Concept of independenceThe ethical standard of independence and the Office’s Code of Values, Ethics and Professional Conduct require that Office employees who meet the definition of an engagement team member be and remain free of any influence, interest, or relationship regarding the entity’s affairs. Any such influence, interest, or relationship, impairs professional judgment or objectivity, or which, in the view of a reasonable observer, would impair professional judgment or objectivity. The Office’s Code of Values, Ethics and Professional Conduct has similar requirements applicable to all employees. Show
Objectivity is to not allow bias, conflict of interest, or the undue influence of others to override professional or business judgments. Independence may be defined as the ability to act with integrity and objectivity and be seen to act this way. The Office’s independence policies and procedures require that all threats to independence be identified, so that their significance can be assessed and safeguards can be put in place to reduce or eliminate all significant threats to an acceptable level. Where safeguards are not available to reduce threats to an acceptable level, the employee or Office should eliminate the activity, interest, or relationship creating the threats, or the employee or Office should refuse to accept or continue the engagement. ApplicabilityAny individual who meets the definition of engagement team member is required to comply with the Office’s audit policies and procedures related to independence, the policies included in the OAG’s Code of Values, Ethics and Professional Conduct, and the requirements of any professional association to which the individual is a member. For purposes of our Office’s Policies and Procedures on Independence, an engagement team member is
The engagement leader is required to form a conclusion on team members’ compliance with independence requirements and should apply professional judgment in assessing who meets the definition of an engagement team member and the extent to which individuals who are consulted or engaged or who provide advice on the engagement have a direct influence on the outcome of the assurance engagement. In addition, the engagement leader should consider whether known relationships between Office employees who are not on the engagement team and the entity may also create threats to independence. The Office considers non-compliance with these standards to be a very serious matter. Employees who breach these standards are subject to appropriate disciplinary action, up to and including termination of employment. For members of a provincial professional accounting body, the engagement leader could refer the issue to the institute/order or association. SpecialistsInternal specialists involved in performing the assurance engagement or who provide formal advice in their area of specialization meet the definition of an engagement team member. External specialists do not always meet the definition of an engagement team member. External specialists meet the definition of an engagement team member if they possess skills, knowledge, and experience in accounting or auditing, and their work in that field is used to help the auditor obtain sufficient appropriate evidence. External specialists who possess skills, knowledge, and experience in a field other than accounting or auditing and whose work in that field is used to help the auditor obtain sufficient appropriate evidence, do not meet the definition of an engagement team member. An internal specialist or external specialist (in accounting or auditing) who will be involved in performing the assurance engagement (i.e. performing procedures that will give rise to audit evidence used by the engagement leader to form a conclusion) would meet the engagement team member definition. An internal specialist or external specialist (in accounting or auditing) providing formal advice regarding technical subject matter or industry-specific subject matter issues, transactions, or events for the assurance team would meet the engagement team member definition. Independence periodThe Office and those meeting the definition of engagement team members should be independent of the assurance entity during both the period covered by the assurance engagement report and the period of the current assurance engagement. This cumulative period starts at the beginning of the period covered by the assurance engagement report and ends when the assurance report is issued. For further clarification, refer to Figure 1.1 below. Figure 1.1 Independence period for each OAG product line Processes for complying with independenceAlthough the Office has a significant degree of independence from its audited entities, it is important nevertheless to take appropriate actions to ensure that engagement team members are (and are perceived to be) independent and objective. An assurance engagement team member must be and remain independent and free of any influence, interest, or relationship, that, regarding the engagement, impairs the professional judgment or objectivity of the engagement team member, or that, in the view of a reasonable observer, would impair the professional judgment or objectivity of the engagement team member. Engagement personnel promptly notify the engagement leader of circumstances and relationships that create threats to independence. If matters come to the engagement leader’s attention through the system of quality control or otherwise, that indicate that a member of the engagement team has a threat to independence requirements, the engagement leader, in consultation with Internal Specialist, Values and Ethics, shall
The engagement leader must consider threats to independence throughout an assurance engagement. All individuals who meet the definition of an engagement team member, including internal and where appropriate, external specialists, must perform the following for each assurance engagement they are involved in:
