Introduction (510.1 to 510.2)
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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.

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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 to 510.3 A3)
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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.

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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.

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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 to R510.5)
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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:

  • The firm or a network firm;

  • An audit team member, or any of that individual's immediate family;

  • 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

  • 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.

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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.

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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:

  • 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

  • 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.

Financial Interests in an Entity Controlling an Audit Client (R510.6)
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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.

Financial Interests Held as Trustee (R510.7)
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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:

  • 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;

  • The interest in the audit client held by the trust is not material to the trust;

  • The trust is not able to exercise significant influence over the audit client; and

  • 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.

Financial Interests in Common with the Audit Client (R510.8)
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R510.8
  • 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:

    • 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

    • The audit client cannot exercise significant influence over the entity.

  • 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:

    • Dispose of the interest; or

    • Dispose of enough of the interest so that the remaining interest is no longer material.

Financial Interests Received Unintentionally (R510.9)
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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:

  • 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

    • 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

    • Pending the disposal of the financial interest, when necessary the firm shall address the threat created.

Financial Interests – Other Circumstances (510.10 A1 to 510.10 A13)
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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.

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510.10 A2

Factors that are relevant in evaluating the level of such threats include:

  • 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.

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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.

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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.

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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.

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510.10 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.

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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.

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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.

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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.

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510.10 A10

Factors that 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.

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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.

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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 audit engagement.

  • Having an appropriate reviewer review the work of the audit team member.

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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.