Section 300Part 3

Applying the Conceptual Framework – Chartered Accountants in Practice

Introduction

300.1 This Part of the Code sets out requirements and application material for chartered accountants in practice when applying the conceptual framework set out in Section 120Section 120. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by chartered accountants in practice, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires chartered accountants in practice to be alert for such facts and circumstances. 300.2 The requirements and application material that apply to chartered accountants in practice are set out in: • Part 3 – Chartered accountants in Practice, Sections 300 to 399, which applies to all chartered accountants in practice, whether they provide assurance services or not. • Independence Standards as follows: o Part 4A – Independence for Audit and Review Engagements, Sections 400Sections 400 to 899, which applies to chartered accountants in practice when performing audit and review engagements. o Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, Sections 900Sections 900 to 999, which applies to chartered accountants in practice when performing assurance engagements other than audit or review engagements. 300.3 In this Part, the term “chartered accountant” refers to individual chartered accountants in practice and their firms.

Requirements and Application Material

General

R300.4

A chartered accountant shall comply with the fundamental principles set out in Section 110Section 110 and apply the conceptual framework set out in Section 120Section 120 to identify, evaluate and address threats to compliance with the fundamental principles.

R300.5

When dealing with an ethics issue, the chartered accountant shall consider the context in which the issue has arisen or might arise. Where an individual who is a chartered accountant in practice is performing professional activities pursuant to the accountant’s relationship with the firm, whether as consultant or employee, the individual shall comply with the provisions in Part 2 that apply to these circumstances. 300.5 A1 Examples of situations in which the provisions in Part 2 apply to a chartered accountant in practice include: • Facing a conflict of interest when being responsible for selecting a vendor for the firm when an immediate family member of the accountant might benefit financially from the contract. The requirements and application material set out in Section 210Section 210 apply in these circumstances. • Preparing or presenting financial information for the accountant’s client or firm. The requirements and application material set out in Section 220Section 220 apply in these circumstances. • Being offered an inducement such as being regularly offered complimentary tickets to attend sporting events by a supplier of the firm. The requirements and application material set out in Section 250Section 250 apply in these circumstances. • Facing pressure from an engagement partner to report chargeable hours inaccurately for a client engagement.

The requirements and application material set out in

Section 270Section 270 apply in these circumstances. 300.5 A2 The more senior the position of a chartered accountant the greater will be the ability and opportunity to access information, and to influence policies, decisions made and actions taken by others involved with the firm. To the extent that they are able to do so, taking into account their position and seniority in the firm, accountants are expected to encourage and promote an ethics-based culture in the firm and exhibit ethical behaviour in dealings with individuals with whom, and entities with which, the accountant or the firm has a professional or business relationship in accordance with paragraph 120.13 A3. Examples of actions that might be taken include the introduction, implementation and oversight of: • Ethics education and training programs. • Firm processes and performance evaluation and reward criteria that promote an ethical culture. • Ethics and whistle-blowing policies. • Policies and procedures designed to prevent non-compliance with laws and regulations.

Identifying Threats

300.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. The categories of threats are described in paragraph 120.6 A3.

The following are examples of facts and circumstances within each of those categories of threats that might create threats for a chartered accountant when undertaking a professional service:

(a)

Self-interest Threats • A chartered accountant having a direct financial interest in a client. • A chartered accountant quoting a low fee to obtain a new engagement and the fee is so low that it might be difficult to perform the professional service in accordance with applicable technical and professional standards for that price. • A chartered accountant having a close business relationship with a client. • A chartered accountant having access to confidential information that might be used for personal gain. • A chartered accountant discovering a significant error when evaluating the results of a previous professional service performed by a member of the accountant’s firm.

(b)

Self-review Threats • A chartered accountant issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems. • A chartered accountant having prepared the original data used to generate records that are the subject matter of the assurance engagement.

(c)

Advocacy Threats • A chartered accountant promoting the interests of, or shares in, a client. • A chartered accountant acting as an advocate on behalf of a client in litigation or disputes with third parties. • A chartered accountant lobbying in favor of legislation on behalf of a client.

(d)

Familiarity Threats • A chartered accountant having a close or immediate family member who is a director or officer of the client. • A director or officer of the client, or an employee in a position to exert significant influence over the subject matter of the engagement, having recently served as the engagement partner. • An audit team member having a long association with the audit client.

(e)

Intimidation Threats • A chartered accountant being threatened with dismissal from a client engagement or the firm because of a disagreement about a professional matter. • A chartered accountant feeling pressured to agree with the judgment of a client because the client has more expertise on the matter in question. • A chartered accountant being informed that a planned promotion will not occur unless the accountant agrees with an inappropriate accounting treatment. • A chartered accountant having accepted a significant gift from a client and being threatened that acceptance of this gift will be made public.

Identifying Threats Associated with the Use of Technology

300.6 A2 The following are examples of facts and circumstances relating to the use of technology that might create threats for a chartered accountant when undertaking a professional activity: • Self-interest Threats o The data available might not be sufficient for the effective use of the technology. o The technology might not be appropriate for the purpose for which it is to be used. o The accountant might not have sufficient information and expertise, or access to an expert with sufficient understanding, to use and explain the technology and its appropriateness for the purpose intended. (Ref: Para. 230.2). • Self-review Threats o The technology was designed or developed using the knowledge, expertise or judgment of the accountant or the firm.