The engagement leader ensures that evidence of compliance with independence requirements is documented for all engagement team members. If rotation is desirable but not practical for an individual engagement team member, the senior engagement personnel should consider how to address any associated risk. References to the Office’s policies and procedures regarding rotation should be considered. See OAG Audit 1071 Job Rotation. The engagement leader, throughout the engagement, remains alert through observation and making inquiries as necessary, for evidence of non-compliance with independence by members of the engagement team. If the engagement leader has an exception to disclose, the engagement leader should identify safeguards in cooperation with the Internal Specialist, Values and Ethics and sign the exception report. If an assistant auditor general has an exception to disclose, he or she should consult the engagement leader and Internal Specialist, Values and Ethics. If a quality reviewer identifies a threat to his or her independence or a threat to his or her ability to perform an objective review, he or she must immediately inform the engagement leader and the Assistant Auditor General, Audit Services. See OAG Audit 3063 Quality reviewer responsibilities. Office independenceThe Office shall be and remain independent and free of any influence, interest, or relationships, that, regarding its audit entities, impairs the Office’s professionalism or objectivity, or that, in the view of a reasonable observer, would impair the Office’s professionalism or objectivity. When new circumstances arise or information is obtained during the engagement that could result in an impairment of independence, team members must immediately report them to the engagement leader, who should make a decision as to whether work should stop immediately. When joint audits are undertaken, the engagement leader should obtain assurance from the joint auditor that he or she has performed an independence assessment. Similarly, the Office should be in a position to provide the same assurance to the joint auditor. Annual conflict of interest confirmationOffice employees sign an annual Conflict of Interest—Confidential Report form, as required by and according to the OAG Code of Values, Ethics and Professional Conduct. This form includes an additional independence declaration for all staff working on audit engagements. Staff members who, during the course of the year, meet the definition of engagement team member on at least one assurance engagement are required to declare that they have read the Office policies on independence and that they comply with these policies and procedures, as required by relevant ethical requirements. The Assistant Auditor General of Corporate Services manages the annual conflict of interest process and reviews and promptly communicates identified threats and breaches to independence to the employee’s assistant auditor general, who communicates the identified threats or breaches to any impacted engagement leaders. A conflict of interest is an incompatibility between an employee’s private interests and his or her duties as a public servant. A conflict of interest may arise from an interest, restriction, or relationship that, regarding an assurance engagement, would be seen by a reasonable observer to influence an employee’s judgment or objectivity in the conduct of the assurance engagement. The Office has established conflict of interest measures that are included in the Code of Values, Ethics and Professional Conduct. These conflict of interest measures both protect Office employees from conflict of interest allegations and help them avoid situations of risk. Office employees have the following overall responsibilities:
Office employees also have the following specific duties:
An employee who does not comply with these requirements is subject to appropriate disciplinary action, up to and including termination of employment. The annual Conflict of Interest—Confidential Report form is designed to remind Office employees of the importance of the Office’s Code of Values, Ethics and Professional Conduct and the relevant ethical requirements, including independence. The form reinforces that Office employees and members of their immediate families should have no financial or other interests that could conflict with the employees’ responsibilities or call into question their judgment or objectivity. Employees are obligated to submit a statement about their assets, liabilities, or other interests as set out in the Conflict of Interest—Confidential Report. This obligation arises
Office employees must disclose all of their reportable assets, liabilities, or other interests (without indicating their value) that could jeopardize or call into question their judgment or objectivity. For purposes of the disclosure, other interests include personal relationships with staff or clients; gifts, hospitality (not allowable under the Code), or other benefits; or participation in outside employment or activities. All employees complete the Conflict of Interest—Confidential Report form and must declare that
If, during the course of the year, an employee’s situation or circumstances change with respect to the declarations previously made, he or she is required to complete a new Conflict of Interest—Confidential Report form and provide it immediately to the Assistant Auditor General, Corporate Services. Assessing compliance with independence requirementsThe Office expects engagement teams to apply a framework when assessing threats to independence. This framework requires the Office and its employees to
