Code of ethics for accountancy and auditing profession in Viet Nam

Thứ tư, 20/03/2013, 21:53 GMT+7

Code of ethics for accountancy and auditing profession in Viet Nam Issued under Decision 87/2005/QD-BTC dated 1 December 2005 of the Minister of Finance

CODE OF ETHICS FOR

VIETNAM STANDARDS ON AUDITING SYSTEM

ACCOUNTANCY AND AUDITING PROFESSION

(Issued under Decision 87/2005/QD-BTC

dated 1 December 2005 of the Minister of Finance)

GENERAL PROVISIONS

01. The objectives of this Codeare to prescribe the principles and contents of, and guidance for application of, the professional ethics standards applicable to practicing accountants, practicing auditors, and persons who perform accounting work and persons who perform auditing work in enterprises and entities so as to ensure to attain the highest standards in respect of professional competence, scope of operations and generally to meet the increasing public interest requirement. This Code requires four basic needs to be met:

· Credibility:

Raise credibility in the whole of society in accounting and auditing information and information systems.

· Professionalism

Establish recognition of employers, entities, clients, and other interested parties for professionalism of persons who perform accounting work and persons who perform auditing work, especially practicing accountants and practicing auditors.

· Quality of Services

Assurance that all accounting and auditing services are carried out to the highest standards of performance.

· Confidence

Establish confidence of users of the accounting and auditing services that there exists a framework of professional ethics which governs the provision of those services.

02. Contents of this Code prescribes the objectives, fundamental ethics principles; ethics standards generally applicable to all persons who perform accounting work and persons who perform auditing work; ethics standards applicable particularly to practicing auditors, audit teams and audit firms; and ethics standards applicable to holders of CPA (Certified Public Accountant) Certificate or holders of Accountancy Practicing Certificate employed in enterprises and entities.

03. This Code of Ethics applies to all persons who perform accounting work and persons who perform auditing work, including:

(a) persons who perform accounting work, act as chief accountants, or internal auditors in enterprises and State accounting entities;

(b) holders of CPA Certificate or Accountancy Practicing Certificate who perform accounting work, act as chief accountants, internal auditors, employers or other work in enterprises and entities;

(c) holders of CPA Certificate or Accountancy Practicing Certificate who have registered to practice in the accounting and auditing service providers;

(d) accounting and auditing practices must adhere to this Code of Ethics throughout their operation.

All persons who perform accounting work and persons who perform auditing work in other industries are also governed by this Code of Ethics during their professional performance. The scope of application of this Code of Ethics for each target group is specified in the “Contents of the Code”.

04. Users of accounting and auditing services, enterprises and entities that employ persons who perform accounting work and persons who perform auditing work, and the accounting and auditing-related entities and individuals must have appropriate knowledge of this Code of Ethics for accountancy and auditing professionfor the purpose of selecting and employing persons who perform accounting work and persons who perform auditing work, or the accounting and auditing service providers; and so as to have grounds for using accounting and auditing information and for collaboration in accounting and auditing activities.

The terms in this Code of Ethics are understood as follows:

05. Financial statement: Reports that are prepared in accordance with the accounting standards and accounting policies in force, and reflect the principal economic and financial information of an accounting entity. Financial statement includes: balance sheet, income statement, cash flow statement and notes to financial statement.

06. Related entity: An entity is considered as a related entity if such entity has control over or significant influence over the other entity in making financial and operational decisions.

An entity that has any of the following relationships with the client:

a) An entity that has direct or indirect control over the client provided the client is material to such entity;

b) An entity with a direct financial interest in the client provided that such entity has significant influence over the client and the interest in the client is material to such entity;

c) An entity over which the client has direct or indirect control;

d) An entity in which the client, or an entity related to the client under c) above, has a direct financial interest that gives it significant influence over such entity the interest is material to the client and its related entity in c).

07. Publicity: The communication to the public of facts about a practicing accountant or practicing auditors which are not designed for the deliberate promotion of that practicing accountant and auditor.

08. Audit Firm: An entity that may include:

a) A practice providing external auditing service in accordance with the laws (such as audit firm A, audit firm B with independent legal status); and

b) An entity that controls such parties referred in (a) (such as general corporation, parent company); or/and

c) An entity that is controlled by such parties referred in (a) (branches, representative offices).

- Accounting, auditing practice: A practice or firm specializing in providing accounting and auditing services and other professional services to the public.

09. Branch: a distinct sub-group, whether organized on geographic or practice lines.

10. Accounting and auditing services: Any service requiring accountancy, auditing or related skills performed by a practicing accountant or practicing auditor including accounting, auditing, taxation, management consulting and other advisory services.

11. Listed entity: An entity whose stock are officially listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body such as: a securities trading joint stock company and entity, securities investment fund management company.

12. Materiality: A term to express the importance of a piece of information or data whereby lack or absence of which would influence a decision to be made by a related person. Material information is expressed by its quantity or nature.

13. Directors(members of the board of directors): Those charged with corporate governance of an entity (including other titles that are charged with corporate governance).

- Lead assurance (audit) engagement director: In connection with an audit, the lead director is the primary person of the two responsible for signing the auditors’ report on the financial statements or consolidated financial statements of the audit client, and, where relevant, the director responsible for signing the auditors’ report in respect of any entity whose financial statements form part of the consolidated financial statements and on which a separate stand-alone auditors’ report is issued.

14. Audit engagement (assurance engagement): A written agreement between an audit practice and a client on terms and conditions for an audit, in which the objectives, scope of audit, rights and responsibilities of each party, format of auditors’ report, timeline, and terms on fees and resolution of dispute are defined. An audit engagement is an audit service contract. An auditservice is a service that gives a high level of assurance that financial statements are free of material misstatement or material misstatement is detected if any. An audit engagement is a type of assurance engagement.

15. Assurance engagement (assurance service): A service contract whereby a practicing auditor provides a conclusion so as to increase the degree of confidence of information users. An assurance engagement is conducted to provide:

a) A high level of assurance that the subject matter conforms in all material respects with identified suitable criteria; or

b) A moderate level of assurance that the subject matter is plausible in the circumstances.

This would include an engagement in accordance with Vietnam Standards on Auditing which are established under the generally accepted international standards on assurance practices, issued by the Ministry of Finance or in accordance with specific standards for assurance engagements issued by the Ministry of Finance such as an audit or review of financial statements in accordance with Vietnam Standards on Auditing.

16. Accountant (person who performs accounting work): an employee of an enterprise or entity (with or without CPA Certificate or Accountancy Practicing Certificate) is charged with performing the accounting work in such entity. Persons who perform accounting work include practicing accountants.

17. Professional accountant: A holder of Vietnamese or International Accountancy Practicing Certificate but is employed by an enterprise or entity.

18. Practicing accountant:A holder of CPA Certificate or Accountancy Practicing Certificate who has registered to provide accounting services either as a sole practitioner or as employed in an accounting or auditing practice.

19. Auditclient: An enterprise, entity or organization in respect of which an auditing practice conducts audit services upon request. When the audit client is a listed entity, audit client will always include its related entities.

20. Assurance (audit engagement) client: An enterprise, entity or organization in respect of which an auditing practice conducts an assurance engagement (audit engagement) upon request.

21. Auditor: A holder of CPA Certificate who has not yet registered or has already registered for auditing practice but is not yet delegated by an audit firm with authority to sign the auditors’ report (an eligible person in accordance with legislation on practicing auditors but is not yet delegated by an audit firm with authority to sign the auditors’ report).

- Practicing auditor:A holder of CPA Certificate who has registered for auditing practice at an audit firm that is established and operates in accordance with the Law of Vietnam, and has been delegated by the audit firm with authority to sign the auditors’ report.

22. Predecessor auditor:A practicing auditor who has performed an audit engagement or accounting, taxation, consulting or similar professional services for a client in previous period (s).

- Existing auditor: A practicing auditor currently holding an audit appointment or carrying out accounting, taxation, consulting or similar professional services for a client.

- Receiving auditor: A practicing auditor (existing or predecessor auditor) to whom the existing auditor or client of the existing auditor has referred audit, accounting, taxation, consulting or similar appointments, or who is consulted in order to meet the needs of the client.

- Auditor assistant: A member of an audit team who does not hold CPA Certificate.

23. Person who performs auditing work: Includes a practicing auditor, auditor and auditor assistant.

24. Audit team (assurance team): including:

a) All practicing auditors, auditors and audit assistants participating in the audit engagement (assurance engagement).

b) All other employees within an audit firm who can directly influence the outcome of the auditors’ report, including:

- Those who recommend the compensation of, or who provide direct supervisory, management or other oversight of the lead assurance engagement director in connection with the performance of the assurance engagement. For the purposes of an audit engagement, this includes those at all successively senior levels, from engagement director to the audit firm’s chief executive.

- Those who provide consultation regarding technical or industry specific issues, transactions or events for the assurance engagement; and

- Those charged with technical control of the assurance engagement, including who provide quality control for the assurance engagement.

c) For the purposes of an audit client, the audit team includes all those within a network firm who can directly influence the outcome of the auditors’ opinion.

- Engagement team: All those directly or indirectly participate in performing an engagement, including specialists retained by an audit firm to perform that engagement.

25. Financial interest: Investments in an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.

26. Direct financial interest:A financial interest:

- Owned directly by or under the control of an individual or entity; or

- Beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has control.

27. Indirect financial interest:A financial interest beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has no control.

28. Network firm: An entity under common control, ownership or management with the audit firm or any entity that a third party would reasonably conclude as being part of the audit firm nationally or internationally, such as the parent company, company, branch, representative office.

29. Blood-related family: a parent, spouse, child or sibling.

Direct family: a spouse, and person such as a parent, child or sibling and other dependent.

30. Advertising: The communication to the public of information and image as to accounting and auditing practices, accounting and auditing services, auditors, practicing accountants and other services with a view to procuring clients and promoting business operations of the accounting and auditing practices.

31. Solicitation: The approach by a practicing auditor or practicing accountant to a potential client (the existing client of another auditing practice, or an enterprise that has never been audited or has newly been established) by a practicing accountant or practicing auditor for the purpose of offering accounting and auditing services to such client.

- Quality review: A procedure designed with a view to objectively reviewing the significant judgments made by an assurance team and the results provided by the team during the preparation of the auditors’ report before being officially issued.

32. Clients’ monies: Any monies - including cash and documents of title to money e.g., bonds, shares, promissory notes, and other documents of title which can be converted into money e.g., bearer bonds, in the clients’ ownership.

33. Independence: Independence is:

a) Independence of mind – the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism; and

a) Independence in appearance - the avoidance of facts and circumstances that are so significant that a third party would reasonably conclude that an audit firm’s, or a member of the assurance team’s, integrity, objectivity or professional scepticism had been compromised.

34. Objectivity:A combination of impartiality, intellectual honesty, respect for truth and a freedom from conflicts of interest.

35. Fundamental principles of the Code of Ethic for Accountancy and Auditing Profession include:

a) Independence (applicable primarily to practicing auditors and practicing accountants);

b) Intergrity;

c) Objectivity;

d) Professional Competence and Due Care;

e) Confidentiality;

f) Professional Behaviour;

g) Technical Standards.

36. Independence:Independence is a fundamental principle for practicing auditors and practicing accountants.

During an audit or provision of accounting services, a practicing auditor and practicing accountant must virtually be free of influence or impact from any material or spiritual interest that may affect his integrity, objectivity and professional independence.

A practicing auditor and practicing accountant is not allowed to perform an auditing work or accounting work for an entity he has an business relationship with, or financial interest in, by way of equity contribution, lending to, or borrowing from, the client, or being a controlling shareholder of the client, or entering into contract for processing, providing services or goods distribution agency.

A practicing auditor and practicing accountant is not allowed to perform an auditing work or accounting work for an entity whose management (board of management, board of directors, chief accountant, managers, deputy mangers or equivalent positions) includes a blood-related family relationship with him (a parent, spouse, child, or sibling).

A practicing auditor is not allowed to perform accounting services such as book keeping, preparation of financial statements, internal audit, valuation, management consulting and financial consulting, and to perform auditing services at the same time for the same client. On the other hand, a person who has provided accounting services to a client, is not allowed to provide auditing services to the same client.

During an audit or provision of accounting services, if there are restrains on independence, a practicing accountant, practicing auditor must seek removing those restrains. If he is not able to do so, he must indicate the fact in the auditors’ report or accounting service report.

37. Integrity:A person who performs accounting work and person who performs auditing work should be straightforward and honest in performing accounting or auditing services, and have his own clear point of view.

38. Objectivity:A person who performs accounting work and person who performs auditing work should be fair, should respect the truth, and should not be prejudiced or biased.

39. Professional Competence and Due Care:A person who performs accounting work and person who performs auditing work should perform accounting and auditing services with required adequate competence, highest due care, and diligence. An auditor has a continuing duty to maintain, update and enhance professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques.

40. Confidentiality:A person who performs accounting work and person who performs auditing work should respect the confidentiality of information acquired during the course of performing an audit; and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.

41. Professional Behavior:A person who performs accounting work and person who performs auditing work should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession.

42. Technical Standards:A person who performs accounting work and person who performs auditing work should perform accounting or auditing work in accordance with the relevant technical and professional standards set out in the Vietnam Standards on Accounting, Vietnam Standards on Auditing, the regulations of a professional association, and current legislation.

43. The Code’s objectives as well as the fundamental principles are to provide rules intended to solve the ethical problems of persons who perform accounting work and persons who perform auditing work in a specific case. The Code provides some guidance as to the application in practice of the objectives and the fundamental principles with regard to a number of typical situations occurring in the accountancy and auditing profession. The Code only prescribes and provides guidance on an approach and does not list all circumstances that may give rise to risk of non-compliance and remedial measures to be taken.

44. The Code set out below is divided into three parts:

- Part A applies to all persons who perform accounting work and persons who perform auditing work

- Part B applies only to practicing auditors, audit teams and audit firms.

- Part C applies to holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities.

Depending on the actual practices, one person may have to adhere to both the provisions in Part A and also the provisions in Part B or Part C. For example: A holder of CPA Certificate who provides auditing services must comply with Part A and Part B, and if such holder performs accounting work in ant in enterprises and entitiesthen that holder must comply with the provisions in Part A and Part C.

THE CONTENT OF THE CODE

PART A

APPLICABLE TO ALL PERSONS WHO PERFORM ACCOUNTING WORK AND PERSONS WHO PERFORM AUDITING WORK

Conceptual Framework Approach

45. The circumstances in which persons who perform accounting work and persons who perform auditing work operate may give rise to specific threats to compliance with the fundamental principles. It is impossible to define every situation that creates such threats and specify the appropriate mitigating action. In addition, the nature of engagements and work assignments may differ and consequently different threats may exist, requiring the application of different safeguards. A conceptual framework that requires persons who perform accounting work and persons who perform auditing work to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specific rules which may be arbitrary, is, therefore, in the public interest. This Code provides a framework to assist persons who perform accounting work and persons who perform auditing work to identify, evaluate and respond to threats to compliance with the fundamental principles. If identified threats are other than clearly insignificant, persons who perform accounting work and persons who perform auditing work should, where appropriate, apply safeguards to eliminate the threats or reduce them to an acceptable level, such that compliance with the fundamental principles is not compromised.

· A person who performs accounting work and person who performs auditing work has an obligation to evaluate any threats to compliance with the fundamental principles when the person who performs accounting work and person who performs auditing work knows, or could reasonably be expected to know, of circumstances or relationships that may compromise compliance with the fundamental principles.

· A person who performs accounting work and person who performs auditing work should take qualitative as well as quantitative factors into account when considering the significance of a threat. If a person who performs accounting work and person who performs auditing work cannot implement appropriate safeguards, the person who performs accounting work and person who performs auditing work should decline or discontinue the specific professional service involved, or where necessary resign from the client (in the case of a practicing auditor, audit team and audit firm) or the employing organization (in the case of a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities).

· A person who performs accounting work and person who performs auditing work may inadvertently violate a provision of this Code. Such an inadvertent violation, depending on the nature and significance of the matter, may not compromise compliance with the fundamental principles provided, once the violation is discovered, the violation is corrected promptly and any necessary safeguards are applied.

46. Parts B and C of this Code include examples that are intended to illustrate how the conceptual framework is to be applied. The examples are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances experienced by a person who performs accounting work and person who performs auditing work that may create threats to compliance with the fundamental principles. Consequently, it is not sufficient for a person who performs accounting work and person who performs auditing work merely to comply with the examples presented; rather, the framework should be applied to the particular circumstances encountered by the person who performs accounting work and person who performs auditing work.

Threats and safeguards

47. The compliance with the fundamental principles may be threatened in many circumstances. Those threats may be classified as follows:

a) “Self-Interest Threat”may occur as a result of the financial or other interests of a person who performs accounting work and a person who performs auditing work or a member in the blood-related family relationship or the direct family relationship;

b) “Self-Review Threat”may occur when a previous judgment needs to be reevaluated by the person who performs accounting work and person who performs auditing work responsible for that judgment;

c) “Advocacy Threat” occurs when a person who performs accounting work and a person who performs auditing work promotes a position or opinion to the point that objectivity may be compromised.

d) “Familiarity Threat” occurs when a person who performs accounting work and a person who performs auditing work becomes too sympathetic to another person’s interests by virtue of a close relationship with that person; and

e) “Intimidation Threat” occurs when a person who performs accounting work and a person who performs auditing work may be deterred from acting objectively by threats, actual or perceived.

Part B and Part C of the Code of Ethics provide the examples of circumstances where a practicing auditor, audit team and audit firm or a holder of CPA Certificate or Accountancy Certificate who are employed in enterprise or entities may encounter the threats above.

