Provision of Non-assurance Services to an Audit Client
(a)
accounting and book keeping services;
(b)
internal audit;
(c)
design and implementation of any financial information system;
(d)
actuarial services;
(e)
investment advisory services;
(f)
investment banking services;
(g)
rendering of outsourced financial services;
(h)
management services; and
(i)
any other kind of services as may be prescribed:
(i)
in case of auditor being an individual, either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual;
(ii)
in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.” 600.5 New business practices, the evolution of financial markets and changes in technology are some developments that make it impossible to draw up an all-inclusive list of non-assurance services that firms and network firms might provide to an audit client. The conceptual framework and the general provisions in this section apply when a firm proposes to a client to provide a non-assurance service for which there are no specific requirements and application material. 600.6 The requirements and application material in this section apply where a firm or a network firm uses technology to provide a non-assurance service to an audit client Requirements and Application Material General Non-Assurance Services Provisions in Laws or Regulations 600.7 A1 Paragraphs R100.6 to 100.7 A1 set out requirements and application material relating to compliance with the Code. If there are laws and regulations relating to the provision of non-assurance services to audit clients that differ from or go beyond those set out in this section, firms providing non-assurance services to which such provisions apply need to be aware of those differences and comply with the more stringent provisions.
(a)
The results of the service will 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; and
(b)
In the course of the audit of those financial statements on which the firm will express an opinion, the audit team will evaluate or rely on any judgments made or activities performed by the firm or network firm when providing the service.
(a)
Does not assume a management responsibility (Ref:
(b)
Applies the conceptual framework to identify, evaluate and address threats, other than self-review threats, to independence that might be created by the provision of that advice. 600.18 A1 Examples of advice and recommendations that might be provided in relation to information or matters arising in the course of an audit include: ● Advising on accounting and financial reporting standards or policies and financial statement disclosure requirements. ● Advising on the appropriateness of financial and accounting control and the methods used in determining the stated amounts in the financial statements and related disclosures. ● Proposing adjusting journal entries arising from audit findings. ● Discussing findings on internal controls over financial reporting and processes and recommending improvements. ● Discussing how to resolve account reconciliation problems. ● Advising on compliance with group accounting policies.
(a)
Adjust the scope of the proposed service to eliminate the circumstances that are creating the threats;
(b)
Decline or end the service that creates the threats that cannot be eliminated or reduced to an acceptable level; or
(c)
End the audit engagement.
(A)
That public interest entity;
(B)
Any entity that controls, directly or indirectly, that public interest entity; or
(C)
Any entity that is controlled directly or indirectly by that public interest entity, the firm shall, unless already addressed when establishing a process agreed with those charged with governance:
(a)
Inform those charged with governance of the public interest entity that the firm has determined that the provision of the service:
(i)
Is not prohibited; and
(ii)
Will not create a threat to the firm’s independence as auditor of the public interest entity or that any identified threat is at an acceptable level or, if not, will be eliminated or reduced to an acceptable level; and
(b)
Provide those charged with governance of the public interest entity with information to enable them to make an informed assessment about the impact of the provision of the service on the firm’s independence. 600.22 A1 Examples of information that might be provided to those charged with governance of the public interest entity in relation to a particular non-assurance service include: ● The nature and scope of the service to be provided. ● The basis and amount of the proposed fee. ● Where the firm has identified any threats to independence that might be created by the provision of the proposed service, the basis for the firm’s assessment that the threats are at an acceptable level or, if not, the actions the firm or network firm will take to eliminate or reduce any threats to independence to an acceptable level. ● Whether the combined effect of providing multiple services creates threats to independence or changes the level of previously identified threats.
(a)
The firm’s conclusion that the provision of the service will not create a threat to the firm’s independence as auditor of the public interest entity, or that any identified threat is at an acceptable level or, if not, will be eliminated, or reduced to an acceptable level; and
(b)
The provision of that service.
(a)
The firm provides such information as it is able without breaching its legal or professional obligations;
(b)
The firm informs those charged with governance of the public interest entity that the provision of the service will not create a threat to the firm’s independence from the public interest entity, or that any identified threat is at an acceptable level or, if not, will be eliminated or reduced to an acceptable level; and
(c)
Those charged with governance do not disagree with the firm’s conclusion in (b).
(a)
The firm or the network firm is not permitted to provide any information to those charged with governance of the audit client that is a public interest entity, unless such a situation is addressed in a process agreed in advance with those charged with governance; or
(b)
Those charged with governance of an audit client that is a public interest entity disagree with the firm’s conclusion that the provision of the service will not create a threat to the firm’s independence from the client or that any identified threat is at an acceptable level or, if not, will be eliminated or reduced to an acceptable level.
