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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 Practice, Sections 300 to 399, which applies to all professional accountants in public  practice, whether they provide assurance services or not.
  • International Independence Standards as follows:
    • 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.
    • 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, employee or owner, 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:

  • 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 220 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 240 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 230 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 280 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.
  • A professional accountant lobbying in favour 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 client 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 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.
  • 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.
  • Disclosing to clients any referral fees or commission arrangements received for recommending services or products might address a self-interest threat.
  • 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 International 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 communication with all 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.