TAKEAWAYS
ISCA’s Code of Professional Conduct and Ethics (EP 100 or the Code) was last revised on 30 August 2023 and became effective on 15 December 2023. EP 100 (revised on 30 August 2023) contains a new Section 405 which holistically addresses independence considerations in a group audit. The changes aim to align with SSA 600 (Revised) Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors).
Section 405 expands independence considerations for the group auditor and its network firms, and introduces new considerations for a component auditor outside the group auditor’s network.
The Code has always required the auditor to be independent of the audit client. Paragraph R400.20 of the Code requires the auditor to be independent of a listed entity audit client and all related entities1. Where an audit client is not a listed entity, the auditor is required to be independent of that entity and those related entities over which the client has direct or indirect control (that is, a controlled entity). When the audit team knows, or has reason to believe, that a relationship or circumstance involving any other related entity of the client is relevant to the evaluation of the firm’s independence from the client, the audit team shall include that related entity when identifying, evaluating and addressing threats to independence.
Prior to the introduction of Section 405, applying the principles of the Code in practice, the group auditor would have been independent of the group entity and relevant related entities as set out above. Group audit team members and firms in the group auditor’s network would have to be independent of a related entity, such as a controlled entity, even if no audit work is performed in relation to that entity for purposes of the group audit.
With the introduction of Section 405, the group auditor has to be independent of the group audit client2, which includes “any other components at which audit work is performed”.
Control and materiality of interest, where there is significant influence but no control, no longer serve to limit the boundaries when identifying threats to independence.
The determination of a component at which to perform audit work for purposes of the group audit is a matter of the auditor’s professional judgement. The group auditor considers events or conditions that may give rise to risks of material misstatement at the assertion level of the group financial statements, such as:
If audit work is performed on an underlying account balance at an immaterial equity accounted investee or joint venture for purposes of the group audit, threats to independence must be identified and evaluated. This is regardless of whether the audit work is performed by the group auditor or a component auditor. Such an entity would be a “component audit client”.
In applying a risk-based approach and in evaluating whether sufficient appropriate audit evidence is expected to be obtained, the list of component audit clients may change in the course of the group audit and from year to year.
With the introduction of Section 405, the component auditor, whether within or outside the group auditor’s network, has to be independent of the group entity.
The geographical location, employer or network of a component auditor no longer serves to limit the boundaries when defining a group audit team.
Group audit team members and firms in the group auditor’s network would have to be independent of entities beyond the related entity definition, namely other entities where one or more account balances have been scoped in for purposes of the group audit.
Group audit team members outside the group auditor’s network have to be independent of the group entity, the relevant component audit client and all controlled entities of the group entity that have (direct or indirect) control over the component audit client. The team member would report a relationship or circumstance involving any other component or related entity of the group entity that the individual knows, or has reason to believe, might create a threat to the individual’s independence in the context of the group audit.
The component auditor outside the group auditor’s network has to be independent of the component audit client. The component auditor also has to be independent of the group entity as it relates to financial interests and loans and guarantees. The component auditor would report a relationship or circumstance involving the group entity, any other component or related entity of the group entity that the component auditor knows, or has reason to believe, might create a threat to the component auditor’s independence in the context of the group audit.
This acknowledges that the direct influence that the component auditor and group audit team member outside the group auditor’s network has on the group audit is limited. Nevertheless, there remains a requirement to identify, evaluate and address threats to their independence that they know, or have reason to believe, exist.
Auditors ought to carefully consider their independence and cautiously navigate their way to ensure that both audit quality and independence are upheld. They also ought to discuss the independence considerations with those charged with governance.
Using a hypothetical group, Part 2 of the article will illustrate the implications for a group auditor and its network firms, as well as component auditors outside the group auditor’s network.
Caroline Lee is Partner, KPMG Singapore. The ISCA Ethics Committee develops the ISCA Code of Professional Conduct and Ethics by adopting the International Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (IESBA), with local adaptations as are necessary to serve the public interest in Singapore and to conform with Singapore’s regulatory environment and statutory requirements.
1 The Glossary of EP 100 (revised on 30 August 2023) defines related entity.
2 The Glossary of EP 100 (revised on 30 August 2023) defines group audit client.
3 Paragraph A51 of SSA 600 (Revised).
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