(a)
The previous non-assurance service complies with the provisions of this section that relate to audit clients that are not public interest entities;
(b)
Non-assurance services currently in progress that are not permitted under this section for audit clients that are public interest entities are ended before or, if that is not possible, as soon as practicable after, the client becomes a public interest entity; and
(c)
The firm and those charged with governance of the client that becomes a public interest entity agree and take further actions to address any threats to independence that are not at an acceptable level. 600.26 A1 Examples of actions that the firm might recommend to the audit client include engaging another firm to: ● Review or re-perform the affected audit work to the extent necessary. ● Evaluate the results of the non-assurance service or re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.
(a)
An entity that has direct or indirect control over the client (other than an engagement to which Companies Act, 2013 applies);
(b)
An entity with a direct financial interest in the client if that entity has significant influence over the client and the interest in the client is material to such entity; or
(c)
An entity which is under common control with the client, provided that all of the following conditions are met:
(i)
The firm or a network firm does not express an opinion on the financial statements of the related entity;
(ii)
The firm or a network firm does not assume a management responsibility, directly or indirectly, for the entity on whose financial statements the firm will express an opinion;
(iii)
The services do not create a self-review threat and
(iv)
The firm addresses other threats created by providing such services that are not at an acceptable level.
(a)
The services are of a routine or mechanical nature; and
(b)
The firm addresses any threats that are not at an acceptable level. 601.5 A1 Accounting and bookkeeping services that are routine or mechanical:
(a)
Involve information, data or material in relation to which the client has made any judgments or decisions that might be necessary; and
(b)
Require little or no professional judgment. 601.5 A2 Accounting and bookkeeping services can either be manual or automated. In determining whether an automated service is routine or mechanical, factors to be considered include the activities performed by, and the output of, the technology, and whether the technology provides an automated service that is based on or requires the expertise or judgment of the firm or network firm. 601.5 A3 Examples of services, whether manual or automated, that might be regarded as routine or mechanical include: • Preparing payroll calculations or reports based on client-originated data for approval and payment by the client. • Recording recurring transactions for which amounts are easily determinable from source documents or originating data, such as a utility bill where the client has determined or approved the appropriate account classification. • Calculating depreciation on fixed assets when the client determines the accounting policy and estimates of useful life and residual values. • Posting transactions coded by the client to the general ledger. • Posting client-approved entries to the trial balance. • Preparing financial statements based on information in the client-approved trial balance and preparing related notes based on client-approved records. The firm or a network firm may provide such services to audit clients that are not public interest entities provided that the firm or network firm complies with the requirements of paragraph R400.21 to ensure that it does not assume a management responsibility in connection with the service and with the requirement in paragraph R601.5 (b). 601.5 A4 Examples of actions that might be safeguards to address a self-review threat created when providing accounting and bookkeeping services of a routine or mechanical nature to an audit client that is not a public interest entity include: • Using professionals who are not audit team members to perform the service. • Having an appropriate reviewer who was not involved in providing the service review the audit work or service performed.
(a)
The audit report on the group financial statements of the public interest entity has been issued;
(b)
The firm or network firm does not assume management responsibility and applies the conceptual framework to identify, evaluate and address threats to independence;
(c)
The firm or network firm does not prepare the accounting records underlying the statutory financial statements of the related entity and those financial statements are based on client approved information; and
(d)
The statutory financial statements of the related entity will not form the basis of future group financial statements of that public interest entity.
(a)
The valuation involves a significant degree of subjectivity; and
(b)
The valuation will have a material effect on the financial statements on which the firm will express an opinion. 603.4 A1 Certain valuations do not involve a significant degree of subjectivity. This is likely to be the case when the underlying assumptions are established by law or regulation, or when the techniques and methodologies to be used are based on generally accepted standards or prescribed by law or regulation. In such circumstances, the results of a valuation performed by two or more parties are not likely to be materially different.
(a)
Tax return preparation services are based on historical information and principally involve analysis and presentation of such historical information under existing tax law, including precedents and established practice; and
(b)
Tax returns are subject to whatever review or approval process the tax authority considers appropriate. B.
(a)
Are supported by a tax authority or other precedent;
(b)
Are based on an established practice (being a practice that has been commonly used and has not been challenged by the relevant tax authority); or
(c)
Have a basis in tax law that the firm is confident is likely to prevail. 604.12 A3 In addition to paragraph 604.3 A2, factors that are relevant identifying self-review or advocacy threats created by providing tax advisory and tax planning services to audit clients and evaluating the level of such threats include: • The degree of subjectivity involved in determining the appropriate treatment for the tax advice in the financial statements. • Whether the tax treatment is supported by a ruling or has otherwise been cleared by the tax authority before the preparation of the financial statements. • The extent to which the outcome of the tax advice might have a material effect on the financial statements. When a self-review threat for an audit client that is a public interest entity has been identified, paragraph R604.15 applies.
