Introduction (410.1 to 410.2)
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
(410.3 A1 to R410.6)
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:
Audit Clients that are Public Interest Entities
R410.4
Where an audit client is a public interest entity and, for two consecutive years, the 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:
-
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; and
-
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:
-
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 a professional body performs a review of that engagement that is equivalent to an engagement quality control review ("a pre-issuance review"); or
-
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 a professional body 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:
Fees – Overdue (410.7 A1 to R410.8)
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 such unpaid fees exist.
410.7 A2
Examples of actions that might be safeguards to address such a self-interest threat include:
R410.8
When a significant part of fees due from an audit client remains unpaid for a long time, the firm shall determine:
Contingent Fees
(410.9 A1 to 410.12 A3)
410.9 A1
Contingent fees are fees calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed. A contingent fee charged through an intermediary is an example of an indirect contingent fee. In this section, a fee is not regarded as being contingent if established by a court or other public authority.
R410.10
A firm shall not charge directly or indirectly a contingent fee for an audit engagement.
R410.11
A firm or network firm shall not charge directly or indirectly a contingent fee for a non-assurance service provided to an audit client, if:
-
The fee is charged by the firm expressing the opinion on the financial statements and the fee is material or expected to be material to that firm;
-
The fee is charged by a network firm that participates in a significant part of the audit and the fee is material or expected to be material to that firm; or
-
The outcome of the non-assurance service, and therefore the amount of the fee, is dependent on a future or contemporary judgment related to the audit of a material amount in the financial statements.
410.12 A1
Paragraphs R410.10 and R410.11 preclude a firm or a network firm from entering into certain contingent fee arrangements with an audit client. Even if a contingent fee arrangement is not precluded when providing a non-assurance service to an audit client, a self-interest threat might still be created.
410.12 A2
Factors that are relevant in evaluating the level of such a threat include:
The range of possible fee amounts.
Whether an appropriate authority determines the outcome on which the contingent fee depends.
Disclosure to intended users of the work performed by the firm and the basis of remuneration.
The nature of the service.
The effect of the event or transaction on the financial statements.
410.12 A3
Examples of actions that might be safeguards to address such a self-interest threat include:
-
Having an appropriate reviewer who was not involved in performing the non-assurance service review the work performed by the firm.
-
Obtaining an advance written agreement with the client on the basis of remuneration.
Building Blocks Approach
Complying with Part 4A requires knowing, understanding and applying:
- Part 1 - The fundamental principles and the conceptual framework
- Part 2 – Part 2 is also applicable to individual professional accountants in public practice (PAPPs) when performing professional activities pursuant to their relationship with the firm
- Part 3 - All of the relevant provisions set out in a particular section (Each 3xx section is also linked to 300)
- Part 4A – All the relevant provisions set out in a particular section (Each 4xx, 5xx, 6xx and 8xx section is also linked to 300 and 400)
- All the relevant provisions of a particular section (“general” and “all audit clients” together with additional specific provisions under sub-headings “audit clients that are Public Interest Entities” or “Audit Clients that are not Public Interest Entities” together with any additional provisions set out in any relevant subsection).
Alert: Part 4A 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.
The IESBA has applied a building blocks approach in establishing the structure of the Code. The conceptual framework set out in Part 1, Section 120, applies to all professional accountants (PAs) and is not repeated in subsequent Parts or sections but is expected to be applied by all PAs in the conduct of professional activities.
As an illustration of the building blocks approach:
- In all situations, paragraphs 120.8 A1 to 120.8 A2 of the conceptual framework identify conditions, policies and procedures that might be “factors relevant to evaluating the level of threats.”
- Incremental application material for evaluating threats is provided for PAPPs in paragraphs 300.7 A1 to 300.7 A2.
- Incremental context-specific factors are then included in each section and in each Part of the Code to emphasize the factors that are relevant to evaluating the level of the threat created by the specific circumstance. For instance, in relation to threats created by providing non-assurance services (NAS) to audit clients, paragraphs 600.5 A1 to 600.5 A4 include examples of factors that are relevant to all types of NAS that might be provided. Additionally, within each subsection of Section 600, as appropriate, there are additional examples of factors that also apply based on the specific type of NAS.