48. Safeguards that may eliminate the threats or reduce them to an acceptable level fall into the following two broad categories:

(a) Safeguards created by legislation or the professional standards; and

(b) Safeguards created by the work environment.

· Safeguards created by legislation or the professional standards, include but not limited to the following measures:

- Educational, training and experience requirements for entry into the accountancy and auditing profession.

- Continuing education requirements.

- Regulations on a corporate governance structure.

- Professional standards and review procedures.

- Professional association’s or regulator’s monitoring and disciplinary processes.

- External control by a third party legally authorised in respect of the reports, returns, notes or information prepared by a person who performs accounting work, a person who performs auditing work.

· Part B and Part C of the Code of Ethics , respectively, discuss safeguards in the work environment of a practicing auditor, audit team and audit firm or a holder of CPA Certificate or Accountancy Certificate who are employed in enterprise or entities.

· Certain safeguards may increase the likelihood of identifying or deterring unethical behavior. Such safeguards, which may be created by the accountancy profession, legislation, regulation or an employing organization, include, but are not restricted to:

- Effective, well publicized complaints systems operated by the employing organization, the accountancy professional association or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional or unethical behavior.

- An explicitly stated duty to report breaches of ethical requirements.

· The nature of the safeguards to be applied will vary depending on the circumstances. In exercising professional judgment, a person who performs accounting work and a person whoperforms auditing work should consider what a reasonable and informed third party, having knowledge of all relevant information, including the significance of the threat and the safeguards applied, would conclude to be unacceptable.

Integrity and Objectivity

49. Integrity implies not merely honesty but fair dealing and truthfulness. The principle of objectivity imposes the obligation on all persons who perform accounting work and persons who perform auditing work to be fair, intellectually honest and free of conflicts of interest.

Persons who perform accounting work and persons who perform auditing work serve in many different capacities and should demonstrate their objectivity in varying circumstances. A practicing auditor undertake assurance engagements, and render tax and other management advisory services. Persons who perform accounting work and persons who perform auditing work prepare financial statements, perform internal auditing services, and serve in financial management capacities in enterprises and entities. Regardless of service or capacity, persons who perform accounting work and persons who perform auditing work should protect the integrity of their professional services, and maintain objectivity in their judgment.

50. In selecting the situations and practices to be specifically dealt within ethics requirements relating to objectivity, adequate consideration should be given to the following factors:

(a) A person who performs accounting work or a person who performs auditing work is exposed to situations which involve the possibility of pressures being exerted on them. These pressures may impair their objectivity.

(b) It is impracticable to define and prescribe all such situations where these possible pressures exist. Therefore, it is necessary to establish standards for identifying relationships that are likely to, or appear to, impair the objectivity of a person who performs accounting work or persons who performs auditing work.

(d) A person who performs accounting work or a person who performs auditing work has an obligation to ensure that personnel engaged on professional services adhere to the principle of objectivity.

(e) A person who performs accounting work or a person who performs auditing work should neither accept nor offer gifts or entertainment which might reasonably be believed to have a significant influence on their professional judgment or those with whom they deal. A person who performs accounting work or a person who performs auditing work should avoid excessive gift or offer of entertainment which would bring their professional standing into disrepute.

· A person who performs accounting work or a persons who performs auditing work should not be associated with any return or communication in which there is reason to believe that it:

- Contains a false or misleading statement that may cause a significant misunderstanding;

- Contains statements or information furnished recklessly or without any real knowledge of whether they are true or false; or

- Omits or obscures information required to be submitted and such omission or obscurity would be misleading.

· A person who performs accounting work or a person who performs auditing work should not be considered having violated the paragraphs above if that person has provided auditors’ opinion that is not an unqualified opinion due to the issues mentioned in the paragraphs above.

Resolution of Ethical Conflicts

51. In the market economy, there are more and more situations which give rise to conflicts of interest in accountancy and auditing profession. Such conflicts may arise in a wide variety of ways, ranging from the relatively trivial dilemma to the serious case of fraud and similar illegal activities. It is not possible to attempt to itemize a comprehensive check list of potential cases where conflicts of interest might occur. Persons who perform accounting work and persons who perform auditing work should be constantly conscious of and be alert to factors which give rise to conflicts of interest. It should be noted that an honest difference of opinion between a person who perform accounting work and person who perform auditing work and another party is not in itself an ethical issue. However, the facts and circumstances of each case need investigation by the parties concerned.

52. There can be particular factors which occur when the responsibilities of a person who performs accounting work and person who performs auditing work may conflict with internal or external demands of one type or another. Hence:

a) There may be the danger of pressure from a regulatory body, higher level entity, director, management; or when there are family or personal relationships which can give rise to the possibility of pressures being exerted upon them. Indeed, relationships or interests which could adversely influence impair or threaten the integrity of a person who performs accounting work and person who performs auditing work should be discouraged.

b) A person who performs accounting work and person who performs auditing work may be asked to act contrary to technical and/or professional standards.

c) A question of divided loyalty as between the superior of the person who performs accounting work and person who performs auditing work and the required professional standards of conduct could occur.

d) Conflict could arise when misleading information is published which may affect the interest of the employer or client and the person who performs accounting work and person who performs auditing work as a result of such publication.

53. In applying standards of ethical conduct a person who perform accounting work and person who perform auditing work may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, the person who performs accounting work and person who performs auditing work should follow the established policies of the employing organization to seek a resolution of such conflict. If those policies do not resolve the ethical conflict, the following should be considered:

a) Review the conflict problem with the immediate superior. If the problem is not resolved with the immediate superior and the person who performs accounting work and person who performs auditing work determines to go to the next higher managerial level, the immediate superior should be notified of the decision. If it appears that the superior is involved in the conflict problem, the person who performs accounting work and person who performs auditing work should raise the issue with the next higher level of management. The immediate superior may be the manager, the higher level is branch director, and the higher level is director or General Shareholders’ Meeting.

b) Consultation with specialists (Professional associations, state authority or legal counsel).

c) If the ethical conflict still remains significant after fully exhausting all levels of internal review, the person who perform accounting work and person who perform auditing work as a last resort may have no other recourse on significant matters (e.g., fraud) than to resign and clear state the reasons.

· If the ethical conflict is significant, depending on the requirements of the law and regulations, the person who performs accounting work and person who performs auditing work must notify relevant authorities of that fact after counseling with professional associations or legal counsels.

A legal counsel must be a competent one and should ensure confidentiality for the person who performs accounting work and person who performs auditing work who consults ethical conflicts.

· Any person who performs accounting work and person who performs auditing work in a senior position should endeavor to ensure that policies are established within his or her employing organization to seek resolution of conflicts.

· Where there is an internal conflict in an entity or a conflict with another entity, the person who performs accounting work and person who performs auditing work should consult with those charged with governance of that entity such as the board of directors or the internal audit committee.

· In his/her own interest, the person who performs accounting work and person who performs auditing work should record in writing the nature of the conflict and contents of any consultation that has been carried out or any decision that has been issued in relation to the conflict.

Professional Competence and Due Care

54 The person who performs accounting work and person who performs auditing work should not portray themselves as having expertise or experience they do not possess.

55 The principle of professional competence and due care requires the person who performs accounting work and person who performs auditing work to fulfill the following responsibilities:

a) To maintain professional knowledge and expertise required to ensure the provision of highest quality professional service to clients or employers;

b) To act properly in accordance with the technical and professional standards in providing professional service.

A good professional service requires the person who performs accounting work and person who performs auditing work to have proper judgment when applying knowledge and expertise to performing that service.

Professional competence may be divided into two separate phases:

a) Attainment of professional competence: The attainment of professional competence mean qualifications evidencing education levels such as: secondary school, college, university, post graduate master, PhD or CPA Certificate and Accountancy Practicing Certificate etc. Professional competence may require work experience (period of practice).

b) Maintenance of professional competence:

(i) The maintenance of professional competence requires a continuing updating of changes in the accountancy and auditing profession including relevant national and international pronouncements on accounting, auditing and other relevant regulations and statutory requirements.

(ii) The person who performs accounting work and person who performs auditing work should at minimum attend the compulsory annual technical update program designed to ensure quality control in the provision of professional services consistent with appropriate national and international pronouncements.

· The maintenance of professional competence requires a continuing awareness and understanding of developments in professional techniques and business. The continuing professional development help building up and maintaining competencies with which the person who performs accounting work and person who performs auditing work are able to work properly in professional environments.

· Due care includes the duty to act in accordance with the requirements of service in a prudent, thorough and timely manner.

· The person who performs accounting work and person who performs auditing work should take measures so as to ensure that staff under their control must be properly trained and supervised.

Confidentiality

56. The person who performs accounting work and person who performs auditing work has an obligation to respect the confidentiality of information about a client’s or employer’s affairs acquired in the course of professional services, and to respect the confidentiality principle even in family and social relationships. The duty of confidentiality continues even after the end of the relationship between the person who performs accounting work and person who performs auditing work and the client, employer, or entity.

57. Confidentiality should always be observed by the person who performs accounting work and person who performs auditing work unless specific authority has been given to disclose information or there is a legal or professional duty to disclose.

The person who performs accounting work and person who performs auditing work has an obligation to ensure that staff under their control and persons from whom advice and assistance is obtained respect the principle of confidentiality.

58. The person who performs accounting work and person who performs auditing work should maintain the confidentiality of information even in social relationships, should be alert for an accidental disclosure of information especially in circumstances of long term cooperation with associate companies, relatives or member from direct family relationship.

59. Confidentiality is not only a matter of disclosure of information. It also requires that a person who performs accounting work and person who performs auditing work acquiring information in the course of performing professional services does neither use nor appear to use that information for personal advantage or for the advantage of a third party.

60. The person who performs accounting work and person who performs auditing work should not make unauthorized disclosures to other persons of confidential information about a client, employer’s or entity’s affair including other information. This does not apply to disclosure of such information in order properly to discharge the responsibility of the person who performs accounting work and person who performs auditing work according to the profession's standards.

61. It is in the interest of the public and the accountancy and auditing profession that the profession’s standards relating to confidentiality be defined and guidance given on the nature and extent of the duty of confidentiality and the circumstances in which disclosure of information acquired during the course of providing professional services shall be prohibited.

62. Confidentiality of information is generally provided for in legal documents. Detailed ethical requirements in respect thereof will depend on the prevailing law of the country and regulation of the professional association from time to time.

63. The following are examples of the points which should be considered in determining whether confidential information may be disclosed:

a) When disclosure is authorized. When authorization to disclose is given by the client or the employer the interests of all the parties including those third parties whose interests might be affected should be considered.

b) When disclosure is required by law, namely:

(i) To produce documents or to give evidence in the course of legal proceedings; and

(ii) To produce documents or to give evidence in the course of investigation, inspection on infringements of the law.

c) When there is a professional duty or right to disclose:

(i) To comply with technical standards and ethics requirements when issuing opinions on truthfulness and fairness of financial statements, including qualified opinions due to the shortcomings and weaknesses of the entity;

(ii) To protect the professional interests of the person who performs accounting work and person who performs auditing work in legal proceedings.

(iii) To comply with the quality (or peer) review of supervisory entity, government agency or a professional association; and

(iv) To respond to an inquiry or investigation by a regulatory body.

64. When the person who performs accounting work and person who performs auditing work has determined that confidential information can be disclosed, the following points should be considered:

a) Whether or not all the relevant facts are known and substantiated; when the situation involves unsubstantiated fact or opinion, professional judgment should be used in determining the degree and appropriate type of disclosure to be made, if any;

b) The parties to whom the communication is addressed should be appropriate recipients and have the responsibility to act on it; and

c) Whether or not the person who performs accounting work and person who performs auditing work would incur any legal liability having made a communication and the consequences thereof.

In all such situations, the person who performs accounting work and person who performs auditing work should consider the need to consult legal counsel and/or the professional organization(s) concerned.

Tax Practiceor Tax Declaration

65. A person who performs accounting work and person who performs auditing work rendering professional tax services is entitled to put forward the best position in favor of a client, or an employer, provided the service is rendered with professional competence, does not in any way impair integrity and objectivity, and is consistent with the law.

66. A person who performs accounting work and person who performs auditing work should not hold out to a client or an employer the assurance that the tax advice offered are beyond challenge. Instead, the person who performs accounting work and person who performs auditing work should ensure that the client or the employer are aware of the limitations attaching to tax advice and services so that they do not misinterpret an expression of opinion as an assertion of fact.

67. A person who performs accounting work and person who performs auditing work who undertakes or assists in the preparation of a tax return should advise the client or the employer that the responsibility for the content of the return rests primarily with the client or employer. The auditor and the professional accountant should take the necessary steps to ensure that the tax return is properly prepared on the basis of the information received.

68. Tax advice or opinions of material consequence given to a client or an employer should be recorded, either in the form of a letter or in a memorandum for the files.

69. A person who performs accounting work and person who performs auditing work should not be associated with any return or communication in which there is reason to believe that it:

a) Contains a false or misleading statement;

b) Contains statements or information furnished recklessly or without any real knowledge of whether they are true or false; or

c) Omits or obscures information required to be submitted and such omission or obscurity would mislead the tax officers.

70. A person who performs accounting work and person who performs auditing work may prepare tax returns involving the use of provision estimates or accounting estimates. When provision or accounting estimates are used, they should be presented as such in a manner so as to avoid the implication of greater accuracy than exists in favor of the client or employer. The person who prepares tax returns should be satisfied that provision or accounting estimates are reasonable under the circumstances.

71. In preparing a tax return, a person who performs accounting work and person who performs auditing work ordinarily may rely on information furnished by the client or employer provided that the information appears reasonable. Although the examination or review of documents or other evidence in support of the information is not required, the person who performs accounting work and person who performs auditing work should encourage, when appropriate, such supporting data to be provided.

In addition, the person who performs accounting work and person who performs auditing work:

(b) Should communicate with the client or employeron the use of their returns for prior years whenever feasible;

(b) Is required to make reasonable inquiries when the information presented appears to be incorrect or incomplete; and

(c)Is encouraged to make reference to the books of legislation and records of the business operations.

72. When a person who performs accounting work and person who performs auditing work learns of a material error or omission in a tax return or tax refund of a prior year (with which the person who performs accounting work and person who performs auditing work may or may not have been associated), the person who performs accounting work and person who performs auditing work has a responsibility to:

a) Promptly advise the client or employer of the error or omission and recommend that disclosure be made to the tax authorities. Normally, the person who performs accounting work and person who performs auditing work is not obligated to inform the tax authorities, except where that person has been associated with the error or omission or has obtained the client’s permission.

b) If the client or the employer does not correct the error the person who performs accounting work and person who performs auditing work:

(i) Should inform the client or the employer that it is not possible to act for them in connection with that return or other consultation submitted to the authorities; and

(ii)Should consider whether continued association with the client or employer in any capacity is consistent with professional responsibilities.

c) If the person who performs accounting work and person who performs auditing work concludes that a professional relationship with the client or employer can be continued, all reasonable steps should be taken to ensure that the error is not repeated in subsequent consultation or tax returns.

d) In case professional or statutory requirements make it necessary for the person who performs accounting work and person who performs auditing work to inform the tax authorities. The person who performs accounting work and person who performs auditing work should advise the client or employer of the position before informing the authorities and should give no further information to the authorities of which the client or employer is not yet aware.

Application of the Code of Ethics to Cross Border Activities

73. When considering the application of ethical requirements in cross border activities a number of situations may arise. Whether a person who performs accounting work and person who performs auditing work is a member of an international professional body and at the same time is a member of a Vietnamese professional association (or holders of Vietnamese CPA Certificate or Accountancy Practising Certificate), the provision of professional services in Vietnam must be conducted in accordance with the Vietnamese Code of Ethics.

74. A foreign professional accountant qualifying in one country but not yet hold Vietnamese CPA Certificate or Accountancy Practicing Certificate may reside in or may be temporarily visiting Vietnam to perform professional services. In case the result of the service is used in Vietnam, this professional accountant should carry out professional services in accordance with the relevant Vietnamese technical standards and ethical requirements. In all other respects, however, the professional accountant should be guided by the ethical requirements set out in paragraph 75 below.

75. When a Vietnamese person who performs accounting work and person who performs auditing work performs services in a country other than the home country or foreign professional accountant performs services in Vietnam, and differences on specific matters exist between ethical requirements of the two countries the following provisions should be applied.

(a) When the Vietnamese ethical requirements are less strict than the IFAC Code of Ethics, then the IFAC ethical requirements must be applied.

(b) When the Vietnamese ethical requirements are stricter than the IFAC Code of Ethics, then the Vietnamese ethical requirements must be applied.

(c) When the ethical requirements of the country where Vietnamese person who performs accounting work and person who performs auditing work perform the professional service are stricter than both the Vietnamese ethical requirements and the IFAC Code of Ethics, then the ethical requirements of that country must be applied.

Publicity

76. In the marketing and promotion of themselves and their work, persons who perform accounting work and persons who perform auditing work should:

(a) Not use means which brings the profession into disrepute;

(b) Not make exaggerated claims for the works they can perform or services they are able to offer, the qualifications they possess, or experience they have gained; and

PART B - APPLICABLE TO PRACTICING AUDITORS, AUDIT TEAMS AND AUDIT FIRMS

Independence

77. Independence is a fundamental principle of the auditors. The Code of Ethics for Accountancy and Auditing Profession requires that all practicing auditors, members of the audit team (assurance teams), audit firms be independent of audit clients.