(a)
The effectiveness of the tax advice depends on a particular accounting treatment or presentation in the financial statements and:
(b)
The audit team has doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework.
(a)
Have no effect on the accounting records or the financial statements other than through accounting entries related to tax. In such situations, the requirements and application material set out in this subsection apply.
(b)
Affect the accounting records or the financial statements in ways not limited to accounting entries related to tax, for example, if the valuation leads to a revaluation of assets. In such situations, the requirements and application material set out in subsection 603 relating to valuation services apply. 604.17 A3 Performing a valuation for tax purposes for an audit client will not create a self-review threat if:
(a)
The underlying assumptions are either established by law or regulation, or are widely accepted; or
(b)
The techniques and methodologies to be used are based on generally accepted standards or prescribed by law or regulation, and the valuation is subject to external review by a tax authority or similar regulatory authority.
(a)
The services involve acting as an advocate for the audit client before a court in the resolution of a tax matter; and
(b)
The amounts involved are material to the financial statements on which the firm will express an opinion. 604.27 A1 Paragraphs R604.25 does not preclude a firm or a network firm from having a continuing advisory role in relation to the matter that is being heard before a court, for example: • Responding to specific requests for information. • Providing factual accounts or testimony about the work performed. • Assisting the client in analyzing the tax issues related to the matter. 604.27 A2 For the purpose of this subsection, “Court” does not include a Tribunal.
(a)
Aggregate source data;
(b)
Form part of the internal control over financial reporting; or
(c)
Generate information that affects the accounting records or financial statements, including related disclosures.
(a)
The client acknowledges its responsibility for establishing and monitoring a system of internal controls;
(b)
The client, through a competent individual (or individuals), preferably within senior management, makes all management decisions that are the proper responsibility of management with respect to the design, development, implementation , operation, maintenance, monitoring, updating or upgrading of the IT systems;
(c)
The client evaluates the adequacy and results of the design. development, implementation, operation, maintenance, monitoring, updating or upgrading of the IT system; and
(d)
The client is responsible for operating the IT system and for the data it generates and uses. 606.3 A1 Examples of IT systems services that result in the assumption of a management responsibility include where a firm or a network firm: • Stores data or manages (directly or indirectly) the hosting of data on behalf of the audit client. Such services include: o Acting as the only access to a financial or non-financial information system of the audit client. o Taking custody of or storing the audit client’s data or records such that the audit client’s data or records are otherwise incomplete. o Providing electronic security or back-up services, such as business continuity or a disaster recovery function, for the audit client’s data or records. • Operates, maintains, or monitors the audit client’s IT systems, network or website. 606.3 A2 The collection, receipt, transmission and retention of data provided by an audit client in the course of an audit or to enable the provision of a permissible service to that client does not result in an assumption of management responsibility.
(a)
A witness of fact is an individual who gives evidence to a tribunal or court based on his or her direct knowledge of facts or events.
(b)
An expert witness is an individual who gives evidence, including opinions on matters, to a tribunal or court based on that individual’s expertise. 607.7 A2 A threat to independence is not created when an individual, in relation to a matter that involves an audit client, acts as a witness of fact and in the course of doing so provides an opinion within the individual’s area of expertise in response to a question asked in the course of giving factual evidence. 607.7 A3 The advocacy threat created when acting as an expert witness on behalf of an audit client is at an acceptable level if a firm or a network firm is:
(a)
Appointed by a tribunal or court to act as an expert witness in a matter involving a client; or
(b)
Engaged to advise or act as an expert witness in relation to a class action (or an equivalent group representative action) provided that:
(i)
The firm’s audit clients constitute less than 20% of the members of the class or group (in number and in value);
(ii)
No audit client is designated to lead the class or group; and
(iii)
No audit client is authorized by the class or group to determine the nature and scope of the services to be provided by the firm or the terms on which such services are to be provided.
(a)
Have the required legal training to practice law; or
(b)
Be admitted to practice law before the courts of India. 608.2 A2 This subsection deals specifically with: • Providing legal advice. • Acting as general counsel. • Acting in an advocacy role.
(a)
The client assigns the responsibility to make all management decisions with respect to hiring the candidate for the position to a competent employee, preferably within senior management; and
(b)
The client makes all management decisions with respect to the hiring process, including: • Determining the suitability of prospective candidates and selecting suitable candidates for the position. • Determining employment terms and negotiating details, such as salary, hours and other compensation.
(a)
Searching for or seeking out candidates;
(b)
Undertaking reference checks of prospective candidates;
(c)
Recommending the person to be appointed; or
(d)
Advising on the terms of employment, remuneration or related benefits of a particular candidate, with respect to the following positions:
(i)
A director or officer of the entity; or
(ii)
A member of senior management in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
(a)
The effectiveness of such advice depends on a particular accounting treatment or presentation in the financial statements on which the firm will express an opinion and
(b)
The audit team has doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework.