Applying the Conceptual Framework to Independence for Audit and Review Engagements
(IRDA)
etc. 400.2 This Part applies to both audit and review engagements unless otherwise stated. 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. 400.3 In this Part, the term “chartered accountant” refers to individual chartered accountants in practice and their firms. 400.4 SQC 1 requires a firm to establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including network firm personnel), maintain independence where required by relevant ethics requirements. SAs and SREs establish responsibilities for engagement partners and engagement teams at the level of the engagement for audits and reviews, respectively. The allocation of responsibilities within a firm will depend on its size, structure and organization. Many of the provisions of this Part do not prescribe the specific responsibility of individuals within the firm for actions related to independence, instead referring to “firm” for ease of reference. Firms assign responsibility for a particular action to an individual or a group of individuals (such as an audit team), in accordance with SQC 1. In addition, an individual chartered accountant remains responsible for compliance with any provisions that apply to that accountant’s activities, interests or relationships. 400.5 Independence is linked to the principles of objectivity and integrity. It comprises:
(a)
Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.
(b)
Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or an audit team member’s, integrity, objectivity or professional skepticism has been compromised.
(a)
Facts and circumstances, including professional activities, interests and relationships, that create or might create threats to independence;
(b)
Potential actions, including safeguards, that might be appropriate to address any such threats; and
(c)
Some situations where the threats cannot be eliminated or there can be no safeguards to reduce them to an acceptable level.
(a)
A network firm; or
(b)
A firm that is not a network firm, or another entity registered with ICAI. 400.11 An audit engagement might involve experts within, or engaged by, the firm, a network firm, who assist in the engagement. Depending on the role of the individuals, they might be engagement team or audit team members. For example: • Individuals with expertise in a specialized area of accounting or auditing who perform audit procedures are engagement team members. These include, for example, individuals with expertise in accounting for income taxes or in analyzing complex information produced by automated tools and techniques for the purpose of identifying unusual or unexpected relationships. • Individuals within, or engaged by, the firm who have direct influence over the outcome of the audit engagement through consultation regarding technical or industry-specific issues, transactions or events for the engagement are audit team members but not engagement team members.
(a)
a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
(b)
an officer or employee of the company;
(c)
a person who is a partner, or who is in the employment, of an officer or employee of the company;
(d)
a person who, or his relative or partner—
(i)
is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company:
(ii)
is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed2; or
(iii)
has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed3;
(e)
a person or a firm who, whether directly or indirectly, has business relationship4 with the company, or its As per Rule 10 of The Companies (Audit and Auditors) Rules, 2014:- 1 For the purpose of proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141, a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh: Provided that the condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities: Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest. 2 For the purpose of sub-clause (ii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lakhs shall not be eligible for appointment. 3 For the purpose of sub-clause (iii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees shall not be eligible for appointment. 4 For the purpose of clause (e) of sub-section (3) of section 141, the term "business relationship" shall be construed as any transaction entered into for a commercial purpose, except- subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;
(f)
a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
(g)
a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies
(h)
a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;
(i)
a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company.
(4)
Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section
(3)
after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.”
(i)
commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
(ii)
commercial transactions which are in the ordinary course of business of the company at arm’s length price - like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.
(a)
Designates an individual who possesses suitable skill, knowledge and experience to be responsible at all times for the client’s decisions and to oversee the activities. Such an individual, preferably within senior management, would understand:
(i)
The objectives, nature and results of the activities; and
(ii)
The respective client and firm or network firm responsibilities.
(b)
Provides oversight of the activities and evaluates the adequacy of the results of the activities performed for the client’s purpose.
(c)
Accepts responsibility for the actions, if any, to be taken arising from the results of the activities. 400.21 A1 When technology is used in performing a professional activity for an audit client, the requirements in paragraphs R400.20 and R400.21 apply regardless of the nature or extent of such use of the technology.
(a)
A listed entity;
(b)
An entity one of whose main functions is to take deposits from the public;
(c)
An entity:
(i)
Defined by regulation or legislation as a public interest entity; or
(ii)
Having borrowings of 500 crores of rupees or more (to be assessed at both the beginning and end of the year). For purpose of this definition, it may be noted that Banks and Insurance Companies are to be considered as Public Interest Entities. Other entities might also be considered by the Firms to be public interest entities, as set out in paragraph 400.13 and 400.14.
