Section 520Part 4A

Business Relationships

Introduction

520.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120Section 120 to identify, evaluate and address threats to independence. 520.2 A close business relationship with an audit client or its management 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

General

520.3 A1 This section contains references to the “materiality” of a financial interest and the “significance” of a business relationship. In determining whether such a financial interest is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account. 520.3 A2 Examples of a close business relationship arising from a commercial relationship or common financial interest include: • Having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individual who performs senior managerial activities for that client. • Arrangements to combine one or more services or products of the firm or a network firm with one or more services or products of the client and to market the package with reference to both parties.

Firm, Network Firm, Audit Team Member or Immediate Family Business

Relationships

R520.4

A firm, a network firm or an audit team member shall not have a close business relationship with an audit client or its management unless any financial interest is immaterial and the business relationship is insignificant to the client or its management and the firm, the network firm or the audit team member, as applicable.

The above is subject to additional restrictions under

Companies Act, 2013, where applicable. As per section

Notes, amendments & references (13)

141(3)(e) of Companies Act, 2013 read with Companies (Audit and Auditors) Rules, 2014, a firm, an individual practitioner, sole proprietor or partner (as the case may be) shall not, whether directly or indirectly, have business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed.

The term "business relationship" shall be construed as any

transaction entered into for a commercial purpose, except -

(i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Companies Act, 2013 and the Chartered Accountants Act, 1949 or any other Act 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. 520.4 A1 A self-interest or intimidation threat might be created if there is a close business relationship between the audit client or its management and the immediate family of an audit team member.

Common Interests in Closely-Held Entities

R520.5

A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not have a business relationship involving the holding of an interest in a closely- held entity when an audit client or a director or officer of the client, or any group thereof, also holds an interest in that entity, unless:

(a) The business relationship is insignificant to the firm, the network firm, or the individual as applicable, and the client;

(b) The financial interest is immaterial to the investor or group of investors; and

(c) The financial interest does not give the investor, or group of investors, the ability to control the closely-held entity.

Buying Goods or Services

520.6 A1 In addition to the provisions of paragraph R520.4, it is reiterated that the purchase of goods and services from an audit client by a firm, a network firm, an audit team member, or any of that individual’s immediate family does not usually create a threat to independence if the transaction is in the normal course of business and at arm’s length. However, such transactions might be of such a nature and magnitude that they create a self- interest threat. 520.6 A2 Subject to the provisions of Companies Act, 2013, examples of actions that might eliminate such a self-interest threat include: • Eliminating or reducing the magnitude of the transaction. • Removing the individual from the audit team.