Building Blocks Approach
Complying with Part 4A requires knowing, understanding and applying:
- Part 1 - The fundamental principles and the conceptual framework
- Part 2 – Part 2 is also applicable to individual professional accountants in public practice (PAPPs) when performing professional activities pursuant to their relationship with the firm
- Part 3 - All of the relevant provisions set out in a particular section (Each 3xx section is also linked to 300)
- Part 4A – All the relevant provisions set out in a particular section (Each 4xx, 5xx, 6xx and 8xx section is also linked to 300 and 400)
- All the relevant provisions of a particular section (“general” and “all audit clients” together with additional specific provisions under sub-headings “audit clients that are Public Interest Entities” or “Audit Clients that are not Public Interest Entities” together with any additional provisions set out in any relevant subsection).
Alert: Part 4A 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.
The IESBA has applied a building blocks approach in establishing the structure of the Code. The conceptual framework set out in Part 1, Section 120, applies to all professional accountants (PAs) and is not repeated in subsequent Parts or sections but is expected to be applied by all PAs in the conduct of professional activities.
As an illustration of the building blocks approach:
- In all situations, paragraphs 120.8 A1 to 120.8 A2 of the conceptual framework identify conditions, policies and procedures that might be “factors relevant to evaluating the level of threats.”
- Incremental application material for evaluating threats is provided for PAPPs in paragraphs 300.7 A1 to 300.7 A2.
- Incremental context-specific factors are then included in each section and in each Part of the Code to emphasize the factors that are relevant to evaluating the level of the threat created by the specific circumstance. For instance, in relation to threats created by providing non-assurance services (NAS) to audit clients, paragraphs 600.5 A1 to 600.5 A4 include examples of factors that are relevant to all types of NAS that might be provided. Additionally, within each subsection of Section 600, as appropriate, there are additional examples of factors that also apply based on the specific type of NAS.
ETHICAL CONSIDERATIONS RELATING TO AUDIT FEE SETTING IN THE CONTEXT OF DOWNWARD FEE PRESSURE (January 2016)
Various factors affect audit fees, including the nature, size and complexity of the audit, the reporting requirements for the particular engagement or in the particular jurisdiction, and market competition. At the level of the audit engagement, decreases in audit fees may arise because of a reduction in the audit scope (such as through the entity’s divestment of components or business lines), fewer complexities in the audit, and efficiencies in the audit methodology and audit process.
However, pressures on audit fees charged or proposed for a given engagement may arise for different reasons. These include efforts by the entity to reduce costs; and increased competition in segments of the audit market as a result of regulatory developments such as mandatory firm rotation, retendering or increased thresholds below which the statutory audit is not required.
Downward pressure on audit fees can have ethical implications for auditors
[Paragraphs 3-5]
Of particular importance when auditors face downward pressure on audit fees is adherence to the fundamental principles of professional competence and due care, and objectivity.
[Paragraph 7]
In circumstances of fee pressure, it is important that auditors pay particular attention to two key considerations in complying with the fundamental principle of professional competence and due care. These are that, regardless of the audit fee:
- Adequate time should be planned and spent to enable the audit to be performed in accordance with applicable technical and professional standards; and
- Audit personnel with sufficient expertise and experience should be assigned in accordance with the nature, size and complexity of the audit engagement.
For example, when entities face economic difficulty, auditors may encounter more challenging audit areas that require additional work and more extensive exercise of professional judgment and greater skepticism. These areas may include, for example, assessing whether an entity is able to continue as a going concern, evaluating whether there are impairments in asset values, and estimating fair values for illiquid assets. Changes in an entity’s business and in financial reporting requirements may also give rise to more complex judgments and the need for additional work effort. Circumstances such as these increase the time and level of expertise and experience needed on audit engagements.
[Paragraph 10-11]
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Non-Authoritative Guidance
Building Blocks
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