Where safeguards are not available to reduce the threat or threats to an acceptable level, the engagement leader consults the Internal Specialist, Values and Ethics concerning eliminating the activity, interest, or relationship creating the threat or threats, or refusing to accept or continue the engagement, if possible, under applicable laws and regulations. Identify threats to compliance with independence requirements. A threat to independence, for the purposes of this policy, is a situation, relationship, or circumstance that may give rise to a breach of an employee’s professional judgment or objectivity. Threats to independence must be considered by all engagement team members throughout the assurance engagement. Threats to independence can be categorized into threats arising from self-interest, self-review, advocacy, familiarity, and intimidation. OAG Audit 1031 Ethical requirements relating to an assurance engagement discusses these categories of threats. When identifying threats to independence, care must be taken as threats are not always direct or overt and, in many cases, they can be quite subtle. Assess the significance of identified threats. OAG Audit 1031 Ethical requirements relating to an assurance engagement discusses the factors to consider when assessing the significance of identified threats. Apply safeguards, when necessary, to eliminate or reduce the threat to an acceptable level. Senior engagement personnel (engagement leader and assistant auditor general), evaluate the significance of identified threats. Safeguards are necessary when identified threats are at a level where a reasonable observer would likely conclude that compliance with the relevant ethical requirements, including independence, may be compromised. OAG Audit 1031 Ethical requirements relating to an assurance engagement provides examples of safeguards that may eliminate or reduce identified threats to an acceptable level. If a threat is other than insignificant, senior engagement personnel identify and apply available safeguards to eliminate or reduce the threat to an acceptable level. The Internal Specialist, Values and Ethics, objectively reviews the threat and safeguards. Document the threat and how safeguards eliminate or reduce the threat to an acceptable level. The ongoing evaluation and disposition of threats to independence should be supported by evidence obtained both before accepting an engagement and while it is being performed. For each threat identified as other than insignificant, an engagement exception report is completed and the engagement leader ensures that all relevant decisions taken are supported and documented. Final exception reports are provided to Records Management for filing purposes. Exception reports are not placed in the audit file due to the personal and confidential nature of the content. Breach to independenceThere may be occasions when an employee or the Office is inadvertently in breach of the relevant ethical requirements, including independence. If such an inadvertent breach occurs, it will generally not impair independence, given that the Office has appropriate quality control policies and procedures in place to promote independence and, once discovered, the breach is corrected promptly and any necessary safeguards are applied. An inadvertent breach includes a situation where the employee did not know of the circumstances that created the breach. Engagement personnel promptly notify the engagement leader of a breach to independence requirements. If matters come to the engagement leader’s attention, through the system of quality control or otherwise, that indicate that a member of the engagement team is in breach of the independence requirements, the engagement leader, in consultation with the employee’s Principal (where different), and the Internal Specialist, Values and Ethics,
The engagement leader documents the breach to independence in an exception report and promptly communicates a proposed action with the Internal Specialist, Values and Ethics. The engagement leader and the employee’s Principal (where different) receive confirmation from the Internal Specialist, Values and Ethics, on the appropriateness of the proposed actions. Records Management receives a copy of the final exception report for filing purposes. Differences of opinionIf differences of opinion arise on the resolution of independence matters, team members should follow the procedures established in OAG Audit 3082 Resolution of differences of opinion. Office employees are entitled to file a complaint or allegation if they believe the Office or its employees have failed to comply with professional standards, including relevant ethical requirements, regulatory and/or legal requirements, including the system of quality control, according to OAG Audit 1091 Complaints and allegations. Referrals to the Internal Specialist, Values and EthicsIndependence matters that must be referred to the Internal Specialist, Values and Ethics, include
What are safeguards to independence?' A safeguard to independence is similar to a control in that it mitigates the risk of something bad happening. What is the bad thing that could happen? The auditor's work is rendered useless because the user of the audit questions the auditor's objectivity.
What are five types of threats to independence?18 of the framework identify the following threats to independence: adverse interest, advocacy, familiarity, management participation, self-interest, self-review, and undue influence.
Which is an example of safeguards within the client's systems and procedures?Examples of safeguards within the client's systems and procedures include: The client requires persons other than management to ratify or approve the appointment of a firm to perform an engagement. The client has competent employees with experience and seniority to make managerial decisions.
What is the greatest threat to auditor independence?Five Threats to Auditor Independence. Self-Interest Threat. A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or depends on the client for a major fee that is outstanding. ... . Self-Review Threat. ... . Advocacy Threat. ... . Familiarity Threat. ... . Intimidation Threat.. |