78. Audit service is intended to enhance the credibility of audited information by evaluating whether the information conforms in all material respects with suitable criteria. The Standard 210 “Audit engagement” describes the objectives and contents of services, responsibilities of each party and other elements of engagements to provide either a high or a moderate level of assurance. The Ministry of Finance has also issued specific standards for certain audit engagements. For example, standards for audit of financial statements (high level assurance), Standard 910 “Review of financial statements”, (moderate level assurance).

Paragraphs 79 through 82 below describe the nature of an audit engagement (assurance engagement). To obtain a full understanding of the objectives and elements of an assurance engagement it is necessary to refer to the full text contained in Standard 210 and each specific standard.

79. Whether a particular engagement is a financial statement audit engagement (an assurance engagement) will depend upon whether it exhibits all the following elements:

(a) A three party relationship involving:

(i) A practicing auditor;

(ii) A party responsible for preparation of the financial statement; and

(iii) An intended user of the audited financial statement;

(b) Type of audit service (in accordance with the provision in paragraph 81);

(d) An engagement process; and

(e) A conclusion: Opinion of auditor in an auditors’ report.

The party responsible for preparation of the financial statement and the intended user of the audited financial statement will often be from separate organizations but need not be. For example, an entity may seek assurance about information provided by a component of that organization. The relationship between the party responsible for preparation of the financial statement and the intended user of the audited financial statement needs to be viewed within the context of a specific engagement.

80. In an assurance service an auditor or independent service provider brings forwards a conclusion in order to enhance credibility of a user of information. The assurance engagement may provide a high or moderate level of assurance. Such engagements may include:

- Financial or non-financial information;

- Attest and direct reporting engagements;

- Engagements to report internally or externally; and

- Engagements in the private and public sector.

81. The audit service may include:

- Audit of financial statements (for example, audit of financial statements, audit of financial statement for tax purposes, review of financial statements).

- Operational audit (for example, assessment of the internal controls, audit of projects); or

- Compliance audit (for example, assessment on compliance with tax regulation, human resource practices).

Audit of financial statements means an assurance service that may provide a high level of assurance. Operational audit, compliance audit are also assurance service may provide a high or moderate level of assurance on a case by case basis.

82. Not all engagements performed by a practicing auditor are assurance engagements. Engagements performed by a practicing accountant are not assurance engagements. Services that are not audit services (other than assurance services) may include:

- Review of financial information based on the agreed-upon procedures;

- Compilation of financial or other information;

- Preparation of tax returns when no conclusion is expressed;

- Management consulting; and

- Other advisory services.

83. Paragraphs from 77 to 124 of the Code of Ethics (this section) provide a framework, built on principles, for identifying, evaluating and responding to threats to independence. The framework establishes principles that members of assurance teams and audit firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level. Judgment is needed to determine which safeguards are to be applied. Some safeguards may eliminate the threat while others may reduce the threat to an acceptable level. This section requires members of assurance teams and audit firms to apply the principles to the particular circumstances under consideration. The examples presented are intended to illustrate the application of the principles in this section and are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances that may create threats to independence. Consequently, it is not sufficient for a member of an assurance team or an audit firm merely to comply with the examples presented, rather they should apply the principles in this section to the particular circumstances they face.

A Conceptual Approach to Independence

84. Independence comprises:

(a) Independence of mind

The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, 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 third party would reasonably conclude a firm’s employee, or a member of the assurance team’s, integrity, objectivity or professional scepticism had been compromised.

85. Independence does not require that a person exercising professional judgment ought to be free from all economic, financial and other relationships as every member of society has relationships with others. Therefore, the significance of economic, financial and other relationships should also be evaluated in the light of whether they affect the independence. When relevant information would lead to a conclusion that the independence is affected, such relationships are unacceptable.

86. Many different circumstances, or combination of circumstances, may or may not be relevant and accordingly it is impossible to define every situation that creates threats to independence and specify the appropriate mitigating action that should be taken. In addition, the nature of assurance engagements may differ and consequently different threats may exist, requiring the application of different safeguards. A conceptual framework that requires firms and members of assurance teams to identify, evaluate and address threats to independence, rather than merely comply with a set of specific rules which may be arbitrary, is, therefore, in the public interest.

87. This section is based on such a conceptual approach, one that takes into account threats to independence, accepted safeguards and the public interest. Under this approach, firms and members of assurance teams have an obligation to identify and evaluate circumstances and relationships that create threats to independence and to take appropriate action to eliminate these threats or to reduce them to an acceptable level by the application of safeguards. In addition to identifying and evaluating relationships between the audit firm, the assurance team and the audit client, consideration should be given to whether relationships between individuals outside of the assurance practice and the audit client create threats to independence.

88. This section of the Code of Ethics provides a framework of principles that an auditor, audit team, firm should use to identify threats to independence (both independence of mind and independence in appearance), evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level.

89. The principles in this section apply to all audit engagements (assurance engagements). The nature of the threats to independence and the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level differ depending on the characteristics of each individual engagement: whether the assurance engagement is an audit engagement or another type of assurance engagement. In the case of an assurance engagement that is not an audit engagement, the purpose and intended users of the report should be considered. An audit firm should, therefore, evaluate the relevant circumstances, the nature of the assurance engagement and the threats to independence in deciding whether it is appropriate to accept or continue an engagement, as well as the nature of the safeguards required and whether a particular firm or auditor should be a member of the assurance team.

90. Audit engagements provide assurance to a wide range of potential users; consequently, in addition to independence of mind, independence in appearance is of particular significance. Accordingly, for audit clients, the audit firm or the audit team are required to be independent of the audit client. Similar considerations in the case of assurance engagements provided to non-audit assurance clients require the audit firm and the audit team to be independent of the non-audit assurance client. In the case of these engagements, consideration should be given to any threats that the audit firm has reason to believe may be created by network firm interests and relationships.

91 Where there two or more audit firms that perform a single audit engagement, i.e. more than one party is responsible for one assurance service, the audit firm with major responsibility must consider the relationships between the members of the audit team. The following elements should be considered:

a) Degree of materiality of the component under the relevant audit firm;

b) Degree of public interest in that service.

Where the content of service to be carried out by an audit firm is insignificant, then this section is not to apply to the auditors of that audit firm in the audit team.

92. In the case of an audit report (assurance report) to a non-audit assurance client expressly restricted for use by identified users, the users of the report are considered to be knowledgeable as to the purpose, subject matter and limitations of the report through their participation in establishing the nature and scope of the audit firm’s instructions to deliver the services. This knowledge and enhanced ability of the audit firm to communicate about safeguards with all users of the report increase the effectiveness of safeguards to independence in appearance. These circumstances may be taken into account by the audit firm in evaluating the threats to independence and considering the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level. It will be necessary to apply the provisions of this section in evaluating the independence of members of the assurance team and their blood-related family relationship. Furthermore, if the audit firm had a material financial interest, whether direct or indirect, in the audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Any threats created by network firm interests and relationships also need to be considered.

93. Accordingly:

(a) For assurance engagements provided to an audit client, the members of the assurance team and the audit firm are required to be independent of the client;

(b) For non-audit assurance engagements, when the report is not expressly restricted for use by identified users, the members of the assurance team and the audit firm are required to be independent of the non-audit assurance client; and

(c) For non-audit assurance engagements, when the assurance report is expressly restricted for use by identified users, the members of the assurance team and the audit firm are required to be independent of the client. In addition, the audit firm should not have a material direct or indirect financial interest* in the client.

These independence requirements for audit engagements (assurance engagements) are illustrated as follows:

Type of assurance Engagement Client
Type of assurance Engagement Client	Audit	Non-audit-not restricted use	Non-audit- restricted use (only applicable for certain users)
Audit client	Audit team and audit firm must be independent
Non-audit assurance client		Assurance team and audit firm must be independent	Assurance team must be independent

94. The threats and safeguards identified in this section are generally discussed in the context of interests or relationships between the audit firm, the audit team (assurance team) and the assurance client. In the case of a listed audit client, the audit firm and audit team are required to consider the interests and relationships that involve that client and its related entities. Ideally those entities and the interests and relationships should be identified before signing the audit engagement. For all other assurance clients, when the audit team has reason to believe that a related entity of such an assurance client is relevant to the audit firm’s independence of the client, the audit team should consider any related entity of that client when evaluating independence and applying appropriate safeguards.

95. The evaluation of threats to independence and subsequent safeguards should be supported by adequate evidence before accepting the engagement and while it is being performed. The obligation to make such an evaluation and take safeguards arises when an audit firm or the audit team knows, or could reasonably be expected to know, of circumstances or relationships that might compromise independence. There may be occasions when the audit firm, a network firm or an individual inadvertently violates independence in this section. If such an inadvertent violation occurs, it would generally not compromise independence with respect to an assurance client provided the audit firm has appropriate quality control policies and procedures in place to promote independence and, once discovered, the violation is corrected promptly and any necessary safeguards are applied.

96. Throughout this section, reference is made to significant and clearly insignificant threats in the evaluation of independence. In considering the significance of any particular matter, qualitative as well as quantitative factors should be taken into account. A matter should be considered clearly insignificant only if it is deemed to be both trivial and inconsequential.

Objective and Structure of the Independence Section

97. The objective of this independence section is to assist audit firms, auditors and the audit teams in:

(a) Identifying threats to independence;

(b) Evaluating whether these threats are clearly insignificant; and

(c) In cases when the threats are clearly insignificant, identifying and applying appropriate safeguards to eliminate or reduce the threats to an acceptable level.

In situations when no safeguards are available to reduce the threat to an acceptable level, the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement.

98. The structure of the independence section includes:

a. the threats to independence (paragraphs 105 through 110);

b. safeguards capable of eliminating these threats or reducing them to an acceptable level (paragraphs 111 through 120);

c. examples of how this conceptual approach to independence is to be applied to specific circumstances and relationships.

The examples discuss threats to independence that may be created by specific circumstances and relationships. Professional judgment is used to determine the appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level. In certain examples, the threats to independence are so significant the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement. In other examples, the threat can be eliminated or reduced to an acceptable level by the application of safeguards. The examples are not intended to be all-inclusive.

99. When threats to independence that are not clearly insignificant are identified, and the audit firm decides to accept or continue the assurance engagement, the decision should be documented. The documentation should include a description of the threats identified and the safeguards applied to eliminate or reduce the threats to an acceptable level.

100. The evaluation of the significance of any threats to independence and the safeguards necessary to reduce any threats to an acceptable level, takes into account the public interest. Certain entities may be of significant public interest because, as a result of their business, their size or they have a wide range of shareholders. Examples of such entities might include listed companies, credit institutions, insurance companies. Because of the strong public interest in the financial statements of listed entities, certain paragraphs in this section deal with additional matters that are relevant to the audit of listed entities. Consideration should be given to the application of the principles set out in this section in relation to the audit of listed entities to other audit clients that may be of significant public interest.

National Perspectives

101. Paragraphs from 77 to 124 of the Code of Ethics provide a conceptual framework for independence requirements for assurance engagements in accordance with the Vietnamese standards. This Code does not apply less stringent standards than those stated in the IFAC Code. No person or organization is allowed to apply less stringent standards than those stated in this section. When other provisions of the laws are more stringent, such provisions must be complied still they should comply with all other parts of this section.

102 Examples in this section are applied to audit engagements of both listed and not listed entity.

103 When an audit firm conducts an assurance engagement in accordance with the standards on audit engagements or with specific standards on assurance engagements issued by the Ministry of Finance such as an audit or review of financial statements in accordance with Vietnam Standards on Auditing, the members of the assurance team and the audit firm should comply with the provisions of this section unless there are more stringent requirement by law or regulation related to certain part of this section. In such cases, the members of the assurance team and the audit firm should comply with all other parts of this section.

104. The audit firms and assurance teams should be aware of those difference should there exist between/among the definitions and terms provided herein and those under the international standards and other legal regulations and comply with the more stringent requirements of the legislation, this Code of Ethics or the international standards.

Threats to Independence

105. Independence is potentially affected by self-interest, self-review, advocacy, blood-related relationship, other relationship and intimidation threats.

106. “Self-Interest Threat” occurs when an audit firm or a member of the audit team could benefit from a financial interest in, or other self-interest conflict with, an assurance client.

Examples of circumstances that may create this threat include, but are not limited to:

(a) A direct financial interest or material indirect financial interest in an assurance client;

(b) A loan, guarantee, or gift to or from an assurance client or any of its directors or officers;

(d) Concern about the possibility of losing the engagement;

(e) Having a close business relationship with an assurance client;

(f) Potential employment with an assurance client; and

(g) Contingent fees relating to assurance engagements.

107. “Self-Review Threat” occurs when

(1) any product or judgment of a previous assurance engagement or non-assurance engagement needs to be re-evaluated in reaching conclusions on the assurance engagement; or

(2) when a member of the assurance team was previously a director or officer of the assurance client, or was an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement.

Examples of circumstances that may create this threat include, but are not limited to:

(a) A member of the assurance team being, or having recently been, a director or officer who has significant influence over the assurance client;

(b) A member of the assurance team being, or having recently been, an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement;

(d) Preparation of original data used to generate financial statements or preparation of other records that are the subject matter of the assurance engagement.

108. “Advocacy Threat” occurs when an audit firm or a member of the assurance team, promotes, or may be perceived to promote, an assurance client’s position or opinion to the point that objectivity may, or may lead to compromised. Such may be the case if an audit firm or a member of the assurance team were to subordinate their judgment to that of the client. Examples of circumstances that may create this threat include, but are not limited to:

(a) Dealing in, or being a promoter of, shares or other securities in an assurance client; and

(b) Acting as an advocate on behalf of an assurance client in litigation or in resolving disputes with third parties.

109. “Blood-related family relationship Threat” occurs when an audit firm or a member of the audit team becomes too sympathetic to the client’s interests by virtue of a blood-related family relationship with the client (such as members of the board of directors or the board of management, chief accountant or equivalent of the assurance client).

Examples of circumstances that may create this blood-related family relationship threat include, but are not limited to:

(a) A member of the audit team having a blood-related family relationship with the director or a member of the board of directors of the assurance client;

(b) A member of the assurance team having a blood-related family relationship with an employee of the assurance client who is in a position to exert direct and significant influence over the subject matter of the assurance engagement of the assurance client;

c) Examples of situations which are not blood related family relationship but can also cause threat to independence:

- A former director of the audit firm being a director, a member of the board of directors of the assurance client or an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement;

- More than 3 years-association of the leader of the assurance team with the same assurance client; and

- Acceptance of gifts, formal reception or hospitality, unless the value is clearly insignificant, from the assurance client, its directors, members of the board of directors or employees.

110. “Intimidation Threat" occurs when a member of the audit team may be deterred from acting objectively and exercising professional skepticism by threats, (actual or perceived), from the directors, members of the board of directors or employees of an assurance client.

Examples of circumstances that may create this threat include, but are not limited to:

(a) Threat of replacement over a disagreement with the application of an accounting principle; and

(b) Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

Safeguards

111. The audit firm and the assurance team have a responsibility to remain independent by taking into account the context in which they practice, the threats to independence and the safeguards available to eliminate the threats or reduce them to an acceptable level.

112. When threats are identified, other than those that are clearly insignificant, appropriate safeguards should be identified and applied to eliminate the threats or reduce them to an acceptable level. This decision should be documented. The nature of the safeguards to be applied will vary depending upon the circumstances. Consideration should be made and relevant information provided to third party including safeguards by issuing “adverse opinion”. The consideration will be affected by matters such as the significance of the threat, the nature of the assurance engagement, the intended users of the assurance report and the structure of the audit firm.

Certain safeguards may increase the possibility to detect and deter a violation of the professional conduct. These safeguards may be brought forwards by the regulatory body, professional bodies or audit firms.

113. Safeguards fall into two broad categories:

(a) Safeguards created by the profession, legislation or regulation;

(b) Safeguards created by the work environment, including:

- Safeguards within the assurance client; and

- Safeguards within the audit firm’s own systems and procedures.

The audit firm and the audit team should select appropriate safeguards to eliminate or reduce threats to independence, other than those that are clearly insignificant, to an acceptable level.

114. Safeguards created by the profession, legislation or regulation, include:

(a) Educational, training and experience requirements for auditors;

(b) Continuing education requirements;

(d) Professional standards and review procedures;

(e) External review of an audit firm’s quality control system; and

(e) Legislation governing the independence requirements of the auditors and the audit firm.

115. Safeguards within the assurance client (b1) include:

(a) When the assurance client’s management appoints the audit firm, the person who appoints shall not be the one who ratifies or approves the appointment;

(b) The assurance client should have competent management to make managerial decisions;

(c) Internal policies and procedures that ensure the assurance client to commission non-assurance engagements which affects the independence of the assurance engagement; and

(e) A corporate governance structure, (such as internal audit committee), that provides appropriate oversight and communications regarding an audit firm’s services.

116. Internal audit committee (the board of control or its equivalent) can have an important corporate governance role when they are independent of client management and can assist the board of directors in satisfying themselves that an audit firm is independent in carrying out its audit role. There should be regular communications between the audit firm and the internal audit committee (or other governance body if there is no internal audit committee) of listed entities regarding relationships and other matters that might, in the audit firm’s opinion, reasonably be thought to bear on independence.

117. Audit firms should establish policies and procedures relating to independence communications with internal audit committees, or others charged with governance. In the case of the audit of listed entities, the audit firm should communicate at least annually, all relationships and other matters between the audit firm, network firms and the audit client that in the audit firm’s professional judgment may reasonably be thought to bear on independence. Matters to be communicated will vary in each circumstance and should be decided by the audit firm, but should generally address the relevant matters set out in this section.

