1. Alignment of Part 4B with ISAE 3000
Liesbet Haustermans, IESBA Member
Task Force Chair
IESBA Meeting, New York
December 3-5, 2018

2. Objectives of the Project
To review Part 4B of the revised and restructured Code for any revisions needed to align with the revised ISAE 3000
No intention to re-open any discussion or to challenge the concepts of ISAE 3000 (Revised)

3. Objectives of the Session
To update the IESBA on developments since the approval of the project proposal in September
To enable the IESBA to provide comments on the issues paper (Agenda item 12-A)
To complete a first read of the draft Exposure Draft (ED) and seek views from IESBA on the revisions proposed to Part 4B (Agenda item 12-B)

4. Developments since the September meeting of IESBA
The TF met in New York on 20 and 21 September to continue to identify the issues for Part 4B arising from the Project and to develop the aligned Part 4B
On 5th November, the TF held a conference call to discuss a draft of the issues paper and the draft ED
The TF requested comments from designated IAASB representatives on the draft issues paper and the draft ED and on 12th November held a conference call with them to discuss their views and comments on the material

5. Outline of the discussion
Independence considerations concerning direct engagements
Key changes proposed in the draft ED
Changes in key terminology (incl. definition of assurance client)
Impact of these changes on the independence requirements
Proposed deletion of R900.18, R and R900.20; proposed revision to A1

6. Outline of the discussion
Other changes proposed in the draft ED
Split of Assurance engagements between Parts 4A and 4B
Examples of assurance engagements – paragraph 900.1
Source of guidance on Assurance Engagements (§900.7 – )
Multiple responsible parties – paragraph A1
Interpretation

7. Outline of the discussion
Other matters for the attention of the IESBA
Split of Assurance engagements between Parts 4A and 4B
Reports that include a restriction on use and distribution

8. 1. Independence considerations concerning direct engagements
IAASB was questioned in 2013 as to whether direct engagements are compatible with independence, either because:
There might be a self-review threat if the practitioner is responsible for measuring or evaluating the underlying subject matter and obtaining assurance to express a conclusion; or
The practitioner might participate in the development of the criteria

9. 1. Independence considerations concerning direct engagements
Generally the practitioner obtains assurance while performing the measurement/evaluation and does not re-evaluate work previously performed. Hence self-review does not arise
The practitioner might participate in the development of criteria, but generally in conjunction with other parties as appropriate
ISAE 3000 (Revised) addresses situations where intended users or the engaging party do not acknowledge suitability of criteria

10. 1. Independence considerations concerning direct engagements
General requirement (R900.15): A firm shall apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence in relation to an assurance engagement
When considering whether to accept a direct engagement, the practitioner needs to take into account how the criteria are to be determined and how the practitioner will be obtaining assurance to enable the conclusion to be provided
The TF proposes that a brief discussion on these matters is included in the explanatory memorandum to accompany the ED and a future staff publication might be considered also

11. Matters for consideration
Do IESBA members have any comments on the proposal to include a summary of the independence considerations arising from direct engagements in the explanatory memorandum and maybe also in a subsequent staff publication?
Do IESBA members have any views on the discussion in relation to direct engagements?

12. 2. Key changes proposed in the draft Exposure Draft
Changes in key terminology, including definition of Assurance Client
Impact of the revised Assurance Client definition on the independence requirements
Proposal to delete paragraphs R900.18, R and to rework and relocate paragraph A1

13. 2a. Changes in key terminology
ISAE 3000 (Revised) terminology changes:
Assertion-based Attestation engagements
Direct reporting Direct engagements
Subject matter Underlying subject matter
The term ‘responsible party’ now used only for the party responsible for the underlying subject matter (SM)
Additional role defined of ‘measurer or evaluator’ (who may or may not be responsible for the subject matter information (SMI))

14. Definition of Assurance Client
Assurance Client is a term used throughout Part 4B
TF proposes to define the Assurance Client as follows:
“The responsible party (entity or individuals) and, in an attestation engagement, the entity or individuals responsible for the subject matter information (who might be the same as the responsible party)”
Definitions of responsible party and measurer or evaluator as per ISAE have also been included in the glossary
TF proposes to amend R to clarify that independence is required of the assurance client(s) and then to reproduce the definition of assurance client as application material at A1

15. Matters for consideration
Do IESBA members believe that the definition of Assurance Client is clear and appropriate for use in Part 4B?
Do IESBA members have any comments on the amendment proposed to R900.14?
Do IESBA members have any comments on the other proposed terminology changes

16. 2b. Impact of the revised Assurance Client definition on the independence requirements
Lack of clarity and logic in existing independence requirements
TF proposes a simplification to require independence both of the responsible party and also (in an attestation engagement) of the measurer or evaluator where that party is responsible for the SMI. This is explained in the new paragraph A2
In most cases, the responsible party and the measurer or evaluator are part of the same organization
This is achieved with minimal textual changes to Part 4B through the amended definition of Assurance Client

17. 2b. Impact of the revised Assurance Client definition on the independence requirements
Example: Paragraph R910.4 prohibits certain financial interests in the Assurance Client
Under the extant Assurance Client definition, in an attestation engagement, if the party responsible for the SMI were not also responsible for the underlying SM, this prohibition would not apply with respect to the party responsible for the underlying SM. In a direct reporting engagement the requirement would apply to the party responsible for the underlying SM
Under the TF’s proposals, these requirements would apply to both parties in the case of an attestation engagement whether or not they are both part of the same organization. See Appendix for other cases

18. 2b. Impact of the revised Assurance Client definition on the independence requirements
The TF has also reviewed the impact of the proposed change on the provisions relating to financial or business relationships, or relationships with directors or officers and those in a position to exert significant influence over the SMI, as well as provisions relating to recent or current roles as director or officer of the assurance client
In considering the impact of the changes, the TF notes that they maintain the alignment of Part 4B with the equivalent provisions in Part 4A – as indicated in the Appendix to Agenda item 12-A
The TF considers this approach is clearer and more consistent as between attestation and direct reporting engagements

19. Matters for consideration
Do IESBA members have any comments on the amendment proposed to A2?
Do IESBA members have any comments on the application of the TF’s proposals to the detailed independence requirements and application material as explained above and summarized in the Appendix to Agenda item 12-A?