Evaluating Threats

300.7 A1 The conditions, policies and procedures described in paragraphs 120.6 A1 and 120.8 A2 might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level. Such conditions, policies and procedures might relate to:

(a)

The client and its operating environment; and

(b)

The firm and its operating environment. 300.7 A2 The chartered accountant’s evaluation of the level of a threat is also impacted by the nature and scope of the professional service.

The Client and its Operating Environment

300.7 A3 The chartered accountant’s evaluation of the level of a threat might be impacted by whether the client is:

(a)

An audit client and whether the audit client is a public interest entity;

(b)

An assurance client that is not an audit client; or

(c)

A non-assurance client.

For example, providing a non-assurance service to an audit client that is a public interest entity might be perceived to result in a higher level of threat to compliance with the principle of objectivity with respect to the audit. 300.7 A4 The corporate governance structure, including the leadership of a client might promote compliance with the fundamental principles. Accordingly, a chartered accountant’s evaluation of the level of a threat might also be impacted by a client’s operating environment. For example: • The client requires appropriate individuals other than management to ratify or approve the appointment of a firm to perform an engagement. • The client has competent employees with experience and seniority to make managerial decisions. • The client has implemented internal procedures that facilitate objective choices in tendering non-assurance engagements. • The client has a corporate governance structure that provides appropriate oversight and communications regarding the firm’s services.

The Firm and its Operating Environment

300.7 A5 A chartered accountant’s evaluation of the level of a threat might be impacted by the work environment within the accountant’s firm and its operating environment. For example: • Leadership of the firm that promotes compliance with the fundamental principles and establishes the expectation that assurance team members will act in the public interest. • Policies or procedures for establishing and monitoring compliance with the fundamental principles by all personnel. • Compensation, performance appraisal and disciplinary policies and procedures that promote compliance with the fundamental principles. • Management of the reliance on revenue received from a single client. • The engagement partner having authority within the firm for decisions concerning compliance with the fundamental principles, including any decisions about accepting or providing services to a client. • Educational, training and experience requirements. • Processes to facilitate and address internal and external concerns or complaints. 300.7 A6 The chartered accountant’s evaluation of the level of a threat associated with the use of technology might also be impacted by the work environment within the accountant’s firm and its operating environment. For example: • Level of corporate oversight and internal controls over the technology. • Assessments of the quality and functionality of technology that are undertaken by a third-party. • Training that is provided regularly to all relevant employees so they obtain and maintain the professional competence to sufficiently understand, use and explain the technology and its appropriateness for the purpose intended.

Consideration of New Information or Changes in Facts and Circumstances

300.7 A7 New information or changes in facts and circumstances might:

(a)

Impact the level of a threat; or

(b)

Affect the chartered accountant’s conclusions about whether safeguards applied continue to address identified threats as intended.

In these situations, actions that were already implemented as safeguards might no longer be effective in addressing threats.

Accordingly, the application of the conceptual framework requires that the chartered accountant re-evaluate and address the threats accordingly. (Ref: Paras. R120.9 and R120.10). 300.7 A8 Examples of new information or changes in facts and circumstances that might impact the level of a threat include: • When the scope of a professional service is expanded. • When the client becomes a listed entity or acquires another business unit. • When the firm merges with another firm. • When the chartered accountant is jointly engaged by two clients and a dispute emerges between the two clients. • When there is a change in the chartered accountant’s personal or immediate family relationships.

Addressing Threats

300.8 A1 Paragraphs R120.10 to 120.10 A2 set out requirements and application material for addressing threats that are not at an acceptable level.

Examples of Safeguards

300.8 A2 Safeguards vary depending on the facts and circumstances.

Examples of actions that in certain circumstances might be safeguards to address threats include: • Assigning additional time and qualified personnel to required tasks when an engagement has been accepted might address a self-interest threat. • Having an appropriate reviewer who was not a member of the team review the work performed or advise as necessary might address a self-review threat. • Using different partners and teams with separate reporting lines for the provision of non-assurance services to an assurance client might address self-review, advocacy or familiarity threats. • Involving another firm to perform or re-perform part of the engagement might address self-interest, self-review, advocacy, familiarity or intimidation threats. • Disclosing to clients any referral fees or commission arrangements received for recommending services might address a self-interest threat. • Separating teams when dealing with matters of a confidential nature might address a self-interest threat. 300.8 A3 The remaining sections of Part 3 and Independence Standards describe certain threats that might arise during the course of performing professional services and include examples of actions that might address threats.

Appropriate Reviewer

300.8 A4 An appropriate reviewer is a professional with the necessary knowledge, skills, experience and authority to review, in an objective manner, the relevant work performed or service provided. Such an individual might be a chartered accountant.

Communicating with Those Charged with Governance

R300.9

When communicating with those charged with governance in accordance with the Code, a chartered accountant shall determine the appropriate individual(s) within the entity’s governance structure with whom to communicate. If the accountant communicates with a subgroup of those charged with governance, the accountant shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed. 300.9 A1 In determining with whom to communicate, a chartered accountant might consider:

(a)

The nature and importance of the circumstances; and

(b)

The matter to be communicated. 300.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an individual member of those charged with governance.

R300.10

If a chartered accountant communicates with individuals who have management responsibilities as well as governance responsibilities, the accountant shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the accountant would otherwise communicate. 300.10 A1 In some circumstances, all of those charged with governance are involved in managing the entity, for example, a small business where a single owner manages the entity and no one else has a governance role. In these cases, if matters are communicated to individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the chartered accountant has satisfied the requirement to communicate with those charged with governance.