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Independence IIIndependence II

Dave WinetroubDave WinetroubTask Force ChairTask Force Chair

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OverviewOverview

• Comment period ended October 15, 2007Comment period ended October 15, 2007

• Task Force met early December and held Task Force met early December and held two conference calls in Januarytwo conference calls in January

• 44 responses received44 responses received

• Internal auditInternal audit

• Fees relative sizeFees relative size

• Contingent feesContingent fees

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Internal Audit – ED PositionInternal Audit – ED Position

• Self-review threat may be created when a Self-review threat may be created when a firm provides internal audit services to an firm provides internal audit services to an audit clientaudit client

• Should not perform management functionsShould not perform management functions

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Internal Audit – ED PositionInternal Audit – ED Position

• Should only provide assistance to an audit client’s Should only provide assistance to an audit client’s internal audit function if:internal audit function if:– Client responsible activities and acknowledges Client responsible activities and acknowledges

responsibility for establishing, maintaining and responsibility for establishing, maintaining and monitoring internal controlmonitoring internal control

– Client designates competent employee to be Client designates competent employee to be responsible for activitiesresponsible for activities

– Client, or those charged with governance, approve Client, or those charged with governance, approve scope, risk and frequency of workscope, risk and frequency of work

– Client evaluates adequacy of procedures and findingsClient evaluates adequacy of procedures and findings– Findings and recommendations are reported Findings and recommendations are reported

appropriately to those charged with governanceappropriately to those charged with governance

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Internal Audit – ED Responses Internal Audit – ED Responses

• Majority of respondents supported approachMajority of respondents supported approach• Eight respondents not supportiveEight respondents not supportive

– No internal audit to any audit client (2 responses)No internal audit to any audit client (2 responses)

– No internal audit to a PIE audit client (3 responses)No internal audit to a PIE audit client (3 responses)

– No internal audit if going to place significant reliance No internal audit if going to place significant reliance in external audit (1 response)in external audit (1 response)

– Safeguards not sufficiently robust (1 response)Safeguards not sufficiently robust (1 response)

– Proposals not sufficiently restrictive (1 response)Proposals not sufficiently restrictive (1 response)

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Internal Audit – ED ResponsesInternal Audit – ED Responses

• More clarity needed on More clarity needed on definition/description of internal audit definition/description of internal audit servicesservices

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Internal Audit – TF ProposalsInternal Audit – TF Proposals

• New paragraph describing internal audit New paragraph describing internal audit activities – consistent with ISA 610 activities – consistent with ISA 610 Auditor’s Consideration of the Internal Auditor’s Consideration of the Internal Audit Function Audit Function

• More guidance on types of internal audit More guidance on types of internal audit services that involve assuming a services that involve assuming a management responsibilitymanagement responsibility

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Internal Audit – TF ProposalsInternal Audit – TF Proposals

• If auditor uses internal audit work in If auditor uses internal audit work in external audit self-review threat created external audit self-review threat created because of risk that results will be used because of risk that results will be used without an appropriate evaluation without an appropriate evaluation

• When auditor uses work of internal audit When auditor uses work of internal audit function, auditing standards require function, auditing standards require performance of procedures to evaluate the performance of procedures to evaluate the adequacy of that workadequacy of that work

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Internal Audit – TF ProposalsInternal Audit – TF Proposals

• If auditor intends to use results of internal audit If auditor intends to use results of internal audit services the firm provided - the procedures services the firm provided - the procedures performed to evaluate the adequacy of the work performed to evaluate the adequacy of the work should be no less rigorous than if service should be no less rigorous than if service performed by an individual who is not a member performed by an individual who is not a member of the firmof the firm

• Individuals who provided internal audit services Individuals who provided internal audit services should not be given external audit responsibility should not be given external audit responsibility for any internal audit function or activity with for any internal audit function or activity with which they were involved as part of performing which they were involved as part of performing internal audit servicesinternal audit services

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Internal Audit – TF ProposalsInternal Audit – TF Proposals

• Additional paragraph to address self interest threat Additional paragraph to address self interest threat created if procedures performed to evaluate the created if procedures performed to evaluate the work identifies a deficiencywork identifies a deficiency

• Threat is similar to threat that may be created Threat is similar to threat that may be created when deficiency in an external audit procedure is when deficiency in an external audit procedure is identified as a result of performance of a identified as a result of performance of a subsequent external audit proceduresubsequent external audit procedure

