1. Alignment of Part 4B with ISAE 3000
Liesbet Haustermans, IESBA Member
Working Group Chair
IESBA Meeting
Athens, Greece
June, 2018

2. Background
2013 – Approval ISAE 3000 (Revised), effective for assurance reports dated on or after 15 December 2015
Need to align Part 4B in the Code with ISAE (Revised) was identified during the restructuring of the Code but was outside the remit of that project
2017 December - Establishment of a Working Group (WG)
Discussion with IAASB staff and members

3. Objectives of the Initiative
To review Part 4B of the restructured Code for any revisions needed to align with the revised ISAE
No intention to challenge the technical validity of the concepts of ISAE 3000 or to revise fundamental decisions previously taken by the IESBA

4. Objectives of the Session
To provide an overview of the preliminary considerations of the WG to the IESBA
To obtain preliminary input from IESBA to assist the WG in developing the proposal for the Project

5. Revised ISAE 3000 Main objectives of IAASB revision:
Incorporate enhanced requirements and guidance
Adopt IAASB’s clarity drafting conventions
Make conforming amendments to the Assurance Framework
Changes that are most relevant for IESBA:
Clarification of the distinction between the types of assurance engagements
Clarification of the parties to the assurance engagement and their roles and responsibilities

6. Types of Assurance Engagements – Attestation engagement
Key changes
Types of Assurance Engagements – Attestation engagement
Change in terminology:
“Assertion-based Engagement” “Attestation Engagement”
An assurance engagement in which a party other than the practitioner measures or evaluates the underlying subject matter against the criteria
A party other than the practitioner also often presents the resulting subject matter information in a report or statement
The practitioner’s conclusion addresses whether the subject matter information is free from material misstatement

7. Type of Assurance Engagements – Direct Engagement
Key changes
Type of Assurance Engagements – Direct Engagement
Change in terminology:
“Direct reporting engagement” “Direct Engagement”
An assurance engagement in which the practitioner measures or evaluates the underlying subject matter against the applicable criteria
The practitioner presents the resulting subject matter information as part of, or accompanying, the assurance report
The practitioner’s conclusion addresses the reported outcome of the measurement or evaluation of the underlying subject matter against the criteria

8. Type of Assurance Engagements – Direct Engagement
Key changes
Type of Assurance Engagements – Direct Engagement
“Direct reporting engagement” “Direct Engagement”
Additionally, certain engagements previously included within direct reporting engagements have now been re-designated as attestation engagements.

9. Parties to an Assurance Engagement
Key changes
Parties to an Assurance Engagement
Responsible party: The party responsible for the underlying subject matter Practitioner: The individual(s) conducting the engagement Intended users: The individual(s) or organization(s), or group(s) thereof that the practitioner expects will use the assurance report. In some cases there may be intended users other than those to whom the assurance report is addressed

10. Parties to an Assurance Engagement
Key changes
Parties to an Assurance Engagement
Measurer or evaluator: The party who measures or evaluates the underlying subject matter against the criteria. Engaging party: The party(ies) that engages the practitioner to perform the assurance engagement.

11. Underlying subject matter / Subject matter information
Key changes
Underlying subject matter / Subject matter information
Underlying subject matter: The phenomenon that is measured or evaluated by applying criteria Subject matter information: The outcome of the measurement or evaluation of the underlying subject matter against the criteria, i.e., the information that results from applying the criteria to the underlying subject matter

12. Example of an Attestation Engagement
Potential Impact of Key Changes
Example of an Attestation Engagement
Case: The practitioner provides a conclusion on a statement by management of effectiveness of internal controls
Parties:
measurer or evaluator – management of the organization
responsible party – in this case, the management is responsible for the internal control process itself and is also the measurer or evaluator

13. Example of an Attestation Engagement
Potential Impact of Key Changes
Example of an Attestation Engagement
underlying subject matter – internal control process
subject matter information – a statement by management
suitable criteria – appropriate benchmark (either established within or outside the organization)