(a)
The engagement period; and
(b)
The period covered by the financial statements. 400.30 A1 The engagement period starts when the engagement team begins to perform the audit. The engagement period ends when the audit report is issued. When the engagement is of a recurring nature, it ends at the later of the notification by either party that the professional relationship has ended or the issuance of the final audit report. Where the audit client is a statutory audit client under the Companies Act, 2013, the engagement period shall be determined in accordance with the provisions of Section 139 of the Companies Act, 2013.
(a)
Financial or business relationships with the audit client during or after the period covered by the financial statements but before accepting the audit engagement; or
(b)
Previous services provided to the audit client by the firm or a network firm. 400.31 A1 Threats to independence are created if a non-assurance service was provided to an audit client during, or after the period covered by the financial statements, but before the engagement team begins to perform the audit, and the service would not be permitted during the engagement period. 400.31 A2 A factor to be considered in such circumstances is whether the results of the service provided might form part of or affect the accounting records, the internal controls over financial reporting, or the financial statements on which the firm will express an opinion. 400.31 A3 Subject to compliance with the requirements of Section 144 of the Companies Act, 2013, where applicable, examples of actions that might be safeguards to address threats to independence include: • Not assigning professionals who performed the non-assurance service to be members of the engagement team. • Having an appropriate reviewer review the audit work or non-assurance service as appropriate. • Engaging another firm outside of the network to evaluate the results of the non-assurance service or having another firm outside of the network re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service. 400.31 A4 A threat to independence created by the provision of a non-assurance service by a firm or a network firm prior to the audit engagement period or prior to the period covered by the financial statements on which the firm will express an opinion is eliminated or reduced to an acceptable level if the results of such service have been used or implemented in a period audited by another firm.
(a)
The provision of such service ceases before the commencement of the audit engagement period;
(b)
The firm takes action to address any threats to its independence; and
(c)
The firm determines that, in the view of a reasonable and informed third party, any threats to the firm’s independence have been or will be eliminated or reduced to an acceptable level. 400.32 A1 Actions that might be regarded by a reasonable and informed third party as eliminating or reducing to an acceptable level any threats to independence created by the provision of non-assurance services to a public interest entity prior to appointment as auditor of that entity include: • The results of the service had been subject to auditing procedures in the course of the audit of the prior year’s financial statements by a predecessor firm. • The firm engages a chartered accountant, who is not a member of the firm expressing the opinion on the financial statements, to perform a review of the first audit engagement affected by the self-review threat that is equivalent to an engagement quality control review. • The public interest entity engages another firm outside of the network to:
(i)
Evaluate the results of the non-assurance service; or
(ii)
Re-perform the service, to the extent necessary to enable the other firm to take responsibility for the result of the service.
(a)
Consider the firm’s judgments in identifying and evaluating threats;
(b)
Consider how threats have been addressed including the appropriateness of safeguards when they are available and capable of being applied; and
(c)
Take appropriate action.
(a)
When safeguards are applied to address a threat, the firm shall document the nature of the threat and the safeguards in place or applied; and
(b)
When a threat required significant analysis and the firm concluded that the threat was already at an acceptable level, the firm shall document the nature of the threat and the rationale for the conclusion. 400.60 A1 Documentation provides evidence of the firm’s judgments in forming conclusions regarding compliance with this Part.
(a)
The firm shall identify and evaluate previous and current interests and relationships with the related entity that, taking into account any actions taken to address the threat, might affect its independence and therefore its ability to continue the audit engagement after the effective date of the merger or acquisition; and
(b)
Subject to paragraph R400.72, the firm shall take steps to end any interests or relationships that are not permitted by the Code by the effective date of the merger or acquisition.
(a)
Evaluate the threat that is created by the interest or relationship; and
(b)
Discuss with those charged with governance the reasons why the interest or relationship cannot reasonably be ended by the effective date and the evaluation of the level of the threat. 400.72 A1 In some circumstances, it might not be reasonably possible to end an interest or relationship creating a threat by the effective date of the merger or acquisition. This might be because the firm provides a non-assurance service to the related entity, which the entity is not able to transition in an orderly manner to another provider by that date. 400.72 A2 Factors that are relevant in evaluating the level of a threat created by mergers and acquisitions when there are interests and relationships that cannot reasonably be ended include: • The nature and significance of the interest or relationship. • The nature and significance of the related entity relationship (for example, whether the related entity is a subsidiary or parent). • The length of time until the interest or relationship can reasonably be ended.
(a)
The interest or relationship will be ended as soon as reasonably possible but no later than six months after the effective date of the merger or acquisition;
(b)
Any individual who has such an interest or relationship, including one that has arisen through performing a non-assurance service that would not be permitted by Section 600Section 600 and its subsections, will not be a member of the engagement team for the audit or the individual responsible for the engagement quality control review; and
(c)
Transitional measures will be applied, as necessary, and discussed with those charged with governance. 400.73 A1 Examples of such transitional measures include: • Having a chartered accountant review the audit or non-assurance work as appropriate. • Having a chartered accountant, who is not a member of the firm expressing the opinion on the financial statements, perform a review that is equivalent to an engagement quality control review. • Engaging another firm to evaluate the results of the non-assurance service or having another firm re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.
(a)
Has evaluated the level of the threat and discussed the results with those charged with governance;
(b)
Complies with the requirements of paragraph R400.73
(b)
to (c); and
(c)
Ceases to be the auditor no later than the date that the audit report is issued.
(a)
Any interests or relationships identified in paragraph 400.70 A1 that will not be ended by the effective date of the merger or acquisition and the reasons why they will not be ended;
(b)
The transitional measures applied;
(c)
The results of the discussion with those charged with governance; and
(d)
The reasons why the previous and current interests and relationships do not create a threat such that objectivity would be compromised.
(a)
End, suspend or eliminate the interest or relationship that created the breach and address the consequences of the breach;
(b)
Consider whether any legal or regulatory requirements apply to the breach and, if so:
(i)
Comply with those requirements;
(c)
Promptly communicate the breach in accordance with its policies and procedures to:
(i)
The engagement partner;
(ii)
Those with responsibility for the policies and procedures relating to independence;
(iii)
Other relevant personnel in the firm and, where appropriate, the network; and
(iv)
Those subject to the independence requirements in Part 4A who need to take appropriate action;
(d)
Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report; and
(e)
Depending on the significance of the breach, determine:
(i)
Whether to end the audit engagement; or
(ii)
Whether it is possible to take action that satisfactorily addresses the consequences of the breach and whether such action can be taken and is appropriate in the circumstances.
(a)
The significance of the breach, including its nature and duration;
(b)
How the breach occurred and how it was identified;
(c)
The action proposed or taken and why the action will satisfactorily address the consequences of the breach and enable the firm to issue an audit report;
(d)
The conclusion that, in the firm’s professional judgment, objectivity has not been compromised and the rationale for that conclusion; and
(e)
Any steps proposed or taken by the firm to reduce or avoid the risk of further breaches occurring.
(a)
All matters discussed in accordance with paragraph R400.82 and obtain the concurrence of those charged with governance that action can be, or has been, taken to satisfactorily address the consequences of the breach; and
(b)
A description of:
(i)
The firm’s policies and procedures relevant to the breach designed to provide it with reasonable assurance that independence is maintained; and
(ii)
Any steps that the firm has taken, or proposes to take, to reduce or avoid the risk of further breaches occurring.
(a)
Consider the impact of the breach, if any, on the firm’s objectivity in relation to any previously issued audit reports, and the possibility of withdrawing such audit reports; and
(b)
Discuss the matter with those charged with governance.
(a)
The breach;
(b)
The actions taken;
(c)
The key decisions made;
(d)
All the matters discussed with those charged with governance; and
(e)
Any discussions with a professional or regulatory body or oversight authority.
(a)
The conclusion that, in the firm’s professional judgment, objectivity has not been compromised; and
(b)
The rationale for why the action taken satisfactorily addressed the consequences of the breach so that the firm could issue an audit report.