Introduction (524.1 to 524.2)
  • Bookmark
524.1

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.

  • Bookmark
524.2

Employment relationships with an audit client might create a self-interest, familiarity 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

All Audit Clients (524.3 A1 to 524.5 A3)
  • Bookmark
524.3 A1

A familiarity or intimidation threat might be created if any of the following individuals have been an audit team member or partner of the firm or a network firm:

  • A director or officer of the audit client.

  • An employee in a position to exert significant influence over the preparation of the client's accounting records or the financial statements on which the firm will express an opinion.

  • Bookmark
R524.4

The firm shall ensure that no significant connection remains between the firm or a network firm and:

  • A former partner who has joined an audit client of the firm; or

  • A former audit team member who has joined the audit client,

if either has joined the audit client as:

  • A director or officer; or

  • An employee in a position to exert significant influence over the preparation of the client's accounting records or the financial statements on which the firm will express an opinion.

A significant connection remains between the firm or a network firm and the individual, unless:

  • The individual is not entitled to any benefits or payments from the firm or network firm that are not made in accordance with fixed pre-determined arrangements;

  • Any amount owed to the individual is not material to the firm or the network firm; and

  • The individual does not continue to participate or appear to participate in the firm's or the network firm's business or professional activities.

  • Bookmark
524.4 A1

Even if the requirements of paragraph R524.4 are met, a familiarity or intimidation threat might still be created.

  • Bookmark
524.4 A2

A familiarity or intimidation threat might also be created if a former partner of the firm or network firm has joined an entity in one of the positions described in paragraph 524.3 A1 and the entity subsequently becomes an audit client of the firm.

  • Bookmark
524.4 A3

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

  • The position the individual has taken at the client.

  • Any involvement the individual will have with the audit team.

  • The length of time since the individual was an audit team member or partner of the firm or network firm.

  • The former position of the individual within the audit team, firm or network firm. An example is whether the individual was responsible for maintaining regular contact with the client's management or those charged with governance.

  • Bookmark
524.4 A4

Examples of actions that might be safeguards to address such familiarity or intimidation threats include:

  • Modifying the audit plan.

  • Assigning to the audit team individuals who have sufficient experience relative to the individual who has joined the client.

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

  • Bookmark
R524.5

A firm or network firm shall have policies and procedures that require audit team members to notify the firm or network firm when entering employment negotiations with an audit client.

  • Bookmark
524.5 A1

A self-interest threat is created when an audit team member participates in the audit engagement while knowing that the audit team member will, or might, join the client at some time in the future.

  • Bookmark
524.5 A2

An example of an action that might eliminate such a self-interest threat is removing the individual from the audit team.

  • Bookmark
524.5 A3

An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review any significant judgments made by that individual while on the team.

Audit Clients that are Public Interest Entities (R524.6 to R524.8)
  • Bookmark
R524.6

Subject to paragraph R524.8, if an individual who was a key audit partner with respect to an audit client that is a public interest entity joins the client as:

  • A director or officer; or

  • An employee in a position to exert significant influence over the preparation of the client's accounting records or the financial statements on which the firm will express an opinion,

independence is compromised unless, subsequent to the individual ceasing to be a key audit partner:

  • The audit client has issued audited financial statements covering a period of not less than twelve months; and

  • The individual was not an audit team member with respect to the audit of those financial statements.

  • Bookmark
R524.7

Subject to paragraph R524.8, if an individual who was the Senior or Managing Partner (Chief Executive or equivalent) of the firm joins an audit client that is a public interest entity as:

  • A director or officer; or

  • An employee in a position to exert significant influence over the preparation of the client's accounting records or the financial statements on which the firm will express an opinion,

independence is compromised, unless twelve months have passed since the individual was the Senior or Managing Partner (Chief Executive or equivalent) of the firm.

  • Bookmark
R524.8

As an exception to paragraphs R524.6 and R524.7, independence is not compromised if the circumstances set out in those paragraphs arise as a result of a business combination and:

  • The position was not taken in contemplation of the business combination;

  • Any benefits or payments due to the former partner from the firm or a network firm have been settled in full, unless made in accordance with fixed pre-determined arrangements and any amount owed to the partner is not material to the firm or network firm as applicable;

  • The former partner does not continue to participate or appear to participate in the firm's or network firm's business or professional activities; and

  • The firm discusses the former partner's position held with the audit client with those charged with governance.