20. 2c. Proposal to delete paragraphs R900.18, R900.19 and R900.20
Paragraphs R900.18, R and R currently summarize independence requirements which are set out in detail in the subsequent sections
The TF believes these paragraphs are unclear and unnecessary given the proposed simplification of the independence requirements and proposes that they be deleted
A1 (situation where the parties responsible for the underlying SM and SMI are different) has been reworked and relocated in A2

21. Matters for consideration
Do IESBA members have any comments on the proposal to delete paragraphs R900.18, R and R900.20?

22. 3. Other changes proposed in the draft Exposure Draft
Split of assurance engagements between Parts 4A and 4B
Examples of assurance engagements – paragraph 900.1
Source of guidance on assurance engagements – paragraphs to
Multiple responsible parties – paragraph A1
Interpretation

23. 3a. Split of assurance engagements between Parts 4A and 4B
Part 4B covers ‘assurance engagements other than audit and review engagements’
In addition to addressing engagements covered by ISAE (Revised), Part 4B also covers audits of specific elements, accounts or items of a financial statement which are conducted under ISA 805 (Revised)
The TF would like to make the split between Parts 4A and 4B clearer in Part 4B by inserting an additional sentence in the definition of Financial Statements in the Glossary

24. 3b. Examples of assurance engagements – paragraph 900.1
The TF believes that it is helpful to illustrate a more extensive range of assurance engagements for which the independence requirements in Part 4B are applicable
Therefore, the TF proposes to include more examples of the types of assurance engagements that fall within the scope of the Part, as set out in paragraph 900.1

25. 3c. Source of guidance on assurance engagements – paragraphs 900
3c. Source of guidance on assurance engagements – paragraphs to
Paragraphs to in the extant Code are intended to provide a summary of the key elements of the different types of assurance engagements. Based on advice from representatives of the IAASB, the TF believes that it is more appropriate for the user to refer to the definitive source of that material
Accordingly, in the draft Exposure Draft most of this material has been removed other than a brief description in paragraph of an assurance engagement and a reference to where further guidance can be obtained, i.e. ISAE 3000 (Revised) and the Assurance Framework

26. 3d. Multiple responsible parties – paragraph 900.21 A1
Paragraph A1 provides a discussion of how a firm might apply the independence requirements of the Code where there are multiple responsible parties
The TF believes that it is uncommon for there to be multiple responsible parties, but accepts that the paragraph is helpful application material which it proposes should be located together with the introductory material from R onwards in a new paragraph, A1

27. 3e. Interpretation
Interpretation was originally developed primarily to provide guidance on the application of extant paragraph A1 (which the TF considers to be clear as to its objective)
The TF is not aware that the Interpretation has been found to be useful in practice and therefore proposes that it should be withdrawn
The TF also notes that the Interpretation is not included in the Handbook of the Code of Ethics

28. Matters for consideration
Do IESBA members believe that the split of assurance engagements between Part 4A and Part 4B would be clarified by inserting additional words to the definition of Financial Statements with respect to certain engagements falling under ISA 805, as illustrated in the Glossary in Agenda item 12-B?
Do IESBA members believe that it is preferable to refer users of Part 4B to guidance on assurance engagements included in the IAASB materials, rather than include additional guidance in the Code?

29. Matters for consideration
Do IESBA members have any comments regarding the provision now proposed for inclusion in paragraph A1 for circumstances where there are multiple responsible parties?
Do IESBA members have any views on the proposal to withdraw Interpretation ?
Do IESBA members have any comments on any of the other changes being proposed in the draft Exposure Draft?

30. 4. Other matters for the attention of the IESBA
Following matters are outside the scope of this project:
Split of assurance engagements between Parts 4A and 4B
Reports that include a restriction on use AND distribution

31. 4a. Split of assurance engagements between Parts 4A and 4B
The IAASB representatives questioned why audits of specific elements, accounts and items of a financial statement are included in Part 4B rather than Part 4A
The split was agreed by IESBA as a response to comments received to the 2007 Exposure Draft of the Code
The IAASB representatives noted that ISA 805 was finalized shortly after the finalization of the Code in 2008 and that it was revised and strengthened again in 2015
It may be rare in practice for the auditor not to perform such audits

32. 4b. Reports that include a restriction on use and distribution
The IAASB representatives questioned why the Code requires the report to be restricted both as to use and distribution before it is eligible for the modifications permitted in sections 800 and 990
IESBA minutes from 2008 record that the intention originally was to track the proposals of ISA 800, but this was later finalized so as not to require restriction of the report either as to use or distribution, but an emphasis of matter is required in the audit report
The TF advised that the IESBA continues to believe it appropriate that the report be restricted both as to use and distribution in order for the engagement to be eligible for the modifications of sections 800 or 990