UNIT 2.
3
SAICA CODE OF PROFESSIONAL CONDUCT
PART 4
INDEPENDENCE FOR AUDIT & REVIEWS
LECTURE 1 of 2
ROV/RGOV301
References
• SAICA Code of Professional Conduct
Part 4A - Independence- Section 400-511
•
• Pdf document of the SAICA Code of Conduct on Moodle.
• Auditing Notes for South African Students
Chapter 2 (Note only sections in slides!!)
• Sections Excluded:
Part 4A - 603 to 610 and 800 and the entire Part 4
B
These PowerPoint slides are intended for the purpose of lecturing
and should not be used as a primary source from which to study.
LEARNING OUTCOMES
• Identify and explain the INDEPENDENCE requirements on which the
SAICA Code of Professional Conduct is based and with which professional
accountants must comply
• Identify and explain threats to independence and recommend safeguards
to address those threats.
• Discuss and critically evaluate the conduct and behaviour of
professional accountants in PUBLIC PRACTICE in a given scenario in the
context of Part 4A of the Code. Make recommendations of appropriate
actions to address the threats identified
Daily Independence Issues
• You are a soccer player for NMU when they play Stellenbosch University.
The referee of the game is a former Stellenbosch University student. How
would you feel?
• You are being charged for public indecency in a court of law for having
fought in public. When the matter is arraigned before court, you realise that
the judge is your ex wife, whom you divorced a year ago after a very long
and messy divorce.
SAICA Code of Professional
Classified accountants Ethics
PART 1 PART 2 PART 3 PART 4
Conceptual
Business Public Practice Public Practice
Framework
• General, applies to • CEOs • Directors/Partners • Independence for both
everybody. • CFOs auditing/ accounting assurance and non
• Financial Managers consultant firms assurance
• Financial Controllers • CA’s in auditing or engagements
• Financial Accountants accounting consultant
• Trainees in Corporate firms
• Trainee Accountants in
auditing or accounting
consultant firms
5
PART 4
Public Practice
• Independence for assurance • Independence for non assurance
engagement engagements
6
PART 4A: Code of Professional Conduct: Section 400
We deal specifically with accountants who are involved in provision of
AUDITS OR REVIEW ENGAGEMENTS.
Individuals
Who is included in this?
Firms
PART 4A: Code of Professional Conduct : Section 400
INDEPENDENCE RELATES TO OBJECTIVITY & INTEGRITY!!!!!!!
(400.5)
What is independence? Def: not being dependent!
Independence in mind
Independence
Independence in
appearance
Independence in mind: mind NOT influenced when making decisions.
Independence in appearance: third party should conclude that an
audit firm/ team members’ integrity, objectivity or professional scepticism
is NOT compromised.
PART 4A: Code of Professional Conduct: Section 400
Shareholder
Director Auditor
We are concerned with any
of these relationships that
may exist
PART 4A:
4A: Code
CodeofofProfessional
ProfessionalConduct
Conduct : Section 400
What is our role in the 3 party relationship?
The code specifically requires independence when performing
assurance engagements!!!!!
When is independence required?
Required to assess whether there are threats!!!!!
4A: Code
PART 4A: CodeofofProfessional
Professional Conduct : Section 400
Conduct
WHEN ARE YOU REQUIRED TO BE INDEPENDENT?
AFS period Audit period
Year start Year end Audit report
PART 4A: Code of Professional Conduct
Examples
Compensation Loans &
Fees (410) guarantees
& evaluation
policies (411) (511)
Independence
Gifts &
Hospitality Financial
(420) interest (510)
Actual/threatened
litigation (430)
PART 4A:
4A: Code
CodeofofProfessional
Professional Conduct : Section 400
Conduct
But what if there is a breach of the independence requirement, what can
the audit firm do?
• End or eliminate the interest or r/ship creating the breach
• Consider legal/regulatory requirements
• Report the breach in terms of its policy.
• Evaluate the impact on objectivity
• Consider ending the audit engagement.
If its determined that nothing can be done to address the breach speak
to TCWG (Those Charged with Governance) and end the engagement.
If action can be taken, discuss with TCWG; the breach, cause, what is
to be done, how and when.
Code of Professional Conduct, S410
INDEPENDENCE: FEES
(S410.)
All entities
• If fees generated represents a large proportion of total fees for the
firm= self interest/intimidation threat.
• Factors to consider e.g. new or old?
• Address?
Code of Professional Conduct, S410
INDEPENDENCE: FEES
(S410.)
Special Section for Public interest entity!!!!!!
• Public interest entity is
1. A listed company.
2. Entity defined by regulation as a public interest entity.
3. Entity whose audit requires same independence as a listed entity.
4. Other specific entities as per Code.
Code of Professional Conduct, S410
INDEPENDENCE: CONTRIBUTION OF FEES
(S410.)
Nature and level of fees create a threat to independence.
Familiarity Self-interest Intimidation
threat threat threat
• How much the fees contribute to total fees and dependence on the
fee. For public interest
Public interest = Client fee > 15% of total fees for 2 consecutive years
• What to do?
Other = Apply judgement
Code of Professional Conduct, S410
INDEPENDENCE: OUTSTANDING FEES
(S410.)
Nature and level of fees create a threat to independence.
Familiarity Self-interest Intimidation
threat threat threat
• How long the fees have been outstanding?
• Why?
Code of Professional Conduct, S410
INDEPENDENCE: CONTINGENT FEES
(S410.)
Nature and level of fees create a threat to independence.
Self-interest
threat
• Contingent fees: a fee calculated on a pre-determined basis relating to
the outcome of a transaction or result of services performed.
