Independence II

1. Independence II Dave Winetroub Task Force Chair

2. Overview • Comment period ended October 15, 2007 • IESBA discussed in January and plans to approve April • 44 responses received • Internal audit • Fees relative size • Contingent fees

3. Internal Audit – ED Position • Self-review threat may be created when a firm provides internal audit services to an audit client • Should not perform management functions

4. Internal Audit – ED Position • Should only provide assistance to an audit client’s internal audit function if: • Client acknowledges responsibility for establishing, maintaining and monitoring internal control • Client designates competent employee to be responsible for activities • Client, or those charged with governance, approve scope, risk and frequency of work • Client evaluates adequacy of procedures and findings • Findings and recommendations are reported appropriately to those charged with governance

5. Internal Audit – ED Responses • Majority of respondents supported approach • Eight respondents not supportive • No internal audit to any audit client (2 responses) • No internal audit to a PIE audit client (3 responses) • No internal audit if going to place significant reliance in external audit (1 response) • Safeguards not sufficiently robust (1 response) • Proposals not sufficiently restrictive (1 response)

6. Internal Audit – ED Responses • More clarity needed on definition/description of internal audit services

7. Internal Audit – Proposed Changes • New paragraph describing internal audit activities – consistent with ISA 610 Auditor’s Consideration of the Internal Audit Function • More guidance on types of internal audit services that involve assuming a management responsibility

8. Internal Audit – Proposed Changes Non Public Interest Entities • If firm provides internal audit services, and results of the services will be used in the external audit, self-review threat created because of possibility results will be used without appropriate evaluation • Significance of threat depends on: • Materiality of related financial statement amounts • Risk of material misstatement of assertions related to those financial statement amounts • Degree of reliance

9. Internal Audit – IESBA Direction Public Interest Entities • Restrict provision of internal audit services for public interest audit clients

10. Internal Audit – Task Force Proposal Public Interest Entities • Firm should not provide internal audit services that relate to internal accounting controls, financial systems or financial statements (does not preclude “operational” auditing) • Firm not precluded from providing a non-recurring internal audit service to evaluate a particular matter (e.g. assist in a fraud investigation), provided services otherwise permitted under Section 290 and conditions in 290.189 are met

11. Fees Relative Size – ED Proposal • Non PIEs – threats and safeguards • PIEs – If total fees >15% for two years disclose to those charged with governance and either: • Post issuance review by accountant who is not a member of the firm; or • Pre-issuance review by accountant who is not a member of the firm • PIEs – In subsequent years in determining which of these safeguards should be applied consideration to be given to relative size of fee. At a minimum a post issuance review once every three years

12. Fees Relative Size – ED Responses • Mixed as to whether a bright-line test is appropriate • In Favor (eleven) • Reasonable threshold • Necessary for clarity and consistent application • Against (fourteen) • Not consistent with a conceptual framework approach • Might have a disproportionate impact on smaller firms and on firm concentration

13. Fees Relative Size – ED Responses • Disclosure to those charged with governance – general support • Pre and post issuance review – general support though some expressed the view that only a pre-issuance review was strong enough - some stated review could be performed by a regulatory body • Insufficient guidance on size relative to partner or office

14. Fees Relative Size – Proposed Changes • Require the application of safeguards to the second year’s audit opinion • Indicate review could be performed by a professional regulatory body • Require firm to discuss with those charged with governance the safeguard that will be applied • If fees significantly exceed 15% firm should determine whether pre-issuance review is the necessary safeguard (not-post issuance) • Expand guidance on size relative to partner or office

15. Contingent fees – ED Position • Should not perform an assurance service for a contingent fee • Should not perform a non-assurance service for an audit client if: • Amount of fee is material to the firm; or • Fee is dependent upon the outcome of a future or contemporary audit judgment related to a material amount in the financial statements

16. Contingent fees – ED Responses • Generally supportive • Four respondents of view should not charge any contingent fee to an audit client • Two respondents of view there should be specific guidance on tax • Two respondents of view guidance should include prohibition on contingent fee arrangements between a firm and a third party • One respondent of view should address contingent fees charged by a network firm • Several noted Section 291 not aligned to 290

17. Contingent fees – Proposed Changes • Clarify contingent fee cannot be charged directly or indirectly • Expand guidance to include a prohibitions on: • Network firms that participate in a significant part of the audit from charging a material contingent fee; and • No contingent fee for non-assurance service where the financial statement amounts are material and will be subject of significant future or contemporary audit judgment • Align guidance in Section 291 with 290 on providing an assurance service for a contingent fee

18. Discussion