Introduction (520.1 to 520.2)
520.1
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.
520.2
A close business relationship with an audit client or its management 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
General
(520.3 A1 to 520.3 A2)
520.3 A1
This section contains references to the "materiality" of a financial interest and the "significance" of a business relationship. In determining whether such a financial 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.
520.3 A2
Examples of a close business relationship arising from a commercial relationship or common financial interest include:
Having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individual who performs senior managerial activities for that client.
Arrangements to combine one or more services or products of the firm or a network firm with one or more services or products of the client and to market the package with reference to both parties.
Distribution or marketing arrangements under which the firm or a network firm distributes or markets the client's products or services, or the client distributes or markets the firm or a network firm's products or services.
Firm, Network Firm, Audit Team Member or Immediate Family Business Relationships (R520.4 to 520.4 A1)
R520.4
A firm, a network firm or an audit team member shall not have a close business relationship with an audit client or its management unless any financial interest is immaterial and the business relationship is insignificant to the client or its management and the firm, the network firm or the audit team member, as applicable.
520.4 A1
A self-interest or intimidation threat might be created if there is a close business relationship between the audit client or its management and the immediate family of an audit team member.
Common Interests in Closely-Held Entities (R520.5)
R520.5
A firm, a network firm, an audit team member, or any of that individual's immediate family shall not have a business relationship involving the holding of an interest in a closely-held entity when an audit client or a director or officer of the client, or any group thereof, also holds an interest in that entity, unless:
-
The business relationship is insignificant to the firm, the network firm, or the individual as applicable, and the client;
-
The financial interest is immaterial to the investor or group of investors; and
-
The financial interest does not give the investor, or group of investors, the ability to control the closely-held entity.
Buying Goods or Services
(520.6 A1 to 520.6 A2)
520.6 A1
The purchase of goods and services from an audit client by a firm, a network firm, an audit team member, or any of that individual's immediate family does not usually create a threat to independence if the transaction is in the normal course of business and at arm's length. However, such transactions might be of such a nature and magnitude that they create a self-interest threat.
520.6 A2
Examples of actions that might eliminate such a self-interest threat include:
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.
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Non-Authoritative Guidance
Building Blocks
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