Introduction (905.1 to 905.2)
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905.1

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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905.2

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 (905.3 A1 to 905.3 A5)
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905.3 A1

When the total fees generated from an assurance client by the firm expressing the conclusion in an assurance engagement 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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905.3 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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905.3 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 assurance client.

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905.3 A4

A self-interest or intimidation threat is also created when the fees generated by the firm from an assurance client represent a large proportion of the revenue from an individual partner's clients.

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905.3 A5

Examples of actions that might be safeguards to address such a self-interest or intimidation threat include:

  • Increasing the client base of the partner to reduce dependence on the assurance client.

  • Having an appropriate reviewer who was not an assurance team member review the work.

Fees — Overdue (905.4 A1 to R905.5)
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905.4 A1

A self-interest threat might be created if a significant part of fees is not paid before the assurance report, if any, for the following period is issued. It is generally expected that the firm will require payment of such fees before any such report is issued. The requirements and application material set out in Section 911 with respect to loans and guarantees might also apply to situations where such unpaid fees exist.

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905.4 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 assurance engagement review the work performed.

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R905.5

When a significant part of fees due from an assurance 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 assurance engagement.

Contingent Fees (905.6 A1 to 905.9 A3)
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905.6 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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R905.7

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

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R905.8

A firm shall not charge directly or indirectly a contingent fee for a non-assurance service provided to an assurance client if the outcome of the non-assurance service, and therefore, the amount of the fee, is dependent on a future or contemporary judgment related to a matter that is material to the subject matter information of the assurance engagement.

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905.9 A1

Paragraphs R905.7 and R905.8 preclude a firm from entering into certain contingent fee arrangements with an assurance client. Even if a contingent fee arrangement is not precluded when providing a non-assurance service to an assurance client, a self-interest threat might still be created.

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905.9 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 subject matter information.

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905.9 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 relevant assurance work.

  • Obtaining an advance written agreement with the client on the basis of remuneration.