• Contingent fees are prohibited for assurance engagements
• Contingent fees prohibited for:
• non assurance if fees is to be material to firm
• or represents a significant part of the work needed for the audit opinion.
Code of Professional Conduct, S411
INDEPENDENCE: COMPENSATION AND EVALUATION SERVICES
(S411.)
A firms evaluation or compensation policy may create a self interest
threat to independence.
Self-interest
threat
• This relates to policies in place to compensate audit team members for
e.g. selling non assurance services.
• How do we establish the level of threat?
• How can we eliminate the risk?
• What safeguards can be put in place?
Code of Professional Conduct, S420
INDEPENDENCE: GIFTS AND HOSPITALITY
(S420.)
Accepting gifts and hospitality create threats to independence.
Self-interest Intimidation Familiarity
threat threat threat
• Audit firms/network firms/audit team member shall not accept gifts and
hospitality unless they are trivial and inconsequential.
Code of Professional Conduct, S430
INDEPENDENCE: ACTUAL OR THREATENED LITIGATION
(S430.)
Actual litigation or threatened litigation creates threats to independence.
Self-interest Intimidation
threat threat
• Management may want to hide something and force auditors to agree
thereby self-interest and intimidation.
• What do we consider when deciding the significance of the threat?
• What can be done if the litigation is against a team member?
• But what if it is the audit firm is being threatened with litigation?
Code of Professional Conduct, S430
INDEPENDENCE: ACTUAL OR THREATENED LITIGATION
(S430.)
Actual litigation or threatened litigation creates threats to independence.
Law
suit
Auditor Auditee
Law
suit
Auditee
Shareholders
Code of Professional Conduct, S510
INDEPENDENCE: FINANCIAL INTERESTS
(S510.)
Definition of financial interests: Refer to definition section of the Code
• Financial interest: equity, debenture, loan, debt instrument or right to
interest in any of the above.
• Direct financial interest: owned directly by entity/person & owned by
entity but owner has influence.
• Indirect financial interest: owned by entity on behalf of other
entity/person. No control/influence.
• Immediate family member: a spouse or dependant.
• Close family member: parent/sibling not an immediate family member.
• Holding of a financial interest in an audit client or related entity
creates threats to independence
Code of Professional Conduct, S510
INDEPENDENCE: FINANCIAL INTERESTS
(S510.)
Self-interest Audit Client’s Direct interest
threat Parent Co.
Direct interest
ABC Ltd
Direct interest
Audit Client
Direct interest
Direct interest
Auditor
• Team member
• Network firm
• Team member or close
family members
Code of Professional Conduct, S511
INDEPENDENCE: LOANS AND GUARANTEES
(S511.)
Audit firm/network firm/audit team member giving a loan or a guarantee
creates a self interest threat to independence.
Self-interest
threat
• The loan is not allowed unless:
• Its immaterial to the firm/network firm/audit team member.
• Its immaterial to the audit client/director of the client.
Code of Professional Conduct, S511
INDEPENDENCE: LOANS AND GUARANTEES
(S511.)
Audit firm/network firm/audit team member receiving a loan or a
guarantee creates a self interest threat to independence.
Self-interest
threat
• They are prohibited from accepting loan from a financial institution unless
it is within the normal terms and conditions.
• But what if it’s a bank? Home loan, mortgage or car financing.
• What if bank loan is for the entire business operations?
• What if its not a banking institution?
Code of Professional Conduct, S511
INDEPENDENCE: LOANS AND GUARANTEES
(S511.)
Audit firm/network firm/audit team member receiving a loan or a
guarantee creates a self interest threat to independence.
Self-interest
threat
• They are prohibited from accepting loan from a banking institution unless
it is immaterial
• to audit firm/network firm/audit team member.
• to the audit client or director of the audit client.
Examples
Youare
You areaadirector
manageratatXXInc
Incaafirm
firmof
ofregistered
auditors. You are busy
auditors. with
You areaudit
bothofa X Ltd
beneficiary and trustee
a manufacturing of aOne
company. trust
of which owns shares
the directors of X LtdinisQinLtd. Thewith your
school
chairman
child. He of
hasQsuddenly
Ltd has approached
been invited toyouanto
allbe their
paid auditortrip
expenses forfor
thethe
current
band
year
clubending 31 members
which all Decemberare2022.
eligible to be on.
What type of accountant are we dealing with and which section applies?
What is the threat & principle is threatened?
What is your assessment of the threat?
If any what action can be taken to address the threat in terms of the Code of Professional
Conduct?
Examples
Youare
You areaadirector
manageratatXXInc
Incaafirm
firmof
ofregistered
auditors. You are busy
auditors. with
You areaudit of X
an avid Ltd
a manufacturing
cyclist in your sparecompany. Onebelong
time and of the directors of X Ltd
to Bushworks is in school
Cycling Club. with
Mr your
Pumba is ahas
child. He CFO as KMT
suddenly Ltd,invited
been one oftoyour audit
an all paidclients.
expensesMrtrip
Pumba is band
for the also a
member of the
club which cycling club.
all members After ato
are eligible cycle you normally meet at the bar for a
be on.
chat with Mr Pumba regarding any issues facing KTM Ltd.
What type of accountant are we dealing with and which section applies? PP! Section 3 &
4
Is this covered in the main heading we have in those sections? No. Do we ignore then?
What is the threat & principle is threatened? Familiarity to objectivity
What is your assessment of the threat? Low
If any what action can be taken to address the threat in terms of the Code of Professional
Conduct?
