IESBA Independence Standards for Better Audit Quality

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The International Ethics Standards Board for Accountants (IESBA) sets the bar high for auditor independence with its rigorous standards.

The IESBA's independence standards aim to promote better audit quality by ensuring that auditors remain impartial and objective in their work.

Auditors must avoid any relationships or situations that could compromise their independence, such as accepting gifts or entertainment from clients.

The IESBA emphasizes the importance of independence in maintaining public trust in the auditing profession.

Auditors are required to disclose any relationships or interests that could impact their independence, providing transparency to stakeholders.

By adhering to these standards, auditors can provide assurance that their work is unbiased and of high quality.

If this caught your attention, see: Iesba Code

IESBA Updates

The International Ethics Standards Board for Accountants (IESBA) has released final revisions to the International Code of Ethics for Professional Accountants, which include the International Independence Standards.

The revisions address the independence considerations in an audit of group financial statements and deal with the independence implications of changes to the definition of an engagement team.

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Group audits play a fundamental role in safeguarding the integrity of and public trust in the financial markets.

The revisions strengthen and clarify the independence principles that apply to group audits, specifying the need for and content of appropriate communication on independence matters between the group auditor firm and component auditor firms.

The process to address a breach of an independence provision at a component auditor firm is now more explicitly set out, reinforcing the importance of transparency and appropriate communication with those charged with governance of the group.

The definitions of the terms "engagement team" and "audit team" in the Code have been amended to recognize the different and evolving engagement team structures.

The IESBA will hold a global webinar on April 18, 2023, to review the revisions to the Code.

The pronouncement will be effective for audits of financial statements and group financial statements for periods beginning on or after December 15, 2023, with early adoption permitted.

Here are some of the key changes in the revised Code:

  • Strengthened and clarified independence principles for group audits
  • Specified need for and content of communication on independence matters
  • Explicit process for addressing independence breaches
  • Amended definitions of engagement team and audit team
  • Provided guidance on determining who is included in an engagement team or audit team
  • Revised and established new defined terms related to independence in group audits

Independence Requirements

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The IESBA has made significant changes to the independence requirements for group audits. The revisions strengthen and clarify the independence principles that apply to individuals involved in a group audit, including those within or engaged by firms that audit components within a group.

The new standards specify the need for and content of appropriate communication on independence matters between the group auditor firm and component auditor firms participating in the group audit. This is crucial to ensure transparency and proper communication with those charged with governance of the group.

The revised definition of an engagement team now includes all partners and staff in the firm who perform audit work on the engagement, as well as any other individuals who perform audit procedures from within or outside the firm. This change aims to address the different and evolving engagement team structures in group audits.

Here are the key changes to the independence requirements for group audits:

  • Strengthen and clarify the independence principles that apply to individuals involved in a group audit
  • Specify the need for and content of appropriate communication on independence matters
  • Revised definition of an engagement team to include all partners and staff who perform audit work
  • More explicitly set out the process to address a breach of an independence provision

The new standards will be effective for audits of financial statements and group financial statements for periods beginning on or after December 15, 2023, with early adoption permitted.

Requirements

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Requirements are essential to maintaining independence in audits and other assurance services. The International Code of Ethics for Professional Accountants (including International Independence Standards) outlines specific requirements for professional accountants to comply with the fundamental principles of independence.

The Code clearly distinguishes between requirements and application material. Requirements are general and specific obligations imposed on the professional accountant to comply with the fundamental principles. They generally use the term "shall".

For example, R510.4 indicates that certain individuals, including all partners who practice in the office in which the audit partner conducts the engagement, may not hold a direct financial interest in an audit client.

Application material, on the other hand, provides factors, explanations, suggested actions, illustrations, or other guidance that helps the professional accountant comply with the Code. This approach is familiar to many professional accountants, as it originated in the ISAs and was applied in the AICPA Auditing Standards Board's clarity project.

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Here are some key requirements for maintaining independence in audits and other assurance services:

  • R510.4: Certain individuals, including all partners who practice in the office in which the audit partner conducts the engagement, may not hold a direct financial interest in an audit client.
  • R510.4 A1: Professional accountants should use judgment in determining the "practice office" whose other partners will be subject to the requirement in R510.4.

These requirements are essential to maintaining the integrity of the audit process and ensuring that professional accountants remain independent and objective in their work.

Experts

Experts play a crucial role in assessing the competence and objectivity of external experts.

The regulations on experts set out a professional framework to assist professionals in assessing whether an external expert has the necessary competence, skills and objectivity to ensure that their work can be used for the intended purposes.

The final regulatory text is expected to be published in mid-January 2025 after the Public Interest Oversight Board (PIOB) has conducted the necessary review of the regulations.

The IESBA intends to publish a series of accompanying materials, which will provide further guidance and application materials for professionals to follow.

Group Audits

Group audits are a crucial aspect of financial reporting, and the IESBA has recently made significant changes to strengthen and clarify independence requirements for group audits. The revised definition of an engagement team now includes all partners and staff in the firm who perform audit work, as well as individuals from network firms or other service providers.

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In a group audit, it's essential to consider the independence of individuals involved, including those within or engaged by firms that audit components within the group. The IESBA revisions specify the need for communication on independence matters between the group auditor firm and component auditor firms.

The IESBA has also clarified the process to address a breach of an independence provision at a component auditor firm, emphasizing the importance of transparency and communication with those charged with governance of the group. This is a critical step in ensuring the integrity of the audit process.

Here's a breakdown of the key changes to the engagement team definition:

  • Includes all partners and staff in the firm who perform audit work
  • Includes individuals from network firms or other service providers

These changes will be effective for audits of financial statements and group financial statements for periods beginning on or after December 15, 2023, with early adoption permitted.

Better Code

The IESBA Code has undergone a significant improvement, resulting in a better code that emphasizes three key messages to professional accountants. These messages are multifaceted and cover the code's structure, applicability, conceptual underpinnings, formatting, language, and clarity.

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The three key messages are: comply with the fundamental principles, be independent when required, and apply the conceptual framework to identify, evaluate, and address threats to compliance with the fundamental principles. This approach ensures that professional accountants are equipped to protect investors and other users of financial information.

The IESBA's top-to-bottom evaluation of the code has led to an enhanced structure, tighter language, and more precise guidance that is now clearer. This improvement positions professional accountants and those who oversee and regulate their work to better protect the public interest and the accounting profession.

The CIMA Code of Ethics, which is based on the IESBA Code, also emphasizes the importance of a conceptual framework. This framework requires professional accountants to identify, evaluate, and address threats to compliance with the fundamental principles.

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Frequently Asked Questions

Who does the IESBA code apply to?

The IESBA Code applies to all professional accountants, regardless of their work setting. This includes accountants in public practice, industry, commerce, the public sector, and education.

Wilbur Huels

Senior Writer

Here is a 100-word author bio for Wilbur Huels: Wilbur Huels is a seasoned writer with a keen interest in finance and investing. With a strong background in research and analysis, he brings a unique perspective to his writing, making complex topics accessible to a wide range of readers. His articles have been featured in various publications, covering topics such as investment funds and their role in shaping the global financial landscape.

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