118. Safeguards within the audit firm’s own systems and procedures may include firm-wide safeguards (b2) such as:

(a) Firm leadership that stresses the importance of independence and the requirement that members of audit teams must sign the undertaking statements and act in accordance with the undertaking statements and in the public interest;

(b) Policies and procedures to implement and monitor quality control of audit engagements;

(c) Documented independence policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the identification and application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level;

(d) Internal policies and procedures to monitor compliance with firm policies and procedures as they relate to independence;

(e) Policies and procedures that will enable the identification of interests or relationships between the audit firm or members of the audit team and assurance clients;

(f) Policies and procedures to monitor and manage the reliance on revenue received from a single assurance client;

(g) Using different members of the board of directors and teams with separate reporting lines for the provision of non-assurance services to an assurance client;

(h) Policies and procedures to prohibit individuals who are not members of the audit team from influencing the outcome of the assurance engagement;

(i) Timely communication of an audit firm’s policies and procedures, and any changes thereto, to the board of directors and professional staff, including appropriate training and education thereon;

(j) Designating a member of the board of directors as responsible for overseeing the adequate functioning of the safeguarding system;

(k) Means of advising the board of directors and professional staff of those assurance clients and related entities from which they must be independent;

(l) A disciplinary mechanism to promote compliance with policies and procedures; and

(m) Policies and procedures to empower staff to communicate to senior levels within the audit firm any issue of independence and objectivity that concerns them; this includes informing staff of the procedures open to them.

119. Safeguards within the audit firm’s own systems and procedures (b2) may include engagement specific safeguards such as:

(a) Involving an additional auditor to review the work done or otherwise advise as necessary. This individual could be someone from outside the audit firm or someone within the audit firm or network firm who was not otherwise associated with the audit team;

(b) Consulting a third party, such as a professional regulatory body, a specialist legal counsel or another practicing auditor;

(d) Discussing independence issues with the persons or others charged with governance (for example: internal audit committee);

(e) Disclosing to the person or others charged with governance, the nature of services provided and extent of fees charged;

(f) Involving another audit firm to re-perform the whole or part of the assurance engagement;

(h) Involving another audit firm to re-perform the whole or part of the non-assurance service to the extent necessary to enable it to take responsibility for that service; and

(i) Removing an individual from the audit team, when that individual’s financial interests or relationships create a threat to independence.

120. When the safeguards available, such as those described above, are insufficient to eliminate the threats to independence or to reduce them to an acceptable level, or when an audit firm decides not to eliminate the activities or interests creating the threat, the only course of action available will be the refusal to perform, or withdrawal from, the assurance engagement.

Engagement Period

121. The members of the audit team and the audit firm should be independent of the assurance client during the period of the assurance engagement. The period of the engagement starts when the assurance team begins to perform assurance services and ends when the assurance report is issued, except when the assurance engagement is of a recurring nature for many years. If the assurance engagement is expected to recur, the period of the assurance engagement ends with the notification by either party that the professional relationship has terminated or the issuance of the final assurance report, whichever is later.

122. When an entity becomes an audit client during or after the period covered by the financial statements that the audit firm will report on, the audit firm should consider whether any threats to independence may be created by:

• Financial or business relationships with the audit client during or after the period covered by the financial statements, but prior to the acceptance of the audit engagement; or

• Previous services provided to the audit client.

Similarly, in the case of an assurance engagement that is not an audit engagement, the audit firm should consider whether any financial or business relationships or previous services may create threats to independence.

123. If non-assurance services were provided to the audit client during or after the period covered by the financial statements but before the commencement of professional services in connection with the audit and those services would be prohibited during the reporting period of the audit engagement, consideration should be given to the threats to independence, if any, arising from those services. If the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

a. Discussing independence issues related to the provision of the non-assurance services with the management of the client;

b. Obtaining the audit client’s acknowledgement of responsibility for the results of the non-assurance services;

c. Precluding personnel who provided the non-assurance services from participating in the audit engagement; and

d. Engaging another firm to review the results of the non-assurance services or having another firm re-perform the non-assurance services to the extent necessary to enable it to take responsibility for those services.

124. Non-assurance services provided to a non-listed audit client will not impair the audit firm’s independence when the client becomes a listed entity provided:

a. The previous non-assurance services were permissible under this section for non-listed audit clients;

b. The services will be terminated within a reasonable period of time of the client becoming a listed entity, if they are impermissible under this section for listed audit clients; and

c. The audit firm has implemented appropriate safeguards to eliminate any threats to independence arising from the previous services or reduce them to an acceptable level.

APPLICATION OF INDEPENDENCE PRINCIPLES TO SPECIFIC SITUATIONS

Financial Interests

125. A financial interest in an assurance client may create a self-interest threat. In evaluating the significance of the threat, and the appropriate safeguards to be applied to eliminate the threat or reduce it to an acceptable level, it is necessary to examine the nature and materiality of the financial interest. This includes an evaluation of the role of the person holding the financial interest, the materiality of the financial interest and the type of financial interest (direct or indirect).

126 When evaluating the type of financial interest, consideration should be given to the fact that financial interests range from those where the individual has no control over the investment vehicle or the financial interest held (e.g., a financial fund, property investment, unit trust or similar intermediary vehicle) to those where the individual has control over the financial interest (e.g., as a trustee) or is able to influence investment decisions. In evaluating the significance of any threat to independence, it is important to consider the degree of control or influence that can be exercised over the intermediary form, the financial interest held, or its investment strategy. When control exists, the financial interest should be considered direct. Conversely, when the holder of the financial interest has no ability to exercise such control the financial interest should be considered indirect.

Provisions Applicable to All Assurance Clients

127. If a member of the assurance team, or their direct family member (blood-related relationship), has a direct financial interest, or an indirect financial interest, in the assurance client, the self-interest threat created would be so significant the only safeguards available to eliminate the threat or reduce it to an acceptable level would be to:

a) Dispose of the direct financial interest prior to the individual becoming a member of the assurance team;

b) Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the remaining interest is no longer material prior to the individual becoming a member of the assurance team; or

c) Remove the member of the assurance team from the assurance engagement.

128. If a member of the assurance team, or their direct family member receives, by way of, for example, an inheritance, gift or, as a result of a merger, a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat would be created. The following safeguards should be applied to eliminate the threat or reduce it to an acceptable level:

a) Disposing of the financial interest at the earliest practical date; or

b) Removing the member of the assurance team from the assurance engagement.

During the period prior to disposal of the financial interest or the removal of the individual from the assurance team, consideration should be given to whether additional safeguards are necessary to reduce the threat to an acceptable level. Such safeguards might include:

a) Discussing the matter with those charged with governance, such as the internal audit committee; or

b) Involving an additional practicing auditor to review the work done, or otherwise providing advice as necessary.

129. When a member of the assurance team knows that his or her direct family member has a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat may be created. In evaluating the significance of any threat, consideration should be given to the nature of the relationship between the member of the assurance team and the direct family member and the materiality of the financial interest. Once the significance of the threat has been evaluated, safeguards should be considered and applied as necessary. Such safeguards might include:

a) The direct family member disposing of all or a sufficient portion of the financial interest at the earliest practical date;

b) Discussing the matter with those charged with governance, such as the internal audit committee;

c) Involving an additional practicing auditor who did not take part in the assurance engagement to review the work done by the member of the assurance team with the direct family relationship or otherwise advise as necessary; or

d) Removing the individual from the assurance engagement.

130. When an audit firm or a member of the assurance team holds a direct financial interest or a material indirect financial interest in the assurance client as a trustee, a self-interest threat may be created by the possible influence of the trust over the assurance client. Accordingly, such an interest should only be held when:

(a) The member of the assurance team, an direct family member of the member of the assurance team, and the audit firm are not beneficiaries of the trust;

(b) The interest held by the trust in the assurance client is not material to the trust;

(d) The member of the assurance team or the audit firm does not have significant influence over any investment decision involving a financial interest in the assurance client.

131. Consideration should be given to whether a self-interest threat may be created by the financial interests of members outside of the assurance team and their direct family members. Such individuals would include:

a) The members of the board of directors, who are not members of the assurance team and their direct family member;

b) The members of the board of directors and managerial employees who provide non-assurance services to the assurance client; and

c) Individuals who have a close personal relationship with a member of the assurance team.

Whether the interests held by such individuals may create a self-interest threat will depend upon factors such as:

a) The audit firm’s organizational, operating and reporting structure; and

b) The nature of the relationship between the individual and the member of the assurance team.

The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

a) Where appropriate, policies to restrict people from holding such interests (if appropriate);

b) Discussing the matter with those charged with governance, such as the internal audit committee; or

c) Involving an additional practicing auditor who did not take part in the assurance engagement to review the work done or otherwise advise as necessary.

132. An inadvertent violation of this section as it relates to a financial interest in an assurance client would not impair the independence of the audit firm, the network firm or a member of the assurance team when:

(a) The audit firm, and the network firm, have established policies and procedures that require all professionals to report promptly to the audit firm any breaches resulting from the purchase, inheritance or other acquisition of a financial interest in the assurance client;

(b) The audit firm, and the network firm, promptly notify the professional that the financial interest should be disposed of; and

(c) The disposal occurs at the earliest practical date after identification of the issue, or the professional is removed from the assurance team.

133. When an inadvertent violation of this section relating to a financial interest in an assurance client has occurred, the audit firm should consider whether any safeguards should be applied. Such safeguards might include:

a) Involving an additional practicing auditor who did not take part in the assurance engagement to review the work done by the member of the assurance team; or

b) Excluding the individual from any substantive decision-making concerning the assurance engagement.

Provisions Applicable to Audit Clients

134. If an audit firm, or a network firm, has a direct financial interest in an audit client of the audit firm the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, disposal of the financial interest would be the only action appropriate to permit the audit firm to perform the engagement.

135. If an audit firm, or a network firm, has a material indirect financial interest in an audit client of the audit firm a self-interest threat is also created. The only actions appropriate to permit the audit firm to perform the engagement would be for the audit firm either to dispose of the indirect interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.

136. If an audit firm, or a network firm, has a material financial interest in an entity that has a controlling interest in an audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The only actions appropriate to permit the audit firm to perform the engagement would be for the audit firm, either to dispose of the indirect financial interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.

137. If the welfare and benefit plan of an audit firm, or network firm, has a financial interest in an audit client a self-interest threat may be created. Accordingly, the significance of any such threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level.

138 If other members of the board of directors, including members who do not perform assurance engagements, or their direct family member, in the office in which the lead audit engagement directorpractices in connection with the audit hold a direct financial interest or a material indirect financial interest in that audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Accordingly, such members of the board of directors or their direct family member should not hold any such financial interests in such an audit client.

139 The office in which the lead audit engagement director practice in connection with the audit is not necessarily the office to which that member is in charge. Accordingly, when the lead audit engagement director located in a different office from that of the other members of the assurance team, judgment should be used to determine in which office the lead audit engagement director practice in connection with that audit.

140. If other members of the board of directors and managerial employees who provide non-assurance services to the audit client, except those whose involvement is clearly insignificant, or their direct family member, hold a direct financial interest or a material indirect financial interest in the audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Accordingly, such personnel or their direct family member should not hold any such financial interests in such an audit client.

141. A financial interest in an audit client that is held by a direct family member of (a) a member of the board of directors located in the office in which the lead audit engagement director practices in an audit engagement, or (b) a member of the board of directors or managerial employee who provides non-assurance services to the audit client is not considered to create an unacceptable threat provided it is received as a result of their employment rights (e.g., share options) and, where necessary, appropriate safeguards are applied to reduce any threat to independence to an acceptable level.

142. A self-interest threat may be created if the audit firm, or a member of the assurance team has an interest in an entity and an audit client, or a director, officer or controlling owner thereof also has an investment in that entity. Independence is not compromised with respect to the audit client if the respective interests of the audit firm, the network firm, or member of the assurance team, and the audit client, or director, officer or controlling owner thereof are both immaterial and the audit client cannot exercise significant influence over the entity. If an interest is material, to either the audit firm, the network firm or the audit client, and the audit client can exercise significant influence over the entity, no safeguards are available to reduce the threat to an acceptable level and the audit firm, or the audit firm, should either dispose of the interest or decline the audit engagement. Any member of the assurance team with such a material interest should either:

(a) Dispose of the interest;

(b) Dispose of a sufficient amount of the interest so that the remaining interest is no longer material; or

Provisions Applicable to Non-Audit Assurance Clients

143. If an audit firm has a direct financial interest in an assurance client that is not an audit client the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, disposal of the financial interest would be the only action appropriate to permit the audit firm to perform the engagement.

144. If an audit firm has a material indirect financial interest in an assurance client that is not an audit client a self-interest threat created would also be so significant that no safeguard could reduce the threat to an acceptable level. The only action appropriate to permit the audit firm to perform the engagement would be for the audit firm to either dispose of the indirect interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.

145. If an audit firm has a material financial interest in an entity that has a controlling interest in an assurance client that is not an audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The only action appropriate to permit the audit firm to perform the engagement would be for the audit firm either to dispose of the financial interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.

146. When a restricted use report for an assurance engagement that is not an audit engagement is issued, exceptions to the provisions in paragraphs 127 through 131 and 143 through 145 are set out in paragraph 92.

Loans and Guarantees

147. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to the audit firm would not create a threat to independence provided the loan is made under normal lending procedures, terms and requirements and the loan is immaterial to both the audit firm and the assurance client. If the loan is material to the assurance client or the audit firm it may be possible, through the application of safeguards, to reduce the self-interest threat created to an acceptable level. Such safeguards might include involving an additional practicing auditor from outside the audit firm, or network firm, to review the work performed.

148. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to a member of the assurance team or their direct family would not create a threat to independence provided the loan is made under normal lending procedures, terms and requirements. Examples of such loans such as home mortgages, bank overdrafts, car loans and credit card balances.

149. Similarly, deposits made by, or current accounts of, an audit firm or a member of the assurance team with an assurance client that is a bank, broker or similar institution would not create a threat to independence provided the deposit or account is held under normal commercial terms.

150. If the audit firm, or a member of the assurance team, makes a loan to an assurance client, that is not a bank or similar institution, or guarantees such an assurance client’s borrowing, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level, unless the loan or guarantee is immaterial to both the audit firm or the member of the assurance team and the assurance client.

151. Similarly, if the audit firm or a member of the assurance team accepts a loan from, or has borrowing guaranteed by, an assurance client that is not a bank or similar institution, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level, unless the loan or guarantee is immaterial to both the audit firm or the member of the assurance team and the assurance client.

152. The examples in paragraphs 147 through 151 relate to loans and guarantees between the audit firm and an assurance client. In the case of an audit engagement, the provisions should be applied to the audit firm, all network firms and the audit client.

Close Business Relationships with Assurance Clients

153. A close business relationship between an audit firm or a member of the assurance team and the assurance client or its management, or between the audit firm, an audit firm and an audit client, will involve a commercial or common financial interest and may create self-interest and intimidation threats. The following are examples of such relationships:

a) Having a material financial interest in a joint venture with the assurance client or a controlling owner, director, officer or other individual who performs senior managerial functions for that client.

b) Arrangements to combine one or more services or products of the audit firm with one or more services or products of the assurance client and to market the package with reference to both parties.

c) Distribution or marketing arrangements under which the audit firm acts as a distributor or marketer of the assurance client’s products or services, or the assurance client acts as the distributor or marketer of the products or services of the audit firm.

In the case of an audit client, unless the financial interest is immaterial and the relationship is clearly insignificant to the audit firm, the network firm and the audit client, no safeguards could reduce the threat to an acceptable level. In the case of an assurance client that is not an audit client, unless the financial interest is immaterial and the relationship is clearly insignificant to the audit firm and the assurance client, no safeguards could reduce the threat to an acceptable level. Consequently, in both these circumstances the only possible courses of action are to:

(a) Terminate the business relationship;

(b) Reduce the magnitude of the relationship so that the financial interest is immaterial and the relationship is clearly insignificant; or

Unless any such financial interest is immaterial and the relationship is clearly insignificant to the member of the assurance team, the only appropriate safeguard would be to remove the individual from the assurance team.

154. In the case of an audit client, business relationships involving an interest held by the audit firm, a network firm or a member of the assurance team or their direct family member in a closely held entity when the audit client or a Director or officer of the audit client, or any group thereof, also has an interest in that entity, do not create threats to independence provided:

(a) The relationship is clearly insignificant to the audit firm, the network firm and the audit client;

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

155. The purchase of goods and services from an assurance client by the audit firm (or from an audit client by a network firm) or a member of the assurance team would not generally create a threat to independence providing the transaction is in the normal course of business and on an arm’s length basis. However, such transactions may be of a nature or magnitude so as to create a self-interest threat. If the threat created is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

a) Eliminating or reducing the magnitude of the transaction;

b) Removing the individual from the assurance team; or

c) Discussing the issue with those charged with governance, such as the internal audit committee.

Family and Personal Relationships

156. Family and personal relationships between a member of the assurance team and a Director, a senior managerial employee or certain employees, depending on their role, of the assurance client, may create self-interest, blood-related family relationship, other relationships or intimidation threats. It is impracticable to attempt to describe in detail the significance of the threats that such relationships may create. The significance will depend upon a number of factors including the individual’s responsibilities on the assurance engagement, the closeness of the relationship and the role of the family member or other individual within the assurance client. Consequently, there is a wide spectrum of circumstances that will need to be evaluated and safeguards to be applied to reduce the threat to an acceptable level.

157. When a direct family member of a member of the assurance team is a director, a senior managerial employee or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement, or was in such a position during any period covered by the engagement, the threats to independence can only be reduced to an acceptable level by removing the individual from the assurance team. The closeness of the relationship is such that no other safeguard could reduce the threat which affects the independence to an acceptable level. If application of this safeguard is not used, the only course of action is to withdraw from the assurance engagement. For example, in the case of an audit of financial statements, if the spouse of a member of the assurance team is an employee in a position to exert direct and significant influence on the preparation of the audit client’s accounting records or financial statements, the threat to independence could only be reduced to an acceptable level by removing the individual from the assurance team.

158. When a direct family member of a member of the assurance team is a Director, a senior managerial employee, or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement, threats to independence may be created. The significance of the threats will depend on factors such as:

a) The position the direct family member holds with the client; and

b) The role of the member on the assurance team.

a) Removing the individual from the assurance team;

b) Where possible, structuring the responsibilities of the assurance team so that the member does not deal with matters that are related to the responsibility of the direct family member; or

c) Policies and procedures to empower staff to communicate to senior levels within the audit firm any issue of independence and objectivity that concerns them.

159. In addition, self-interest, blood-related family relationship or intimidation threats may be created when a person who is other than a direct family member of a member of the assurance team has a close relationship with the member of the assurance team and is a director, a senior managerial employee or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement. Therefore, members of the assurance team are responsible for identifying any such persons with such relationship and for consulting in accordance with firm procedures. The evaluation of the significance of any threat created and the safeguards appropriate to eliminate the threat or reduce it to an acceptable level will include considering matters such as the closeness of the relationship and the role of the individual within the assurance client.

160. Consideration should be given to whether self-interest, blood-related family relationship or intimidation threats may be created by a personal or family relationship between a Director or employee of the audit firm who is not a member of the assurance team and a director, a senior managerial employee or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement. Therefore, Directors and employees of the audit firm are responsible for identifying any such relationships and for consulting in accordance with firm procedures. The evaluation of the significance of any threat created and the safeguards appropriate to eliminate the threat or reduce it to an acceptable level will include the consideration of matters such as the closeness of the relationship, the interaction of the audit firm professional with the assurance team, the position held within the audit firm, and the role of the individual within the assurance client.

161. An inadvertent violation of this section as it relates to blood-related family and personal relationships would not impair the independence of an audit firm or a member of the assurance team when:

(a) The audit firm has established policies and procedures that require all professionals to report promptly to the audit firm any breaches resulting from changes in the employment status of their direct family members or other personal relationships that create threats to independence;

(b) Either the responsibilities of the assurance team are re-structured so that the professional does not deal with matters that are within the responsibility of the person with whom he or she is related or has a personal relationship, or, if this is not possible, the audit firm promptly removes the professional from the assurance engagement; and

162. When an inadvertent violation of this section relating to blood-related family and personal relationships has occurred, the audit firm should consider whether any safeguards should be applied. Such safeguards might include:

a) Involving an additional practicing auditor who did not take part in the assurance engagement to review the work done by the assurance team; or

b) Excluding the individual from any substantive decision-making concerning the assurance engagement.

Employment at the Assurance Clients

163. An audit firm or a member of the assurance team’s independence may be threatened if a Director, a senior managerial employee or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or former Director of the audit firm. Such circumstances may create self-interest, familiarity and intimidation threats particularly when significant connections remain between the individual and his or her former firm. Similarly, a member of the assurance team’s independence may be threatened when an individual participates in the assurance engagement knowing, or having reason to believe, that he or she may join the assurance client some time in the future.

164. If a member of the assurance team, Director or former Director of the audit firm has joined the assurance client. The significance of the self-interest, familiarity, blood-related family relationship, other relationships or intimidation threats created will depend upon the following factors:

(a) The position the individual has taken at the assurance client;

(b) The amount of any involvement the individual will have with the assurance team;

(d) The former position of such individual within the assurance team or audit firm.

The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied to reduce the threat to an acceptable level. Such safeguards might include:

a) Considering the appropriateness or necessity of modifying the assurance plan;

b) Assigning an assurance team to the subsequent assurance engagement that is of sufficient experience in relation to the individual who has joined the assurance client;

c) Involving an additional practicing auditor who was not a member of the assurance team to review the work done or otherwise advise as necessary; or

d) Quality control review of the assurance engagement.

In all cases, all of the following safeguards are necessary to reduce the threat to an acceptable level:

(a) The individual concerned is not entitled to any benefits or payments from the client enterprise unless with predetermined arrangements. In addition, such individual is not allowed to owe from that client any amount of such significance to influence the audit firm’s independence; and

(b) The related individual does not continue participate in the audit firm’s business or professional activities.

165. A self-interest threat is created when a member of the assurance team participates in the assurance engagement while knowing that he or she is to, or may, join the assurance client some time in the future. This threat can be reduced to an acceptable level by the application of all of the following safeguards:

(a) Policies and procedures to require the individual to notify the audit firm before entering employment negotiations with the assurance client.

(b) Removal of the individual from the assurance team.

In addition, consideration should be given to performing an independent review of any significant judgments made by that individual while on the engagement.

Recent Service with Assurance Clients

166. To have a former officer, Director or employee of the assurance client serve as a member of the assurance team may create self-interest, self-review and familiarity threats. This would be particularly true when a member of the assurance team has to report on, for example, subject matter he or she had prepared or elements of the financial statements he or she had prepared while with the assurance client.

167. If, during the assurance report, a member of the assurance team had served as an officer or Director of the assurance client, or had been an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement, the threat created would be so significant no safeguard could reduce the threat to an acceptable level. Such individuals should not be assigned to the assurance team.

168. If, prior to the assurance report, a member of the assurance team had served as an officer or director of the assurance client, or had been an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement, this may create self-interest, self-review and familiarity threats. For example, such threats would be created if a decision made or work performed by the individual in the prior period, while employed by the assurance client, is to be evaluated in the current period as part of the current assurance engagement. The significance of the threats will depend upon factors such as:

a) The position the individual held with the assurance client;

b) The length of time that has passed since the individual left the assurance client; and

c) The role the individual plays on the assurance team.

The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

a) Involving an additional practicing accountant to review the work done by the individual as part of the assurance team or otherwise advise as necessary; or

b) Discussing the issue with those charged with governance, such as the internal audit committee.

Employee of the Audit firm serving as a Member of the Board of Management or Director of Assurance Clients

169. If member of the board of directors or employee providing services (professional staff) of the audit firm serves as a member of the board of director or as a member of the board of management of an assurance client the self-review and self-interest threats created would be so significant no safeguard could reduce the threats to an acceptable level (especially in the case of an audit engagement). Consequently, if such an individual were to accept such a position the only course of action is to refuse to perform, or to withdraw from the assurance engagement.

170. If an employee has significant influence to the personnel management and the maintenance of company records and registers, to duties as diverse as ensuring that the company complies with regulations or providing advice on corporate governance matters (such as assistant to the director, chief accountant), that position may create self-review and advocacy threats.

171. If a member of the board of directors or employee of the audit firm exerts significant influence on an audit client the self-review and advocacy threats created would generally be so significant, no safeguard could reduce the threat to an acceptable level.

172. If a person of the audit firm performs routine administrative and secretarial function of the client, that work is generally not perceived to impair independence, provided client management makes all relevant decisions.

Long Association of Senior Personnel with Assurance Clients

General Provisions

173. Using the same auditor on an assurance engagement over a long period of time may create a familiarity threat. The significance of the threat will depend upon factors such as:

a) The length of time that the individual has been a member of the assurance team;

b) The role of the individual on the assurance team;

c) The organizational structure of the audit firm; and

d) The nature of the assurance engagement.

a) Rotating the practicing auditor off the assurance team and the member of the board of directors at maximum once 3 years;

b) Involving an additional practicing auditor who was not a member of the assurance team to review the work done by the auditor or otherwise advise as necessary; or

c) Independent internal quality reviews.

Audit Clients that are Listed Entities

174. When using the same lead audit engagement director and practicing auditor on an audit over a prolonged period may create a familiarity threat. This threat is particularly relevant in the context of the audit of listed entities. Where audit for the listed entities, the safeguards include:

(a) The lead audit engagement director and the practicing auditor should be rotated after a pre-defined period, normally no more than three years; and

(b) The lead audit engagement director and the practicing auditor rotating as the period stated in point (a) may return to participate in such audit engagement at least after two years.

When an audit client becomes a listed entity, the lead audit engagement director, the practicing auditor and the quality reviewer should be rotated earlier.

175. While the lead audit engagement director, the practicing auditor and the quality reviewer should be rotated after such a pre-defined period, some degree of flexibility over timing of rotation may be necessary in certain circumstances. Examples of such circumstances include:

a) Situations when the lead audit engagement director’s, the practicing auditor’s and the quality reviewer’scontinuity is especially important to the audit client, for example, when there will be major changes to the audit client’s structure that would otherwise coincide with the rotation of those persons; and

b) Situations when, due to the size of the audit firm, rotation is not possible or does not constitute an appropriate safeguard.

In all such circumstances, if within 3 years the rotation has not been carried out all safeguards should be applied to reduce any threats to an acceptable level.

176. When an audit firm has only 2 members of the board of directors, besides the rotation, safeguards may include the involvement of additional practicing auditors who are not engaged in the assurance team to review the audit or for consultation as necessary.

177. If an audit firm has only one audit director with the necessary knowledge and experience to serve as the lead engagement director on an audit client that is a listed entity, safeguards to minimize the threat to acceptable level include:

a) After 3 years, transferring the audit client to another firm;

b) Collaborating with another firm to perform that audit engagement provided that the member of the board of director of the other audit firm shall be the one who signs the auditors’ report.

Provision of Non-Assurance Services to Assurance Clients

178. Audit firms have traditionally provided to their assurance clients a range of non-assurance services that are consistent with their skills and expertise. Assurance clients value the benefits that derive from having these firms, who have a good understanding of the business, bring their knowledge and skill to bear in other areas. Furthermore, the provision of such non-assurance services will often result in the assurance team obtaining information regarding the assurance client’s business and operations that is helpful in relation to the assurance engagement. The greater the knowledge of the assurance client’s business, the better the assurance team will understand the assurance client’s procedures and controls, and the business and financial risks that it faces. The provision of non-assurance services may, however, create threats to the independence of the audit firm, a network firm or the members of the assurance team, particularly with respect to perceived threats to independence. Consequently, it is necessary to evaluate any threat created by the provision of such services. In some cases it may be possible to eliminate or reduce the threat created by application of safeguards. In other cases no safeguards are available to reduce the threat to an acceptable level.

179. The following activities would generally create self-interest or self-review threats that are so significant that only avoidance of the activity or refusal to perform the assurance engagement would reduce the threats to an acceptable level:

• Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of the client, or having the authority to do so.

• Determining which recommendation of the audit firm should be implemented.

• Reporting, in a management role, to those charged with governance.

180. The examples set out in paragraphs 186 through 225 are addressed in the context of the provision of non-assurance services to an assurance client. The potential threats to independence will most frequently arise when a non-assurance service is provided to an audit client. The financial statements of an entity provide financial information about a broad range of transactions and events that have affected the entity. The subject matter of other assurance services, however, may be limited in nature. Threats to independence, however, may also arise when an audit firm provides a non-assurance service related to the subject matter of a non-audit assurance engagement. In such cases, consideration should be given to the significance of the audit firm’s involvement with the subject matter of the non-audit assurance engagement, whether any self-review threats are created and whether any threats to independence could be reduced to an acceptable level by application of safeguards, or whether the non-assurance engagement should be declined. When the non-assurance service is not related to the subject matter of the non-audit assurance engagement, the threats to independence will generally be clearly insignificant.

181. The following activities may also create self-review or self-interest threats:

a) Controlling assurance client’s assets.

b) Supervising assurance client employees in the performance of their normal recurring activities; and

c) Preparing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, invoices, vouchers).

The significance of any threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. Such safeguards might include:

a) Making arrangements so that personnel providing such services do not participate in the assurance engagement;

b) Involving an additional practicing auditor to advise on the potential impact of the non-assurance engagement on the independence of the audit firm and the assurance team; or

c) Other relevant safeguards set out in national regulations.

182. New developments in business, the evolution of financial markets, rapid changes in information technology, and the consequences for management and control, make it impossible to draw up an all-inclusive list of all situations when providing non-assurance services to an assurance client might create threats to independence and of the different safeguards that might eliminate these threats or reduce them to an acceptable level. In general, however, an audit firm may provide services beyond the assurance engagement provided any threats to independence have been reduced to an acceptable level.

183. The following safeguards may be particularly relevant in reducing to an acceptable level threats created by the provision of non-assurance services to assurance clients:

a) Policies and procedures to prohibit practicing auditors from making management decisions for the assurance client, or assuming responsibility for such decisions;

b) Discussing independence issues related to the provision of non-assurance services with those charged with governance, such as the internal audit committee.

c) Policies within the assurance client regarding the responsibility for provision of non-assurance services by the audit firm.

d) Involving an additional practicing auditor to advise on the potential impact of the non-assurance engagement on the independence of the member of the assurance team and the audit firm.

e) Involving an additional practicing auditor outside of the audit firm to provide assurance on a discrete aspect of the assurance engagement.

f) Obtaining the assurance client’s acknowledgement of responsibility for the results of the work performed by the audit firm.

g) Disclosing to division charged with governance, such as the internal audit committee, the nature and extent of fees charged.

h) Making arrangements so that personnel providing non-assurance services do not participate in the assurance engagement.

184. Before the audit firm accepts an engagement to provide a non-assurance service to an assurance client, consideration should be given to whether the provision of such a service would create a threat to independence. In situations when a threat created is other than clearly insignificant, the non-assurance engagement should be declined unless appropriate safeguards can be applied to eliminate the threat or reduce it to an acceptable level.

185. The provision of certain non-assurance services to audit clients may create threats to independence so significant that no safeguard could eliminate the threat or reduce it to an acceptable level. However, the provision of such services to a related entity, division or discrete financial statement item of such clients may be permissible when any threats to the audit firm’s independence have been reduced to an acceptable level by arrangements for that related entity, division or discrete financial statement item to be audited by another firm or when another firm re-performs the non-assurance service to the extent necessary to enable it to take responsibility for that service.

Preparing Accounting Records and Financial Statements for audit clients

186. Assisting an audit client in matters such as preparing accounting records or financial statements may create a self-review threat when the financial statements are subsequently audited by the audit firm.

187. It is the responsibility of client management to ensure that accounting records are kept and financial statements are prepared, although they may request the audit firm to provide assistance. If firm, or network firm, personnel providing such assistance make management decisions, the self-review threat created could not be reduced to an acceptable level by any safeguards. Consequently, personnel should not make such decisions. Examples of such managerial decisions include:

a) Determining or changing journal entries, or the classifications for accounts or transaction or other accounting records without obtaining the approval of the audit client;

b) Authorizing or approving transactions; and

c) Preparing source documents or originating data (including decisions on valuation assumptions), or making changes to such documents or data.

188. The audit process involves extensive dialogue between the audit firm and management of the audit client. During this process, management requests and receives significant input regarding such matters as accounting principles and financial statement disclosure, the appropriateness of controls and the methods used in determining the stated amounts of assets and liabilities. Technical assistance of this nature and advice on accounting principles for audit clients are an appropriate means to promote the fair presentation of the financial statements. The provision of such advice does not generally threaten the audit firm’s independence. Similarly, the audit process may involve assisting an audit client in resolving account reconciliation problems, analyzing and accumulating information for regulatory reporting, assisting in the preparation of consolidated financial statements (including the translation of local statutory accounts to comply with group accounting policies and the transition to a different reporting framework), drafting disclosure items, proposing adjusting journal entries and providing assistance and advice in the preparation of local statutory accounts of subsidiary entities. These services are considered to be a normal part of the audit process and do not, under normal circumstances, threaten independence.

General Provisions on clients

189. The examples in paragraphs 190 through 193 indicate that self-review threats may be created if the audit firm is involved in the preparation of accounting records or financial statements and those financial statements are subsequently the subject matter of an audit engagement of the audit firm. This notion may be equally applicable in situations when the subject matter of the assurance engagement is not financial statements. For example, a self-review threat would be created if the audit firm developed and prepared prospective financial information and subsequently provided assurance on this prospective financial information. Consequently, the audit firm should evaluate the significance of any self-review threat created by the provision of such services. If the self-review threat is other than clearly insignificant safeguards should be considered and applied as necessary to reduce the threat to an acceptable level.

Audit Clients that are Not Listed Entities

190. The audit firm, or a network firm, may provide an audit client that is not a listed entity with accounting and bookkeeping services according to agreed upon procedures provided any self-review threat created is reduced to an acceptable level. Examples of such services include:

a) Recording transactions for which the audit client has determined or approved the appropriate account classification;

b) Posting coded transactions to the audit client’s general ledger;

c) Preparing general purpose financial statements based on prepared statements of entities; and

d) Posting audit client approved entries to the trial balance.

The significance of any threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

a) Making arrangements so such services are not performed by a member of the assurance team;

b) Implementing policies and procedures to prohibit the individual providing such services from making any managerial decisions on behalf of the audit client;

c) Requiring the source data for the accounting entries to be originated by the audit client;

d) Requiring the underlying assumptions to be originated and approved by the audit client; or

e) Obtaining audit client approval for any proposed journal entries without original documents (such as estimated provision, allocation…) or other changes affecting the financial statements.

Audit Clients that are Listed Entities

191. The provision of accounting and bookkeeping services, and the preparation of financial statements or financial information which forms the basis of the financial statements on which the audit report is provided, on behalf of an audit client that is a listed entity, may impair the independence of the audit firm or network firm, or at least give the appearance of impairing independence. Accordingly, no safeguard other than the prohibition of such services, except in emergency situations and when the services fall within the external audit mandate, could reduce the threat created to an acceptable level. Therefore, an audit firm or a network firm should not, with the limited exceptions below, provide such services to listed entities which are audit clients.

192 The provision of accounting and bookkeeping services of a routine or mechanical nature to divisions or subsidiaries of listed audit clients would not be seen as impairing independence of the auditing company with respect to the audit client provided that the following conditions are met:

(a) The services do not involve the exercise of judgment.

(b) The divisions or subsidiaries for which the service is provided are collectively immaterial to the audit client, or the services provided are collectively immaterial to the division or subsidiary.

If such services are provided, all of the following safeguards should be applied:

(a) The audit firm, or network firm, should not assume any managerial role nor make any managerial decisions.

(b) The listed audit client should accept responsibility for the results of the work.

Emergency Situations

193. The provision of accounting and bookkeeping services to audit clients in emergency or other unusual situations, when it is impractical for the audit client to make other arrangements, would not be considered to pose an unacceptable threat to independence provided:

(a) The audit firm, or network firm, does not assume any managerial role or make any managerial decisions;

(b) The audit client accepts responsibility for the results of the work; and

Valuation Services for Audit Clients

194.A valuation is the estimation of assumed values with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value for an asset, a liability or for a business as a whole.

195. A self-review threat may arise when an audit firm or network audit firms perform a valuation for a client that is to be incorporated into the client’s financial statements.

196. If the valuation service involves the valuation of matters material to the financial statements and the valuation involves a significant degree of subjectivity, the self-review threat created could not be reduced to an acceptable level by the application of any safeguard. Accordingly, such valuation services should not be provided or, alternatively, the only course of action would be to withdraw from the audit engagement.

197. Performing valuation services that are neither separately, nor in the aggregate, material to the financial statements, or that do not involve a significant degree of subjectivity, may create a self-review threat that could be reduced to an acceptable level by the application of safeguards. Such safeguards might include:

a) Involving an additional practicing auditor who was not a member of the assurance team to review the work done or otherwise advise as necessary;

b) Confirming with the audit client their understanding of the underlying assumptions of the valuation and the methodology to be used and obtaining the client’s approval for their use;

c) Obtaining the audit client’s acknowledgement of responsibility for the results of the work performed by the audit firm; and

d) Making arrangements so that personnel providing such services will not participate in the audit engagement.

In determining whether the above safeguards would be effective, consideration should be given to the following matters:

(a) The extent of the audit client’s knowledge, experience and ability to evaluate the issues concerned, and the extent of their involvement in determining and approving significant matters of judgment.

(b) The degree to which established methodologies and professional guidelines are applied when performing a particular valuation service.

(c) For valuations involving standard or established methodologies, the degree of subjectivity inherent in the item concerned.

(d) The reliability and extent of the underlying data.

(e) The degree of dependence on future events of a nature which could create significant volatility inherent in the amounts involved.

(f) The extent and clarity of the disclosures in the financial statements.

198. When an audit firm, or a network firm, performs a valuation service for an audit client for the purposes of making a filing or return to a tax authority, computing an amount of tax due by the assurance client, or for the purpose of tax planning, stock issuing, this would not create a significant threat to independence because such valuations are generally subject to external review, for example by a tax authority, stock exchange center.

199. When the audit firm performs a valuation that forms part of the subject matter of an assurance engagement that is not an audit engagement, the audit firm should consider any self-review threat. If the threat is other than clearly insignificant, safeguards should be applied as necessary to eliminate or reduce the threat to an acceptable level.

Provision of Taxation Services to Audit Clients

200. The audit firm may be asked to provide taxation services to an audit client. Taxation services comprise a broad range of services, including tax compliance, tax planning, provision of formal taxation opinions and assistance in the resolution of tax disputes. Such assignments are generally not considered to create threats to independence.

Provision of Internal Audit Services to Audit Clients

201. A self-review threat may be created when an audit firm, or network firm, provides internal audit services to an audit client. Internal audit services may comprise an extension of the audit firm’s audit service beyond requirements of generally accepted auditing standards (external auditing standards). In evaluating any threats to independence, it is necessary to consider the nature of the internal audit service. For this purpose, internal audit services do not include operational internal audit services unrelated to the internal accounting controls, financial systems or financial statements.

202. Services involving an extension of the procedures required to conduct an audit in accordance with generally accepted auditing standards (external auditing standards) would not be considered to impair independence with respect to an audit client provided that the audit firm’s or network firm’s personnel do not act or appear to act in a capacity equivalent to a member of audit client management.

203. When the audit firm, or a network firm, provides an internal audit service or part of this service to an external audit client, any self-review threat may be reduced to an acceptable level by ensuring that there is a clear separation between the management and control of the internal audit by the audit client management and the internal audit activities themselves.

204. Performing a significant portion of the audit client’s internal audit activities may create a self-review threat and an audit firm, or network firm, should consider the threats and proceed with caution before taking on such activities. Appropriate safeguards should be put in place and the audit firm, or network firm, should, in particular, ensure that the audit client acknowledges its responsibilities for establishing, maintaining and monitoring the system of internal controls.

205. Safeguards to be applied in all circumstances to reduce any threats to an acceptable level include ensuring that:

(a) The audit client is responsible for internal audit activities and acknowledges its responsibility for establishing, maintaining and monitoring the system of internal controls;

(b) The audit client designates a competent employee, preferably within senior management, to be responsible for internal audit activities;

(c) The audit client (the internal audit committee or supervisory body) approves the scope, risk and frequency of internal audit work;

(d) The audit client is responsible for evaluating and determining which recommendations of the audit firm should be implemented;

(e) The audit client evaluates the adequacy of the internal audit procedures performed and the findings resulting from the performance of those procedures by, among other things, obtaining and acting on reports from the audit firm; and

(f) The findings and recommendations resulting from the internal audit activities are reported appropriately to the internal audit committee or supervisory body.

206. Consideration should also be given to whether such non-assurance services should be provided only by personnel not involved in the audit engagement and with different reporting lines within the audit firm.

Provision of Accounting Software Design and Installation Services to Audit Clients

207. The provision of services by an audit firm or network firm to an audit client that involve the design and implementation of financial information technology systems (accounting software) that are used to generate information forming part of a client’s financial statements may create a self-review threat.

208. The self-review threat is likely to be too significant to allow the provision of such services to an audit client unless appropriate safeguards are put in place ensuring that:

(a) The audit client acknowledges its responsibility for establishing and monitoring a system of internal controls;

(b) The audit client designates a competent employee, preferably within senior management, with the responsibility to make all management decisions with respect to the design and implementation of the hardware or software system;

(d) The audit client evaluates the adequacy and results of the design and implementation of the system; and

(e) The audit client is responsible for the operation of the system (hardware or software) and the data used or generated by the system.

209. Consideration should also be given to whether such non-assurance services should be provided only by personnel not involved in the audit engagement and with different reporting lines within the audit firm.

210. The provision of services by an audit firm, or network firm, to an audit client which involve either the design or the implementation of financial information technology systems that are used to generate information forming part of a client’s financial statements may also create a self-review threat. The significance of the threat, if any, should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level.

211. The provision of services in connection with the assessment, design and implementation of internal accounting controls and risk management controls are not considered to create a threat to independence provided that firm or network firm personnel do not perform management functions.

Temporary Staff Assignments to Audit Clients

212. The temporary assignment of staff by an audit firm, or network firm, to an audit client may create a self-review threat when the individual is in a position to influence the preparation of a client’s accounts or financial statements. In practice, such assistance may be given (particularly in emergency situations) but only on the understanding that the audit firm’s or network firm’s personnel will not be involved in:

(a) Making management decisions;

(b) Approving or signing agreements or other similar documents; or

Each situation should be carefully analyzed to identify whether any threats are created and whether appropriate safeguards should be implemented. Safeguards that should be applied in all circumstances to reduce any threats to an acceptable level include:

(a) The staff providing the assistance to audit clients should not be given audit responsibility for any function or activity that they performed or supervised during their temporary staff assignment; and

(b) The audit client should acknowledge its responsibility for directing and supervising the activities of firm, or network firm, personnel.

Provision of Litigation Support Services to Audit Clients

213. Litigation support services may include such activities as acting as an expert (lawyer), witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval in relation to a dispute or litigation.

214. A self-review threat may be created when the litigation support services provided to an audit client include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the financial statements. The significance of any threat created will depend upon factors such as:

(a) The materiality of the amounts involved;

(b) The degree of subjectivity inherent in the matter concerned; and

The audit firm, or network firm, should evaluate the significance of any threat created and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. Such safeguards might include:

(a) Policies and procedures to prohibit individuals assisting the audit client from making managerial decisions on behalf of the client;

(b) Using professionals who are not members of the assurance team to perform the service; or

215. If the role undertaken by the audit firm or network firm involved making managerial decisions on behalf of the audit client, the threats created could not be reduced to an acceptable level by the application of any safeguard. Therefore, the audit firm or network firm should not perform this type of service for an audit client.

Provision of Legal Services to Audit Clients

216. Legal services are defined as any services for which the person providing the services must either be admitted to practice before the Courts of the jurisdiction in which such services are to be provided, or have the required legal training to practice law. Legal services encompass a wide and diversified range of areas (including both corporate and commercial services to clients), such as contract support, litigation, mergers and acquisition advice and support and the provision of assistance to clients’ internal legal departments. The provision of legal services by an audit firm, or network firm, to an entity that is an audit client may create both self-review and advocacy threats.

217. Threats to independence need to be considered depending on the nature of the service to be provided, whether the service provider is separate from the assurance team and the materiality of any matter in relation to the entities’ financial statements. The safeguards set out in paragraph 183 may be appropriate in reducing any threats to independence to an acceptable level. In circumstances when the threat to independence cannot be reduced to an acceptable level the only available action is to decline to provide such services or withdraw from the audit engagement.

218. The provision of legal services to an audit client which involve matters that would not be expected to have a material effect on the financial statements are not considered to create an unacceptable threat to independence.

219. There is a distinction between advocacy and advice. Legal services to support an audit client in the execution of a transaction (e.g., contract support, legal advice, legal due diligence and restructuring) may create self-review threats; however, safeguards may be available to reduce these threats to an acceptable level. Such a service would not generally impair independence, provided that:

(a) Members of the assurance team are not involved in providing the service; and

(b) In relation to the advice provided, the audit client makes the ultimate decision or, in relation to the transactions, the service involves the execution of what has been decided by the audit client.

220. Acting for an audit client in the resolution of a dispute or litigation in such circumstances when the amounts involved are material in relation to the financial statements of the audit client would create advocacy and self-review threats so significant no safeguard could reduce the threat to an acceptable level. Therefore, the audit firm should not perform this type of service for an audit client.

221. When an audit firm is asked to act in an advocacy role for an audit client in the resolution of a dispute or litigation in circumstances when the amounts involved are not material to the financial statements of the audit client, the audit firm should evaluate the significance of any advocacy and self-review threats created and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level. Such safeguards might include:

(a) Policies and procedures to prohibit individuals assisting the audit client from making managerial decisions on behalf of the client; or

(b) Using professionals who are not members of the assurance team to perform the service.

222. The appointment of a member of board of directors or an employee of the audit firm or network firm as general counsel for legal affairs to an audit client would create self-review and advocacy threats that are so significant no safeguards could reduce the threats to an acceptable level. The position of general counsel is generally a senior management position with broad responsibility for the legal affairs of a company and consequently, no member of the audit firm or network firm should accept such an appointment for an audit client.

Recruiting Senior Management to Audit Clients

223. The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the assurance engagement, may create current or future self-interest, familiarity and intimidation threats. The significance of the threat will depend upon factors such as:

(a) The role of the person to be recruited; and

(b) The nature of the assistance sought.

The audit firm could generally provide such services as reviewing the professional qualifications of a number of applicants and provide advice on their suitability for the post. In addition, the audit firm could generally produce a short-list of candidates for interview, provided it has been drawn up using criteria specified by the assurance client.

The significance of the threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. In all cases, the audit firm should not make any recruitment decisions and the final decision as to whom to hire should be left to the client.

Provision of Corporate Finance Services and Similar Activities to Audit Clients

224. The provision of corporate finance services, advice or assistance to an assurance client may create advocacy and self-review threats. In case of certain corporate finance services, the independence threats created would be so significant no safeguards could be applied to reduce the threats to an acceptable level. For example, promoting, dealing in, or underwriting of an assurance client’s shares is not compatible with providing assurance services. Moreover, committing the assurance client to the terms of a transaction or consummating a transaction on behalf of the client would create a threat to independence so significant no safeguard could reduce the threat to an acceptable level. In the case of an audit client the provision of those corporate finance services referred to above by an audit firm or a network firm would create a threat to independence so significant no safeguard could reduce the threat to an acceptable level.

225. Other corporate finance services may create advocacy or self-review threats; however, safeguards may be available to reduce these threats to an acceptable level. Examples of such services include assisting a client in developing corporate strategies, assisting in identifying or introducing a client to possible sources of capital that meet the client specifications or criteria, and providing structuring advice and assisting a client in analyzing the accounting effects of proposed transactions. Safeguards that should be considered include:

(a) Policies and procedures to prohibit individuals assisting the assurance client from making managerial decisions on behalf of the client;

(b) Using professionals who are not members of the assurance team to provide the services; and

(c) Ensuring the audit firm does not commit the assurance client to the terms of any transaction or consummate a transaction on behalf of the client.

Fees and Pricing for Audit Services

Fees—Relative Size

226. When the total fees generated by an assurance client represent a large proportion of an audit firm’s total revenues, the dependence on that client or client group and concern about the possibility of losing the client may create a self-interest threat. The significance of the threat will depend upon factors such as:

(a) The structure of the audit firm; and

(b) Whether the audit firm is well established or newly created.

(a) Discussing the extent and nature of fees charged with the board of directors, the chief accountant, or the internal audit committee;

(b) Taking steps to reduce dependency on the client;

(d) Consulting a third party, such as a professional association, professional regulatory body or another practicing auditor.

227. A self-interest threat may also be created when the fees generated by the assurance client represent a large proportion of the revenue of an individual member of the board of director. The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

• Policies and procedures to monitor and implement quality control of assurance engagements; and

• Involving an additional practicing auditor who was not a member of the assurance team to review the work done or otherwise advise as necessary.

Fees—Overdue

228. A self-interest threat may be created if fees due from an assurance client for professional services are unpaid for a long time, especially if a significant part is not paid before the issue of the assurance report for the following year. Generally the payment of such fees should be required before or immediately after the report is issued. The following safeguards may be applicable:

(a) Discussing the level of outstanding fees with the board of directorsand the chief accountant of the client; and

(b) Involving an additional practicing auditor who did not take part in the assurance engagement to provide advice or review the work performed.

The audit firm should also consider whether the overdue fees might be regarded as being equivalent to a loan to the client and whether, because of the significance of the overdue fees, it is appropriate for the audit firm to be re-appointed.

Low Fee Setting

229. When an audit firm obtains an assurance engagement at a significantly lower fee level than that charged by the predecessor firm, or quoted by other firms, the self-interest threat created will not be reduced to an acceptable level unless:

(a) The audit firm is able to demonstrate that appropriate time and qualified staff are assigned to the task; and

(b) All applicable audit standards (audit procedures), guidelines and quality control procedures are being complied with.

Contingent Fees

230. Contingent fees (on success basis) are fees calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed. For the purposes of this section, fees are not regarded as being contingent if a court or other public authority has established them.

231. A contingent fee charged by an audit firm in respect of an assurance engagement creates self-interest and advocacy threats that cannot be reduced to an acceptable level by the application of any safeguard. Accordingly, an audit firm should not enter into any fee arrangement for an assurance engagement under which the amount of the fee is contingent on the result of the assurance work.

232. A contingent fee charged by an audit firm in respect of a non-assurance service provided to an assurance client may also create self-interest and advocacy threats. If the amount of the fee for a non-assurance engagement was agreed to, or contemplated, during an assurance engagement and was contingent on the result of that assurance engagement, the threats could not be reduced to an acceptable level by the application of any safeguard. Accordingly, the only acceptable action is not to accept such arrangements. For other types of contingent fee arrangements, the significance of the threats created will depend on factors such as:

(a) The range of possible fee amounts;

(b) The degree of variability;

(d) Whether the outcome or result of the transaction is to be reviewed by an independent third party; and

(e) The effect of the event or transaction on the assurance engagement.

The significance of the threats should be evaluated and, if the threats are other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threats to an acceptable level. Such safeguards might include:

(a) Disclosing to the board of directors, the chief accountant, or the internal audit committee of the client, the extent and nature of fees charged;

(b) Review or determination of the final fee by an unrelated third party; or

Gifts and Hospitality

233. Accepting gifts or hospitality from an assurance client may create self-interest and familiarity threats. When a member of audit firm management or a member of the assurance team accepts gifts or hospitality, unless the value is clearly insignificant, the threats to independence cannot be reduced to an acceptable level by the application of any safeguard. Consequently, an audit firm or a member of the assurance team should not accept such gifts or hospitality.

Actual or Threatened Litigation

234. When litigation takes place, or appears likely, between the audit firm or a member of the assurance team and the assurance client, a self-interest or intimidation threat may be created. The relationship between client management and the members of the assurance team must be characterized by complete candor and full disclosure regarding all aspects of a client’s business operations. The audit firm and the client’s management may be placed in adversarial positions by litigation, affecting management’s willingness to make complete disclosures and the audit firm may face a self-interest threat. The significance of the threat created will depend upon such factors as:

(a) The materiality of the litigation;

(b) The nature of the assurance engagement; and

Once the significance of the threat has been evaluated the following safeguards should be applied, if necessary, to reduce the threats to an acceptable level:

(a) Disclosing to the board of directors of the audit firm, and the board of directors, the chief accountant or the internal audit committee of the client, the extent and nature of the litigation;

(b) If the litigation involves a member of the assurance team, removing that individual from the assurance team; or

(c) Involving an additional practicing auditor who is not a member of the assurance team to review the work done or otherwise advise as necessary.

If such safeguards do not reduce the threat to an appropriate level, the only appropriate action is to withdraw from, or refuse to accept, the assurance engagement.

Professional Competence and Responsibilities while Using experts who are not practicing auditors

235. Practicing auditors should refrain from agreeing to perform professional services which they are not competent to carry out unless competent advice and assistance is obtained so as to enable them to satisfactorily perform such services. If a practicing auditor does not have the competence to perform a specific part of the professional service, technical advice may be sought from experts such as other practicing auditors, lawyers, technicians, engineers, geologists, valuers.

236. In such situations, although the practicing auditor is relying on the technical competence of the expert, the knowledge of the ethical requirements cannot be automatically assumed. Since the ultimate responsibility for the professional service rests with the practicing auditor, the practicing auditor should see that the requirements of ethical behavior are followed by the expert.

237 When using the services of experts who are not practicing auditor, the professional accountant must take steps to see that such experts are aware of ethical requirements. Primary attention should be paid to the fundamental principles in paragraph 36 of this Code. These principles would extend to any assignment in which such experts would participate.

238. The degree of supervision and the amount of guidance needed will depend upon the individuals involved and the nature of the engagement. Examples of such guidance and supervision might include:

(a) Asking individuals to read the appropriate ethical codes for auditing and accountancy profession;

(b) Requiring written confirmation of understanding of the ethical requirements; and

239 The practicing auditorshould also be alert to specific independence requirements or other risks unique to the engagement. Such situations will require special attention and guidance/supervision to see that ethical requirements are met by the professionals. For example, Paragraph 78 to 124 of this Code requires all professionals participating in the assurance engagement to be independent of the assurance client.

240. If at any time the practicing auditoris not satisfied that proper ethical behavior can be respected or assured, the engagement should not be accepted; or, if the engagement has commenced, it should be terminated.

Fees for Consulting Services

241. Practicing auditors who undertake consulting services for a client, assume the responsibility to perform such services with integrity and objectivity and in accordance with the appropriate technical standards. That responsibility is discharged by applying the professional skill and knowledge which practicing auditors have acquired through training and experience. For the services rendered, the practicing auditor is entitled to remuneration.

242. Consulting fees should be a fair reflection of the value of the services performed for the client, taking into account:

(a) The skill and knowledge required for the type of consulting services involved;

(b) The level of training and experience of the persons necessarily engaged in performing the consulting services;

(d) The degree of responsibility that performing those services entails.

243. Consulting fees should normally be computed on the basis of appropriate rates per hour or per day for the time of each person engaged in performing consulting services. These rates should be based on the fundamental premise that the organization and conduct of the practicing auditor and the services provided to clients are well planned, controlled and managed. They should take into account the factors set out in paragraph 242 and are influenced by the legal, social and economic conditions of each country. It is for each practicing auditor to determine the appropriate rates.

244. A practicing auditor should not make a representation that specific consulting services in current or future periods will be performed for either a stated fee, estimated fee, or fee range if it is likely at the time of the presentation that such fee will be substantially increased and the prospective client is not advised of that likelihood.

245. When performing consulting services for a client it may be necessary or expedient to charge a pre-arranged fee, in which event the practicing auditor should estimate a fee taking into account the matters referred to in paragraphs 242 through 244.

246. It is not improper for a practicing auditor to charge a client a lower fee than has previously been charged for similar services, provided the fee has been calculated in accordance with the factors referred to in paragraphs 242 through 244.

The facts that a practicing auditor secures work by reasonably quoting a fee lower than another is not improper. However, practicing auditors who obtain work at fees significantly lower than those charged by a precedingauditor, or quoted by others, should be aware that there is a risk of a perception that the quality of work could be impaired.

Accordingly, when deciding on a fee to be quoted to a client for the performance of professional services, a practicing auditor should be satisfied that, as a result of the fee quoted:

(a) The quality of work will not be impaired and that due care will be applied to comply with all professional standards and quality control procedures in the performance of those services, and

(b) The client will not be misled as to the precise scope of services that a quoted fee is intended to cover.

247. As stated in paragraph 231:

An assurance engagement should not be performed for a fee that is contingent on the result of the assurance work or on items that are the subject matter of the assurance engagement. Paragraph 232 provides guidance on threats that may be created if a non-assurance engagement is provide to an assurance client for a contingent fee, and the safeguards that may reduce the threats to an acceptable level.

Fees should not be regarded as being contingent if fixed by a court or other public authority. Fees charged on a percentage-of-revenue basis (%) or similar basis, except when authorized by statute or approved by a member body as generally accepted practice for certain professional services, should be regarded as contingent fees.

248. The foregoing paragraphs relate to fees as distinct from reimbursement of expenses. Out-of-pocket expenses, in particular traveling, food or accommodation expenses, attributable directly to the professional services performed for a particular client would normally be charged to that client in addition to the professional fees.

249. It is in the best interests of both the client and the practicing auditor that the basis on which fees are computed and any billing arrangements are clearly defined, preferably in writing, before the commencement of the engagement to help in avoiding misunderstandings with respect to fees.

Commissions

250. Under the prevailing legal regulations, payment and receipt of commissions for consulting, accounting and external auditing activities are not allowed.

251. Subject to paragraph 250, a practicing auditor and audit firm should not pay a commission to obtain a client nor should a commission be accepted for referral of a client to a third party or for the referral of the products or services of others.

252. Payment and receipt of referral fees between practicing auditors when no services are performed by the referring practicing auditor are regarded as commissions for the purpose of paragraph 251.

253. A practicing auditor may enter into an arrangement for the purchase of the whole or part of an accounting practice, an auditing practice requiring payments to individuals formerly engaged in the practice or payments to their heirs or estates. Such payments are not regarded as commissions for the purpose of paragraph 251.

Activities Incompatible with the Accountancy and Auditing Profession

254. A practicing auditor should not concurrently engage in any business, occupation or activity which impairs or might impair integrity, objectivity or independence, or the good reputation of the profession and therefore would be incompatible with the rendering of professional services.

255. The rendering of two or more types of professional services concurrently does not by itself impair integrity, objectivity or independence.

256. The simultaneous engagement in another business, occupation or activity unrelated to professional services which has the effect of not allowing the practicing auditor to properly conduct a professional practice in accordance with the fundamental ethical principles of the accountancy profession should be regarded as inconsistent with the international practice .

Clients’ Monies

257. According to the prevailing legal regulations, a practicing auditor is not allowed to hold clients’ monies. The practicing auditor should not receive service fees directly from clients, unless the practicing auditor is introduced by an audit firm in official letter.

258. A practicing auditor entrusted with services fee should:

(a) Keep such monies separately from personal monies;

(b) Should not use such monies for the purpose other than deposit to Company’s account; and

Relations with Other Practicing Auditors

Accepting New Assignments

259. The extension of the operations of a business undertaking frequently results in the formation of branches or subsidiary companies at locations where an existing accountant auditor does not practice. In these circumstances, the client or the existing auditor in consultation with the client may request a receiving auditor practicing at those locations to perform such professional services as necessary to complete the assignment.

260. Referral of business may also arise when clients request the provision of services or other areas of special tasks. The scope of the services offered by practicing auditor continues to expand and the depth of knowledge which is needed to serve the public often calls for special skills. Since it is impracticable for any one practicing auditor to acquire special expertise or experience in all fields of accountancy, some practicing auditors have decided that it is neither appropriate nor desirable to develop within their firms the complete range of special skills which may be required.

261. Practicing auditors should only undertake such services which they can expect to complete with professional competence. It is essential therefore for the profession in general that practicing auditors be encouraged to obtain advice when appropriate from those who are competent to provide it.

262. An existing auditor without a particular skill may however be reluctant to refer a client to another practicing auditor who may possess that skill. As a result, clients may be deprived of the benefit of advice which they are entitled to receive.

263. The wishes of the client should be paramount in the choice of professional advisers, whether or not special skills are involved. Accordingly, a practicing auditor should not attempt to restrict in any way the client’s freedom of choice in obtaining special advice, and when appropriate should encourage a client to do so.

264. The services or advice of a practicing auditor having special skills may be sought in one or other of the following ways:

(a) By the client:

(i) After prior discussion and consultation with the existing auditor;

(ii) On the specific request or recommendation of the existing auditor; and

(iii) Without reference to the existing auditor; or

(b) By the existing auditor.

265. When a practicing auditor is asked to provide services or advice, inquiries should be made as to whether the prospective client has an existing auditor. In cases where there is an existing auditor who will continue to provide professional services, the procedures set out in paragraphs 266 through 272 should be observed. If the appointment will result in another practicing auditor being superseded, the procedures set out in paragraphs 273 through 284 should be followed.

266. The receiving auditor should limit the services provided to the specific assignment received by referral from the preceding auditor or the client unless otherwise requested by the client. The receiving auditor also has the duty to take reasonable steps to support the preceding auditor’s current relationship with the client and should not express any criticism of the professional services of the preceding auditor without giving the latter an opportunity to provide all related services.

267. A receiving auditor who is asked by the client to undertake an assignment of a type which is clearly distinct from that being carried out by the preceding auditor or from that initially received by referral from the preceding auditor or from the client, should regard this as a separate request to provide services or advice. Before accepting any appointments of this nature, the receiving auditor should advise the client of the professional obligation to communicate with the preceding auditor and should immediately do so preferably in writing, advising of the approach made by the client and the general nature of the request as well as seeking all relevant information, if any, necessary to perform the assignment.

268. Circumstances sometimes arise when the client insists that the preceding auditor should not be informed. In this case, the receiving auditor should decide whether the client’s reasons are valid. A mere disinclination by the client for communication with the preceding auditor would not be a satisfactory reason.

269. The receiving auditor should:

(a) Comply with the instructions received from the preceding auditor or the client to the extent that they do not conflict with relevant legal requirements or regulations of professional association; and

(b) Ensure, insofar as it is practicable to do so, that the preceding auditor is kept informed of the general nature of the professional services being performed.

270. When there are two or more other practicing auditors performing professional services for the client concerned it may be appropriate to notify only the relevant practicing auditor depending on the specific services being performed.

271. When appropriate the existing auditor, in addition to issuing instructions concerning referred business, should maintain contact with the receiving auditors and cooperate with them in all reasonable requests for assistance.

272. When the opinion of a practicing auditor, other than the existing auditor, is sought on the application of accounting, auditing, reporting or other standards or principles to specific circumstances or transactions, the practicing auditor should be alert to the possibility of the opinion creating undue pressure on the judgment and objectivity of the existing auditor. An opinion given without full and proper facts can cause difficulty to the receiving auditor if the opinion is challenged or the receiving auditor is subsequently appointed by the company. Accordingly, the practicing auditor should seek to minimize the risk of giving inappropriate guidance by ensuring that he or she has access to all relevant information. When there is a request for an opinion in the above circumstances there is a requirement for communication with the preceding auditor. It is important that the preceding auditor, with the permission of the client, provide the receiving auditor with all requested relevant information about the client. With the permission of the client, the receiving auditor should also provide a copy of the final report to the preceding auditor. If the client does not agree to these communications, then the engagement should ordinarily not be performed.

Superseding Another Practicing Auditor

273. The proprietors of a business have an indisputable right to choose their professional advisers and to change to others should they so desire. A practicing auditor who is asked to replace another practicing auditor should ascertain if there are any professional reasons why the appointment should not be accepted. This cannot effectively be done without direct communication with the preceding auditor. In the absence of a specific request, the preceding auditor should not volunteer information about the client’s affairs.

274. Above communication enables a receiving auditor reason to ascertain a change in appointment and also whether there is a wish to undertake the engagement. In addition, such communication helps to preserve the harmonious relationships which should exist between all practicing auditors on whom clients rely for professional advice and assistance.

275. The extent to which a preceding auditor can discuss the affairs of the client with the proposed receiving auditor depends on:

(a) Whether the client’s permission to do so has been obtained; and/or

(b) Compliance with the legal requirements.

276. The receiving auditor should treat in the strictest confidence and give due weight to any information provided by the preceding auditor.

277. The information provided by the preceding auditor may indicate, for example, that the ostensible reasons given by the client for the change are not in accordance with the facts. It may disclose that the proposal to make a change in auditor was made because the preceding auditors stood their ground and properly carried out the duties as practicing auditors despite opposition or evasion on an occasion on which important differences of principles or practice have arisen with the client.

278. Communication between the parties therefore serves:

(a) To protect a practicing auditor from accepting an appointment in circumstances where all the pertinent facts are not known;

(b) To protect the minority proprietors of a business who may not be fully informed of the circumstances in which the change is proposed; and

(c) To protect the interests of the existing practicing auditor upon the conscientious exercise of the existing practicing auditor’s duty to act as an independent professional.

279. Before accepting an appointment involving recurring professional services hitherto carried out by another practicing auditor, the receiving auditor should:

(a) Ascertain if the prospective client has advised the existing auditor of the proposed change and has given permission, preferably in writing, to discuss the client’s affairs fully and freely with the receiving auditor;

(b) If request for permission to discuss with preceding auditor is not given, the receiving auditor should, in the absence of exceptional circumstances of which there is full knowledge, and unless there is satisfaction as to necessary facts by other means, decline the appointment; and

(i) To provide information on any professional reasons which should be known before deciding whether or not to accept the appointment; and

(ii) To provide all the necessary details to be able to come to a decision.

280. The preceding auditor, on receipt of the communication referred to in paragraph 279 (c) should forthwith:

(a) Reply in writing, advising whether there are any professional reasons why the receiving auditor should not accept the appointment;

(b) If there are other matters which should be disclosed, ensure that the client has given permission to give details of this information to the receiving auditor. If permission is not granted, the preceding auditor should report that fact to the receiving auditor; and

(c) On receipt of permission from the client, disclose all information needed by the receiving auditor to be able to decide whether or not to accept the appointment, and discuss freely with the receiving auditor all matters relevant to the appointment of which the latter should be aware.

281. If the receiving auditor does not receive, within a reasonable time, a reply from the preceding auditor and there is no reason to believe that there are any exceptional circumstances surrounding the proposed change, the receiving auditor should endeavor to communicate with the preceding auditor by some other means. If unable to obtain a satisfactory outcome in this way, the receiving auditor should send a further letter, stating that there is an assumption that there is no professional reason why the appointment should not be accepted.

282. The fact that there may be fees owing to the preceding auditor is not a professional reason why another preceding auditor should not accept the appointment.

283. The preceding auditor should promptly transfer to the receiving auditor all books and papers of the client which are or may be held after the change in appointment has been effected and should advise the client accordingly, unless the preceding auditor has a legal right to withhold them.

284. In cases, either because of legislative requirements or otherwise, there is call for submissions or tenders, e.g., competitive bids, in relation to professional services offered by practicing auditor through a public advertisement, all auditors are allowed to submit a tender. If the appointment may result in the replacement of another auditor, the auditors that submit the tender should state in the submission or tender that before acceptance the opportunity to contact the preceding auditor is required so that inquiries may be made as to whether there are any professional reasons why the appointment should not be accepted. If the submission or tender is successful, the preceding auditor should then be contacted according to regulations stated in paragraph 273 to 283.

Advertising and Solicitation

285. Auditors and audit firm are not permitted to advertise and solicitate about their firm or services.

286. Auditors and audit firms are permitted to present and introduce about auditors, the audit firm and its services in an objective manner and should be decent, honest, truthful and in good taste.

287. Auditors and audit firms are prohibited from the following activities:

(a) Create false, deceptive or unjustified expectations of favorable results;

(b) Imply the ability to influence any court, tribunal, regulatory agency or similar body or official;

(d) Make comparisons with other auditors or audit firms;

(e) Contain testimonials or endorsements of people with significant influence;

(f) Contain any other representations that would be likely to cause a reasonable person to misunderstand or be deceived; and

(g) Make unjustified claims to be an expert or specialist in a particular field of accountancy.

288. Auditors and audit firms operating in Vietnam are not permitted to advertise in newspapers or magazines published or distributed in a country where advertising is permitted.

289. In situations where auditors in their international cross border activities violate the provisions of paragraph 288, the professional association in that country should inform the professional member body in Vietnam of those violations to ensure proper disciplinary treatment.

290. In order to let the public aware of the range of services that an auditor can provide, the professional association can provide this information in a truthful and unbiased manner.

Publicity by Auditors and Audit firms

291. Publicity by auditors and audit firms is acceptable provided:

(a) It has as its object the notification to the public or such sectors of the

public as are concerned, of matters of fact relating to auditors, audit firms, services

(b) It is in good taste;

(d) It avoids frequent repetition of, and any undue prominence being given to the name of the auditor.

292. The examples which follow are illustrative of circumstances in which publicity is acceptable.

(a) Appointments and Awards:

It is in the interests of the public and the accountancy and auditing profession that any appointment or other comments in a matter of national or local importance, or the award of any distinction to an auditor or audit firm should receive publicity. However, the auditor should not make use of any of the aforementioned appointments or activities for personal professional advantage.