14. Example of a Direct Engagement
Potential Impact of Key Changes
Example of a Direct Engagement
Case: The practitioner provides a conclusion on the effectiveness of internal controls
Parties:
measurer or evaluator – practitioner
responsible party – the management is responsible for the internal control process

15. Example of Direct Engagement
Potential Impact of Key Changes
Example of Direct Engagement
underlying subject matter – internal control process
subject matter information – practitioner’s description of internal controls, together with the assurance conclusion on effectiveness
suitable criteria – appropriate benchmark (either established within or outside the organization)

16. Independence Implication of Direct Engagements
Potential Impact of Key Changes
Independence Implication of Direct Engagements
Respondent to the ED:
Whether it is possible for the practitioner to be independent in direct engagements as the practitioner prepares the subject matter information and may be involved in selecting the criteria
IAASB’s answer in Basis for Conclusion:
Referring to discussion held with IESBA, the independence requirements for direct engagements are addressed in Section 291 of the IESBA Code

17. Independence Implication of Direct Engagements Self-review Threat
Potential Impact of Key Changes
Independence Implication of Direct Engagements Self-review Threat
WG’s preliminary observation:
No separate output that could be referred to as “subject matter information” independently of the assurance report
Process does not require practitioner to re-evaluate own work in deriving the output (i.e. the subject matter information)
Same rationale in 2005 when the approach to independence in Section 291 was developed

18. Potential Impact of Key Changes
Independence Implication of Direct Engagements Practitioner involvement in the Development of the Criteria
WG’s preliminary observation:
The practitioner might participate in the development of the criteria. This is likely to be in conjunction with the intended user(s) or the engaging party and possibly the responsible party. The practitioner also needs to be satisfied as to the appropriateness of the criteria and ought to obtain agreement on the criteria from the engaging party and/or the responsible party, as appropriate
Therefore, the involvement in the development of the criteria does not mean that the practitioner is not independent of the subject matter information

19. Potential Impact of Key Changes
Independence Implication of Direct Engagements Practitioner involvement in the Development of the Criteria
WG’s preliminary observation:
Part 4B of the Code requires the professional accountant to apply the conceptual framework to identify, evaluate and address threats to independence (R900.15)
WG needs more examples of different types of direct engagement in order to validate this view

20. Matters for Consideration
Do IESBA members have initial comments on the WG’s preliminary views on attestation and direct engagements for the purposes of the Project Proposal?

21. Parties to an Assurance Engagement
Potential Impact of Key Changes
Parties to an Assurance Engagement
Definition of Assurance Client in the Extant Code
The responsible party that is the person (or persons) who:
In a direct reporting engagement, is responsible for the subject matter; or
In an assertion-based engagement, is responsible for the subject matter information and might be responsible for the subject matter
Significant change for the purposes of aligning Part 4B of the Code to ISAE 3000 (Revised):
The term “responsible party” is no longer used also to refer to the measurer or evaluator

22. Parties to an Assurance Engagement
Potential Impact of Key Changes
Parties to an Assurance Engagement
WG’s preliminary consideration:
Whether the definition of Assurance Client should remain in the Code
the term “assurance client” is used extensively throughout Part 4B
corresponding term in Part 4B to the term “audit client” used in Part 4A
WG believes it is preferable to retain the term, but define it differently

23. Parties to an Assurance Engagement
Potential Impact of Key Changes
Parties to an Assurance Engagement
WG’s preliminary proposed definitions:
Assurance client: In an attestation engagement, the measurer or evaluator (who might also be the responsible party) or in a direct engagement, the responsible party
Measurer or evaluator: In an assurance engagement, the party(ies) who measures or evaluates the underlying subject matter against the criteria
Responsible party: In an assurance engagement, the party responsible for the underlying subject matter. In an attestation engagement, the responsible party is often also the measurer or evaluator

24. Matters for Consideration
Do IESBA members have initial comments on the WG’s preliminary views on addressing the independence requirements with respect to the parties to an assurance engagement for the purposes of the Project Proposal?

