Professional Skepticism Richard Fleck, IESBA WG Chair IESBA Meeting New York March 13-15, 2017

Objectives To consider and approve a project proposal To consider, with a view to approving for exposure, proposed text to describe linkage between FPs and PS To consider, with a view to approving for exposure, proposed text to clarify req’t for PAs to exercise PJ when applying the CF

Reference to PS in SSBs’ Standards PS is defined in IAASB’s standards Applies to PAs who perform audits and other assurance engagements only Code only refers to PS as part of describing independence Independence applies to audits and other assurance engagements only IAESB standards refer to PS definition in the IAASB’s standards PS applies to all PAs, including PAIBs who prepare financial statements

Recap of Feedback to IESBA about PS Initial WG proposals for PS discussed at Q4 2016 meetings of PSWG, IESBA CAG, IAASB and IESBA Two principle concerns: Concern that extending PS to all PAs would dilute the concept of PS in IAASB’s standards Concern that to extend PS to all PAs might have unintended consequences

IESBA WG Proposals Input from December 2016 meetings used to redraft PS project proposal and Refine proposed description of linkage b/w FPs and PS Propose clarifications to existing req’t to exercise PJ when applying the CF (req’t to apply critical mindset withdrawn)

Key Takeaways from March 2017 IESBA CAG Full support for PS Project Proposal Proposed text to describe linkage b/w FPs and PS (120.13) Proposed clarification to existing req’t and new AM relating to exercising PJ when applying the CF (120.5) Importance of SSBs’ prioritization of LT initiative to address issues relating to applying “PS” (however described) by all PAs emphasized PS necessary for all PAs, but level should be higher for auditors Note to Richard – Indicate that CAG also provided some drafting suggestions that you will cover later in your presentation

General Reactions from SMPC Suggested need for longer term project involving all three SSBs to re-visit notion of PS Support for decision to focus on PS in context of audit and assurance only and clarifying req’t to exercise PJ Welcomed withdrawal of req’t to “apply critical mindset” for all PAs Concerns about timing Proposed approach for coordination with IAASB and IAESB Note to Richard – Indicate that SMPC also provided some drafting suggestions that you will cover later in your presentation

Linkage between FPs and PS Broadening description of PS or changing how PS is used in Code (e.g., require for PS for all PAs) requires consideration of complex issues in a coordinated manner by SSBs In short term, public interest is best served if IESBA focuses its attention on emphasizing PS for audits, reviews and other assurance engagements Proposed text provides examples to illustrate interaction b/w FPs and PS

Advance Feedback – PSWG, CAG and SMPC Editorial refinements suggested to 120.13 A1 Comments on 120.13 A2 Questions about whether use of word “requires” introduces hidden req’ts Examples in bulleted list should be more audit and assurance specific Suggestions to clarify description of linkage with respect to integrity, confidentiality and professional behavior Some material in IAASB’s standards is repeated Some further alignment needed to the Code’s new drafting conventions

Matters for IESBA Consideration Do IESBA members support: PS Project proposal in Agenda Item 2-B? WG’s proposed text to describe linkage b/w FPs and PS in Agenda Item 2-C (Updated)?

Clarification – Exercise Professional Judgment Enhanced CF through Safeguards project Reflections on feedback received to-date suggest need for clarification to enhanced CF to help PAs better comply with FPs Proposed clarification will make it explicit that PAs should obtain an understanding of facts and circumstances when exercising PJ

Advance Feedback – PSWG CAG and SMPC Concerns that proposed changes to R120.5(a) might imply additional work effort and more documentation Confusion about what is meant by “clear understanding” Comments on 120.5 A1 Add words “known to the accountant” to align with R120.5 (a) Drop the words “in all cases” because relevant facts may not always be available Clarify that examples of matters in list may not be the only ones Note to Richard – also mention that SMPC questioned the usefulness of proposed clarification to CF and riased concerns about additional work effort and need for more documentation

Matters for IESBA Consideration Do IESBA members support the proposed text to clarify req’t to exercise PJ in Agenda Item 2-D (Updated) ?

Way Forward and Interaction with Others WG advised PSWG of its plan to put forward proposals to IESBA at its March 2017 meeting and has received preliminary comments Subject to IESBA support for and finalization of proposals Immediately after meeting: Input of a “fatal flaw nature” to be requested from PSWG, IAASB and IAESB Mid-April 2017: IESBA to consider significant issues via teleconference (if needed) Late-April 2017: Planned release of EDs

Looking Ahead to Longer Term PS Initiatives (1) A longer term project will involve considering Whether and, if so, how to convey to all PAs need to apply “PS” Whether and, if so, how proportionality might be introduced to address application of “PS” in different circumstances/engagements.

Looking Ahead to Longer Term PS Initiatives (2) A longer term project might also involve considering Whether material to address bias and other impediments to application of “PS” should be developed Merits of a non-authoritative publication to explain the expectations of a PA more broadly

Update on PSWG Activities (1) PSWG is planning to issue joint stakeholder communication To give prominence to SSBs’ work on PS, and highlight role of others Publication will Highlight PSWG’s identification of significant issues to-date based on feedback from all three SSBs’ stakeholders Provide an update on current and planned SSBs’ activities both individually and jointly Challenges identified to-date by PSWG Call for action by others in financial reporting supply chain Richard to indicate that draft outline of this publication was to be presented to the IAASB and IESBA at their March 2017 meetings and to the IAESB at its April 2017 meeting but PSWG has agreed to defer and present near-final draft document at June 2017 meetings of all SSBs

Update on PSWG Activities (2) PSWG agreed on need to explore implications and potential unintended consequences of changes to concept of PS in IAASB’s standards Varied views among PSWG members about Scope of PSWG remit and how it compares to traditional WGs How to prioritize activities in light of different SSBs’ mandates and already fully committed work programs Timing and extent of involvement needed by others SSBs in progressing individual SSB initiatives

Matters for IESBA Consideration IESBA members are asked for views about the WG’s current thinking? What other actions should be taken to respond to stakeholder concerns about “PS” in the context of the Code?