The auditors’ report discloses this fact
- Either the financial statements or the auditors’ report discloses the type of non-audit services provided to the audited entity or the fact that a former engagement partner or other person personally approved as a statutory auditor has joined the audited entity
S.I. No. 312 of 2016 and the Companies Act 2014 also provide prohibitions with regard to certain relationships with an audit client and should be carefully reviewed.