A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 16, Issue 4 October 2014

STANDARDS UPDATE

AMENDMENTS TO THE IESBA CODE
Introduction
The 2013 IESBA Code of Ethics for Professional Accountants (“the Code”) includes three new pronouncements:

  • Addressing a breach of a requirement of the Code,
  • Conflicts of interest, and
  • The definition of “engagement team”.

This is a brief reminder of the amendments and effective dates introduced in the 2013 Code.

Breach of a requirement of the Code 
Previously the Code contained several provisions that addressed an inadvertent violation of a provision. Such a violation will be deemed not to compromise compliance with the fundamental principles, or independence, provided certain conditions are met. The IESBA decided to re-consider these provisions as they could be misread as implying that all inadvertent violations can be corrected by applying necessary safeguards.

The IESBA implemented the use of the term “breach” as opposed to “inadvertent” to improve consistency within the Code and now includes new requirements where a breach of an independence requirement has occurred. The revisions to the Code establish a robust framework for addressing a breach of an independence requirement. The Code now requires a firm to undertake various actions, which may include terminating the relationship causing the breach, evaluating the significance of the breach, communicating the breach, and documentation requirements.

The changes were effective on 1 April 2014.

Conflict of interest 
The Code has established more specific requirements and provided more comprehensive guidance to support professional accountants. Some of the amendments include:

  • A more clear description of the meaning of conflict of interest
  • Examples of situations in which conflicts of interest may arise
  • The process to identify actual or potential conflict of interest and guidance regarding the evaluation thereof
  • Many more examples of safeguards to eliminate or reduce threats to an acceptable level
  • Guidance regarding the disclosure and obtaining explicit consent taking into account breach of confidentiality.
  • Further guidance regarding ethical behavior – when pressured to prepare or report information in a misleading way.
  • Guidance relating to financial interests now includes interests arising from compensation or incentive arrangements.
  • Furthermore there has been a reclassification of the professional activity and professional services definition.

The changes were effective on 1 July 2014.

Definition of “Engagement Team” 
The existing definition includes all partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform assurance procedures on the engagement. This excludes external experts engaged by the firm or by a network firm.

The amendment now excludes individuals within the client’s internal audit function who provide direct assistance on an audit engagement when the external auditor complies with the requirements of ISA 610 (Revised 2013), Using the Work of Internal Auditors.

The revised definition of engagement team is effective for audits of financial statements for periods ending on or after 15 December 2014. Early adoption is permitted.

REVISIONS TO ISA 610: USING THE WORK OF INTERNAL AUDITORS

Introduction
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment and ISA 610 Using the Work of Internal Auditors have undergone a number of related revisions summarised in this paper.

The IAASB’s objective in revising ISA 315 and ISA 610 was to enhance the performance of external auditors by:
(a) enabling them to better consider and leverage, as appropriate, the knowledge and findings of an entity’s internal audit function in making risk assessments in the external audit, and
(b) strengthening the framework for the evaluation and, where appropriate, use of the work of internal auditors in obtaining audit evidence.

It is the IAASB’s belief that the revision will enhance the quality of audits internationally.

Identifying and assessing risks
In March 2012, ISA 315 (Revised) was approved and released. One of the major revisions of ISA 315 relates to the inquiries made by external auditors of the internal audit function since internal auditors have better knowledge and understanding of the organisation and its internal control.

External auditors are now required to make inquiries of the internal audit function to identify and assess risks of material misstatement.

Using the work of internal auditors
The IAASB issued ISA 610 (Revised 2013) on 19 March 2013, which addresses new requirements and guidance relating to using the work of the internal audit function in obtaining audit evidence as well as using internal auditors to provide direct assistance under the direction, supervision and review of the external auditor. This edition includes the new requirements and follows an earlier revision to the standard in March 2012.

When the 2012 revision was made, the IAASB decided to only include provisions addressing the external auditor’s use of work of the internal audit function, therefore allowing the IESBA to implement the amendments to the Code regarding the term “engagement team”. This term now excludes the internal audit function providing direct assistance on an audit engagement.

ISA 610 is effective for audits of financial statements for periods ending on or after 15 December 2013, except for material pertaining to the use of internal auditors to provide direct assistance, which is effective for audits of financial statements for periods ending on or after 15 December 2014.

IMPORTANT DISCLAIMER:
This publication should not be regarded as offering a complete explanation of the accounting matters that are contained herein.

This publication has been distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication.

The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication.

Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.