(b) Auditors Seeking Employment or Professional Business:

An auditor may inform interested parties through any medium that a partnership or salaried employment of an accounting and auditing nature is being sought. An auditor may write a letter or make a direct approach to another auditor when seeking employment or professional business.

(c) Directories:

An auditor may be listed in a directory provided neither the directory itself nor the entry could reasonably be regarded as a promotional advertisement for those listed therein. Entries should be limited to name, address, telephone number, professional description and any other information necessary to enable the user of the directory to make contact with the person or organization to which the entry relates.

(d) Books, Articles, Interviews, Lectures, Radio and Television Appearances:

Auditors who author books or articles on professional subjects, may state their name and professional qualifications and give the name of their organization but shall not give any information as to the services that firm provides.

Similar provisions are not applicable to participation by a professional accountant in a lecture, interview or a radio or television program on a professional subject. What professional accountants write or say, however, should not be promotional of themselves or their firm but should be an objective professional view of the topic under consideration. Professional accountants are responsible for using their best endeavors to ensure that what ultimately goes before the public complies with these requirements.

(e) Training Courses, Seminars:

Auditor and audit firm may invite clients, staff or other auditors to attend training courses or seminars. However, undue prominence should not be given to the name of an auditor in any booklets or documents issued in connection therewith.

(f) Booklets and Documents Containing Technical Information:

Booklets and other documents bearing the name of an auditor and giving technical information for the assistance of staff or clients may be issued to such persons or to other auditors.

(g)Staff Recruitment:

Genuine vacancies for staff may be communicated to the public through any medium in which comparable staff vacancies normally appear. The fact that a job specification necessarily gives some detail as to one or more of the services provided to clients by the auditor is acceptable but it should not contain any promotional element. There should not be any suggestion that the services offered are superior to those offered by other auditor or audit firm for any reason.

In publications such as those specifically directed to schools and other places of education to inform students and graduates of career opportunities in the profession, services offered to the public may be described in a businesslike way.

More latitude may also be permissible in a section of a newspaper devoted to staff vacancies.

(h) Publicity on Behalf of Clients:

A practicing auditor may publicize on behalf of clients, provided the emphasis in the publicity is directed towards the objectives to be achieved for the client.

(i) Brochures:

Auditors and audit firms may issue brochures to clients or, in response to an unsolicited request, to a non-client:

- A factual and objectively worded account of the services provided; and

- A directory setting out names of Director, senior officer, office addresses and names and addresses of branches.

(j) Stationery and Nameplates:

Stationery of auditors should be of an acceptable professional standard and comply with the requirements of the law and of the professional association concerned as to names of directors, principals and others who participate in the practice, use of professional descriptions and designatory letters, cities or countries where the practice is represented, logotypes, etc. The designation of any services provided by the practice should not be permitted. Similar provisions, where applicable, should apply to nameplates.

(k) Newspaper Announcements:

Appropriate newspapers or magazines may be used to inform the public of the establishment of the audit firm or new branch, of changes in the company’s organization, changes in auditor, or of any alteration in the address of a practice.

Such announcements should be limited to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the newspaper or magazine and number of insertions.

(l) Inclusion of the Name of an Auditor in a Document Issued by a Client:

When a client proposes to publish a report by an auditor dealing with the client’s existing business affairs or in connection with the establishment of a new business venture, the auditor should take steps to ensure that the context in which the report is published is not such as might result in the public being misled as to the nature and meaning of the report. In these circumstances, the auditor should advise the client that permission should first be obtained before publication of the document.

Similar consideration should be given to other documents proposed to be issued by a client containing the name of an auditor acting in an independent professional capacity. This does not preclude the inclusion of the name of an auditor in the annual report of a client.

When auditors in their private capacity are associated with, or hold office in, an organization, the organization may use their name and professional status on stationery and other documents. The auditors should ensure that this information is not used in such a way as might lead the public to believe that there is a connection with the organization in an independent professional capacity.

PART C—APPLICABLE TO HOLDERS OF CPA CERTIFICATE OR ACCOUNTANCY PRACTICING CERTIFICATEEMPLOYED IN ENTERPRISES AND ENTITIES

The following sections contain guidance which is particularly relevant to holders of CPA Certificate or Accountancy Practicing Certificate that are employed in enterprises and entities other than accounting and auditing practices. These people should be aware they may find that apart from the principles stated in Part A the principles set out in Part C below are also of application to their particular circumstances. They should seek assistance from the State regulatory body or professional association if having difficulties in implementing these principles.

Position and Responsibilities

293. Investors, creditors, employers and other sectors of the business community, as well as governments and the public at large, all may rely on the work of holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities. Holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may be solely or jointly responsible for the preparation and reporting of financial and other information, which both their employing organizations and third parties may rely on. They may also be responsible for providing effective financial management and competent advice on a variety of business-related matters.

294. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may be a salaried employee, a partner, director (whether executive or non-executive), an owner manager, a volunteer or another working for one or more employing organization. The legal form of the relationship with the employing organization, if any, has no bearing on the ethical responsibilities incumbent on the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities.

295. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities has a responsibility to further the legitimate aims of their employing organization. This Code does not seek to hinder a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities from properly fulfilling that responsibility, but considers circumstances in which conflicts may be created with the absolute duty to comply with the fundamental principles.

296. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities often holds a senior position within an organization. The more senior the position, the greater will be the ability and opportunity to influence events, practices and attitudes. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities is expected, therefore, to encourage an ethics-based culture in an employing organization that emphasizes the importance that senior management places on ethical behavior.

297. The examples presented in the following sections are intended to illustrate how the conceptual framework is to be applied and are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances experienced by a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities that may create threats to compliance with the principles. Consequently, it is not sufficient for a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities merely to comply with the examples; rather, the framework should be applied to the particular circumstances faced.

Threats and Safeguards

298. Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories:

(a) Self-interest;

(b) Self-review;

(d) Familiarity; and

(e) Intimidation.

These threats are discussed further in Part A of this Code.

299. Examples of circumstances that may create self-interest threats for a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities include, but are not limited to:

a) Financial interests, loans or guarantees.

b) Incentive compensation arrangements.

c) Inappropriate personal use of corporate assets.

d) Concern over employment security.

e) Commercial pressure from outside the employing organization.

300. Circumstances that may create self-review threats include, but are not limited to, business decisions or data being subject to review and justification by the same holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities responsible for making those decisions or preparing that data.

301. When furthering the legitimate goals and objectives of their employing organizations holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may promote the organization’s position, provided any statements made are neither false nor misleading. Such actions generally would not create an advocacy threat.

302. Examples of circumstances that may create familiarity threats include, but are not limited to:

• A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities in a position to influence financial or non-financial reporting or business decisions having an blood-related family or direct family member who is in a position to benefit from that influence.

• Long association with business contacts influencing business decisions.

• Acceptance of a gift or preferential treatment, unless the value is clearly insignificant.

303. Examples of circumstances that may create intimidation threats include, but are not limited to:

• Threat of dismissal or replacement of the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities or a close or direct family member over a disagreement about the application of an accounting principle or the way in which financial information is to be reported.

• A dominant personality attempting to influence the decision making process, for example with regard to the awarding of contracts or the application of an accounting principle.

304. Holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may also find that specific circumstances give rise to unique threats to compliance with one or more of the fundamental principles. Such unique threats obviously cannot be categorized. In all professional and business relationships, holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should always be on the alert for such circumstances and threats.

305. Safeguards that may eliminate or reduce to an acceptable level the threats faced by holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities fall into two broad categories:

(a) Safeguards created by the profession, legislation or regulation; and

(b) Safeguards in the work environment.

306. Examples of safeguards created by the profession, legislation or regulation are detailed in paragraph 48 of Part A of this Code.

307. Safeguards in the work environment include, but are not restricted to:

• The employing organization’s systems of corporate oversight or other oversight structures.

• The employing organization’s ethics and conduct programs.

• Recruitment procedures in the employing organization emphasizing the importance of employing high caliber competent staff.

• Strong internal controls.

• Appropriate disciplinary processes.

• Leadership that stresses the importance of ethical behavior and the expectation that employees will act in an ethical manner.

• Policies and procedures to implement and monitor the quality of employee performance.

• Timely communication of the employing organization’s policies and procedures, including any changes to them, to all employees and appropriate training and education on such policies and procedures.

• Policies and procedures to empower and encourage employees to communicate to senior levels within the employing organization any ethical issues that concern them without fear of retribution.

• Consultation with another appropriate person who performs accounting work and person who performs auditing work.

308. In circumstances where a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities believes that unethical behavior or actions by others will continue to occur within the employing organization, the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should consider seeking legal advice. In those extreme situations where all available safeguards have been exhausted and it is not possible to reduce the threat to an acceptable level, a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may conclude that it is appropriate to resign from the employing organization.

Potential Conflicts

309. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities has a professional obligation to comply with the fundamental principles. There may be times, however, when their responsibilities to an employing organization and the professional obligations to comply with the fundamental principles are in conflict. Ordinarily, a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should support the legitimate and ethical objectives established by the employer and the rules and procedures drawn up in support of those objectives. Nevertheless, where compliance with the fundamental principles is threatened, a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities must consider a response to the circumstances.

310. As a consequence of responsibilities to an employing organization, a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may be under pressure to act or behave in ways that could directly or indirectly threaten compliance with the fundamental principles. Such pressure may be explicit or implicit; it may come from a supervisor, manager, director or another individual within the employing organization. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may face pressure to:

• Act contrary to law or regulation.

• Act contrary to technical or professional standards.

• Facilitate unethical or illegal earnings management strategies.

• Lie to, or otherwise intentionally mislead (including misleading by remaining silent) others, in particular: the auditors of the employing organization; or regulators.

• Issue, or otherwise be associated with, a financial or non-financial report that materially misrepresents the facts, including statements in connection with, for example:

- The financial statements;

- Tax compliance;

- Legal compliance; or

- Reports required by securities regulators.

311. The significance of threats arising from such pressures, such as intimidation threats, should be evaluated and, if they are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. Such safeguards may include:

• Obtaining advice where appropriate from within the employing organization, an independent professional advisor or a relevant professional body.

• The existence of a formal dispute resolution process within the employing organization.

• Seeking legal advice.

Preparation and Reporting of Information

312. Holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities are often involved in the preparation and reporting of information that may either be made public or used by others inside or outside the employing organization. Such information may include financial or management information, for example, forecasts and budgets, financial statements, management discussion and analysis, and the management letter of representation provided to the auditors as part of an audit of financial statements. Holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should prepare or present such information fairly, honestly and in accordance with relevant professional standards so that the information will be understood in its context.

313. Holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities who have responsibility for the preparation or approval of the general purpose financial statements of an employing organization should ensure that those financial statements are presented in accordance with the applicable financial reporting standards.

314. Holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should maintain information for which the holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities are responsible in a manner that:

(a) Describes clearly the true nature of business transactions, assets or liabilities;

(b) Classifies and records information in a timely and proper manner; and

315. Threats to compliance with the fundamental principles, for example self-interest or intimidation threats to objectivity or professional competence and due care, may be created where a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may be pressured (either externally or by the possibility of personal gain) to become associated with misleading information or to become associated with misleading information through the actions of others.

316. The significance of such threats will depend on factors such as the source of the pressure and the degree to which the information is, or may be, misleading. The significance of the threats should be evaluated and, if they are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. Such safeguards may include consultation with the board of directors, for example, the internal audit committee or other body responsible for governance, or with a relevant professional body.

317. Where it is not possible to reduce the threat to an acceptable level, a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should refuse to remain associated with information they consider is or may be misleading. Should the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities be aware that the issuance of misleading information is either significant or persistent, the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should consider informing appropriate authorities in line with the guidance. The holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may also wish to seek legal advice or resign.

Acting with Sufficient Expertise

318. The fundamental principle of professional competence and due care requires that a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should only undertake significant tasks for which the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities has, or can obtain, sufficient specific training or experience. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should not intentionally mislead an employer as to the level of expertise or experience possessed, nor should a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities fail to seek appropriate expert advice and assistance when required.

319. Circumstances that threaten the ability of a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities to perform duties with the appropriate degree of professional competence and due care include:

• Insufficient time for properly performing or completing the relevant duties.

• Incomplete, restricted or otherwise inadequate information for performing the duties properly.

• Insufficient experience, training and/or education.

• Inadequate resources for the proper performance of the duties.

320. The significance of such threats will depend on factors such as the extent to which the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities is working with others, relative seniority in the business and the level of supervision and review applied to the work. The significance of the threats should be evaluated and, if they are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. Safeguards that may be considered include:

• Obtaining additional advice or training.

• Ensuring that there is adequate time available for performing the relevant duties.

• Obtaining assistance from someone with the necessary expertise.

• Where appropriate, frequently:

-Reporting to the board of directors;

- Consulting with independent experts; or

- Consulting with a relevant professional body.

321. Where threats cannot be eliminated or reduced to an acceptable level, holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should consider whether to refuse to perform the duties in question. If the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities determines that refusal is appropriate the reasons for doing so should be clearly communicated.

Financial Interests

322. Holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may have financial interests, or may know of financial interests of blood-related family or direct family members, that could, in certain circumstances, give rise to threats to compliance with the fundamental principles. For example, self-interest threats to objectivity or confidentiality may be created through the existence of the motive and opportunity to manipulate price sensitive information in order to gain financially. Examples of circumstances that may create self-interest threats include, but are not limited to situations where the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities or a blood-related family or direct family member:

• Holds a direct or indirect financial interest in the employing organization and the

value of that financial interest could be directly affected by decisions made by

the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities;

• Is eligible for a profit related bonus and the value of that bonus could be directly

affected by decisions made by the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities;

• Holds, directly or indirectly, share options in the employing organization, the

value of which could be directly affected by decisions made by the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities;

• Holds, directly or indirectly, share options in the employing organization which

are, or will soon be, eligible for conversion; or

• May qualify for share options in the employing organization or performance

related bonuses if certain targets are achieved.

323. In evaluating the significance of such a threat, and the appropriate safeguards to be applied to eliminate the threat or reduce it to an acceptable level, holders of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities must examine the nature of the financial interest. This includes an evaluation of the significance of the financial interest and whether it is direct or indirect. Clearly, what constitutes a significant or valuable stake in an organization will vary from individual to individual, depending on personal circumstances.

324. If threats are other than clearly insignificant, safeguards should be considered and

applied as necessary to eliminate or reduce them to an acceptable level. Such safeguards may include:

• Policies and procedures for a committee independent of management to

determine the level of form of remuneration of senior management.

• Disclosure of all relevant interests, and of any plans to trade in relevant shares to

those charged with the governance of the employing organization, in accordance

with any internal policies.

• Consultation, where appropriate, with the board of directors.

• Consultation, where appropriate, with those charged with the governance of the

employing organization or relevant professional bodies.

• Internal and external audit procedures.

• Up-to-date education on ethical issues and the legal restrictions and other

regulations around potential insider trading.

325. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should neither manipulate information nor use confidential information for personal gain.

Inducements

Receiving Offers

326. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities or a blood-related family or direct family member may be offered an inducement. Inducements may take various forms, including gifts, hospitality, preferential treatment and inappropriate appeals to friendship or loyalty.

327. Offers of inducements may create threats to compliance with the fundamental principles. When a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities or a blood-related family or direct family member is offered an inducement, the situation should be carefully considered. Self-interest threats to objectivity or confidentiality are created where an inducement is made in an attempt to unduly influence actions or decisions, encourage illegal or dishonest behavior or obtain confidential information. Intimidation threats to objectivity or confidentiality are created if such an inducement is accepted and it is followed by threats to make that offer public and damage the reputation of either the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities or a blood-related family or direct family member.

328. The significance of such threats will depend on the nature, value and intent behind the offer. If a reasonable and informed third party, having knowledge of all relevant information, would consider the inducement insignificant and not intended to encourage unethical behavior, then a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may conclude that the offer is made in the normal course business and may generally conclude that there is no significant threat to compliance with the fundamental principles.

329. If evaluated threats are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. When the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should not accept the inducement. As the real or apparent threats to compliance with the fundamental principles do not merely arise from acceptance of an inducement but, sometimes, merely from the fact of the offer having been made, additional safeguards should be adopted. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should assess the risk associated with all such offers and consider whether the following actions should be taken:

(a) Where such offers have been made, immediately inform higher levels of

management or those charged with governance of the employing organization;

(b) Inform third parties of the offer – for example, a professional body or the

employer of the individual who made the offer; a holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should, however, consider seeking legal advice before taking such a step; and

(c) Advise blood-related family or direct family members of relevant threats and safeguards where they are potentially in positions that might result in offers of inducements, for example as a result of their employment situation; and

(d) Inform higher levels of management or those charged with governance of the employing organization where blood-related family or direct family members are employed by competitors or potential suppliers of that organization.

Making Offers

330. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities may be in a situation where the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities is expected to, or is under other pressure to, offer inducements to subordinate the judgment of another individual or organization, influence a decision making process or obtain confidential information.

331. Such pressure may come from within the employing organization, for example, from a colleague or superior. It may also come from an external individual or organization suggesting actions or business decisions that would be advantageous to the employing organization possibly influencing the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities improperly.

332. A holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should not offer an inducement to improperly influence professional judgment of a third party.

333. Where the pressure to offer an unethical inducement comes from within the employing organization, the holder of CPA Certificate or Accountancy Practicing Certificate employed in enterprises and entities should follow the principles and guidance regarding ethical conflict resolution set out in Part A of this Code.

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