• Individuals assigned to evaluate adequacy of Individuals assigned to evaluate adequacy of firm’s internal audit services should have firm’s internal audit services should have appropriate level of expertise and stature within appropriate level of expertise and stature within the firmthe firm

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Fees Relative Size – ED ProposalFees Relative Size – ED Proposal

• If total fees >15% for two years disclose to those If total fees >15% for two years disclose to those charged with governance and either:charged with governance and either:– Post issuance review by accountant who is not a Post issuance review by accountant who is not a

member of the firm; ormember of the firm; or– Pre-issuance review by accountant who is not a Pre-issuance review by accountant who is not a

member of the firmmember of the firm

• In subsequent years in determining which of these In subsequent years in determining which of these safeguards should be applied consideration to be safeguards should be applied consideration to be given to relative size of fee. At a minimum a post given to relative size of fee. At a minimum a post issuance review once every three yearsissuance review once every three years

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Fees Relative Size – ED ResponsesFees Relative Size – ED Responses

• Mixed as to whether a bright-line test is Mixed as to whether a bright-line test is appropriateappropriate

• In Favor (eleven)In Favor (eleven)– Reasonable thresholdReasonable threshold

– Necessary for clarity and consistent applicationNecessary for clarity and consistent application

• Against (fourteen)Against (fourteen)– Not consistent with a conceptual framework approachNot consistent with a conceptual framework approach

– Might have a disproportionate impact on smaller firms Might have a disproportionate impact on smaller firms and on firm concentrationand on firm concentration

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Fees Relative Size – ED ResponsesFees Relative Size – ED Responses

• Disclosure to those charged with Disclosure to those charged with governance – general support governance – general support

• Pre and post issuance review – general Pre and post issuance review – general support though some expressed the view support though some expressed the view that only a pre-issuance review was strong that only a pre-issuance review was strong enough - some stated review could be enough - some stated review could be performed by a regulatory bodyperformed by a regulatory body

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Fees Relative Size – TF ProposalsFees Relative Size – TF Proposals

• Require the application of safeguards to the second Require the application of safeguards to the second year’s audit opinionyear’s audit opinion

• Indicate review could be performed by a Indicate review could be performed by a professional regulatory bodyprofessional regulatory body

• Require firm to discuss with those charged with Require firm to discuss with those charged with governance the safeguard that will be appliedgovernance the safeguard that will be applied

• If fees significantly exceed 15% firm should If fees significantly exceed 15% firm should determine whether pre-issuance review is the determine whether pre-issuance review is the necessary safeguard (not-post issuance)necessary safeguard (not-post issuance)

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Contingent fees – ED PositionContingent fees – ED Position

• Should not perform an assurance service for Should not perform an assurance service for a contingent feea contingent fee

• Should not perform a non-assurance service Should not perform a non-assurance service for an audit client if:for an audit client if:– Amount of fee is material to the firm; orAmount of fee is material to the firm; or– Fee is dependent upon the outcome of a future Fee is dependent upon the outcome of a future

or contemporary audit judgment related to a or contemporary audit judgment related to a material amount in the financial statementsmaterial amount in the financial statements

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Contingent fees – ED ResponsesContingent fees – ED Responses

• Generally supportiveGenerally supportive• Four respondents of view should not charge any contingent Four respondents of view should not charge any contingent

fee to an audit clientfee to an audit client• Two respondents of view there should be specific guidance Two respondents of view there should be specific guidance

on taxon tax• Two respondents of view guidance should include Two respondents of view guidance should include

prohibition on contingent fee arrangements between a firm prohibition on contingent fee arrangements between a firm and a third partyand a third party

• One respondent of view should address contingent fees One respondent of view should address contingent fees charged by a network firmcharged by a network firm

• Several noted Section 291 not aligned to 290Several noted Section 291 not aligned to 290

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Contingent fees – TF ProposalsContingent fees – TF Proposals

• Expand guidance to include a prohibition on Expand guidance to include a prohibition on network firms charging contingent fees that network firms charging contingent fees that would be material to the audit firm, if the would be material to the audit firm, if the audit firm charged the feeaudit firm charged the fee

• Align guidance in Section 291 with 290 on Align guidance in Section 291 with 290 on providing an assurance service for a providing an assurance service for a contingent fee contingent fee

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DiscussionDiscussion