25. Independence Requirements for Attestation Engagements (Extant Code)
Independence Requirements for Attestation and Direct Engagements
Independence Requirements for Attestation Engagements (Extant Code)
(R ) When performing an assertion-based assurance engagement:
The assurance team members and the firm shall be independent of the assurance client (the party responsible for the subject matter information, and which might be responsible for the subject matter)
The firm shall apply the conceptual framework set out in Section 120 to relationships with individuals at the client in a position to exert significant influence over the subject matter of the engagement; and
The firm shall evaluate and address any threats that the firm has reason to believe are created by network firm interests and relationships.

26. Independence Requirements for Attestation Engagements (Extant Code)
Independence Requirements for Attestation and Direct Engagements
Independence Requirements for Attestation Engagements (Extant Code)
(R ) When performing an assertion-based assurance engagement where the responsible party is responsible for the subject matter information but not the subject matter:
The assurance team members and the firm shall be independent of the party responsible for the subject matter information (the assurance client); and
The firm shall evaluate and address any threats the firm has reason to believe are created by interests and relationships between an assurance team member, the firm, a network firm and the party responsible for the subject matter.

27. Independence Requirements for Direct Engagement (Extant Code)
Independence Requirements for Attestation and Direct Engagements
Independence Requirements for Direct Engagement (Extant Code)
(R900.20) When performing a direct reporting assurance engagement:
The assurance team members and the firm shall be independent of the assurance client (the party responsible for the subject matter); and
The firm shall evaluate and address any threats to independence the firm has reason to believe are created by network firm interests and relationships.

28. WG’s Initial Observation
Independence Requirements for Attestation and Direct Engagements
WG’s Initial Observation
Differences in the independence requirements for the two types of assurance engagements, i.e. :
Different work effort to identify, evaluate and address threats to independence from the responsible party
Whether the requirements for independence of certain parties are intended to apply at an entity level or at an individual level
Potential changes to Part 4B should be taken into consideration for Part 4A in order to ensure consistency

29. Matters for Consideration
Do IESBA members have initial comments on the WG’s preliminary views regarding the relative independence requirements for attestation and direct engagements and the possible benefits of reviewing the consistency and clarity of the requirements?

30. Explanatory Materials
Approach to Explanatory Materials in the Code
Explanatory Materials
Explanatory material reproduces some material from the IAASB
Assurance Framework
WG’s preliminary consideration:
Whether to cross-reference to IAASB material rather than incorporate directly into the Code
Whether any remaining references to IAASB material in Part 4B should be to ISAE 3000 (Revised), rather than to the Assurance Framework

31. Approach to Explanatory Materials in the Code
Interpretation
Interpretation
Part 4B provides a discussion of how a firm might apply the independence requirements of the Code where there are multiple responsible parties
Interpretation provides guidance on this paragraph
WG’s preliminary consideration:
Whether to extend requirements to multiple measurers or evaluators
Whether the interpretation is the right place to deal with such matters

32. Approach to Explanatory Materials in the Code
Other Materials
More practical implications
It is likely that some of the changes discussed above will require more discussion as to their practical implications
Explanatory material included in the text of Part 4B
Other explanatory material (FAQs or Interpretations)

33. Matters for Consideration
Do IESBA members have initial comments on the approach to explanatory material to accompany Part 4B of the Code (including FAQs/interpretation ) for the purposes of the Project Proposal?
Do IESBA members have any further comments they wish to make regarding the Project Proposal, including matters that should be specifically scoped in or scoped out?

34. Proposed Strategy and Work Plan 2019 – 2023
PROJECT/WORK STREAM/ACTIVITY
SCOPE
EXPECTED START
EXPECTED COMPLETION
Part 4B Consistency with ISAE 3000 (Revised)
• Review Part 4B of the restructured Code for any changes needed to make the provisions in that section consistent with the assurance terms and concepts in ISAE 3000 (Revised).
International Independence Standard
Project proposal
Q3 2018
Q2 2020

35. Next Steps IESBA input to WG’s consideration and scope of the project
WG’ s Project Proposal for September 2018 IESBA meeting