Introduction (410.1 to 410.2)
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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.

  • Non-Authoritative Guidance
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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)
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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.

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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.

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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.

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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.

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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.

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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.

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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").

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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.

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R410.6

If the fees described in paragraph R410.4 continue to exceed 15%, the firm shall each year:

  • Disclose to and discuss with those charged with governance the matters set out in paragraph R410.4; and

  • Comply with paragraphs R410.4(b) and R410.5.

Fees – Overdue (410.7 A1 to R410.8)
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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.

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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.

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R410.8

When a significant part of fees due from an audit client remains unpaid for a long time, the firm shall determine:

  • Whether the overdue fees might be equivalent to a loan to the client; and

  • Whether it is appropriate for the firm to be re-appointed or continue the audit engagement.

Contingent Fees (410.9 A1 to 410.12 A3)
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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.

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R410.10

A firm shall not charge directly or indirectly a contingent fee for an audit engagement.

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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.

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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.

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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.

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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.