Introduction (940.1 to 940.2 )
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940.1

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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940.2

When an individual is involved in an assurance engagement of a recurring nature over a long period of time, familiarity and self-interest threats might be created. This section sets out requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material

General (940.3 A1 to R940.4)
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940.3 A1

A familiarity threat might be created as a result of an individual's long association with:

  • The assurance client;

  • The assurance client's senior management; or

  • The subject matter and subject matter information of the assurance engagement.

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940.3 A2

A self-interest threat might be created as a result of an individual's concern about losing a longstanding assurance client or an interest in maintaining a close personal relationship with a member of senior management or those charged with governance. Such a threat might influence the individual's judgment inappropriately.

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940.3 A3

Factors that are relevant to evaluating the level of such familiarity or self-interest threats include:

  • The nature of the assurance engagement.

  • How long the individual has been an assurance team member, the individual's seniority on the team, and the nature of the roles performed, including if such a relationship existed while the individual was at a prior firm.

  • The extent to which the work of the individual is directed, reviewed and supervised by more senior personnel.

  • The extent to which the individual, due to the individual's seniority, has the ability to influence the outcome of the assurance engagement, for example, by making key decisions or directing the work of other engagement team members.

  • The closeness of the individual's personal relationship with the assurance client or, if relevant, senior management.

  • The nature, frequency and extent of interaction between the individual and the assurance client.

  • Whether the nature or complexity of the subject matter or subject matter information has changed.

  • Whether there have been any recent changes in the individual or individuals who are the responsible party or, if relevant, senior management.

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940.3 A4

The combination of two or more factors might increase or reduce the level of the threats. For example, familiarity threats created over time by the increasingly close relationship between an individual and the assurance client would be reduced by the departure of the individual who is the responsible party.

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940.3 A5

An example of an action that might eliminate the familiarity and self-interest threats in relation to a specific engagement would be rotating the individual off the assurance team.

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940.3 A6

Examples of actions that might be safeguards to address such familiarity or self-interest threats include:

  • Changing the role of the individual on the assurance team or the nature and extent of the tasks the individual performs.

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

  • Performing regular independent internal or external quality reviews of the engagement.

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R940.4

If a firm decides that the level of the threats created can only be addressed by rotating the individual off the assurance team, the firm shall determine an appropriate period during which the individual shall not:

  • Be a member of the engagement team for the assurance engagement;

  • Provide quality control for the assurance engagement; or

  • Exert direct influence on the outcome of the assurance engagement.

The period shall be of sufficient duration to allow the familiarity and self-interest threats to be addressed.