1. 1 Independence II Dave Winetroub Task Force Chair

2. 2 Overview Comment period ended October 15, 2007Comment period ended October 15, 2007 IESBA discussed in January and plans to approve AprilIESBA discussed in January and plans to approve April 44 responses received44 responses received Internal auditInternal audit Fees relative sizeFees relative size Contingent feesContingent fees

3. 3 Internal Audit – ED Position Self-review threat may be created when a firm provides internal audit services to an audit clientSelf-review threat may be created when a firm provides internal audit services to an audit client Should not perform management functionsShould not perform management functions

4. 4 Internal Audit – ED Position Should only provide assistance to an audit client’s internal audit function if:Should only provide assistance to an audit client’s internal audit function if: –Client acknowledges responsibility for establishing, maintaining and monitoring internal control –Client designates competent employee to be responsible for activities –Client, or those charged with governance, approve scope, risk and frequency of work –Client evaluates adequacy of procedures and findings –Findings and recommendations are reported appropriately to those charged with governance

5. 5 Internal Audit – ED Responses Majority of respondents supported approachMajority of respondents supported approach Eight respondents not supportiveEight respondents not supportive –No internal audit to any audit client (2 responses) –No internal audit to a PIE audit client (3 responses) –No internal audit if going to place significant reliance in external audit (1 response) –Safeguards not sufficiently robust (1 response) –Proposals not sufficiently restrictive (1 response)

6. 6 Internal Audit – ED Responses More clarity needed on definition/description of internal audit servicesMore clarity needed on definition/description of internal audit services

7. 7 Internal Audit – Proposed Changes New paragraph describing internal audit activities – consistent with ISA 610 Auditor’s Consideration of the Internal Audit FunctionNew paragraph describing internal audit activities – consistent with ISA 610 Auditor’s Consideration of the Internal Audit Function More guidance on types of internal audit services that involve assuming a management responsibilityMore guidance on types of internal audit services that involve assuming a management responsibility

8. 8 Internal Audit – Proposed Changes Non Public Interest Entities If firm provides internal audit services, and results of the services will be used in the external audit, self-review threat created because of possibility results will be used without appropriate evaluationIf firm provides internal audit services, and results of the services will be used in the external audit, self-review threat created because of possibility results will be used without appropriate evaluation Significance of threat depends on:Significance of threat depends on: –Materiality of related financial statement amounts –Risk of material misstatement of assertions related to those financial statement amounts –Degree of reliance

9. 9 Internal Audit – IESBA Direction Public Interest Entities Restrict provision of internal audit services for public interest audit clientsRestrict provision of internal audit services for public interest audit clients

10. 10 Internal Audit – Task Force Proposal Public Interest Entities Firm should not provide internal audit services that relate to internal accounting controls, financial systems or financial statements (does not preclude “operational” auditing)Firm should not provide internal audit services that relate to internal accounting controls, financial systems or financial statements (does not preclude “operational” auditing) Firm not precluded from providing a non-recurring internal audit service to evaluate a particular matter (e.g. assist in a fraud investigation), provided services otherwise permitted under Section 290 and conditions in 290.189 are metFirm not precluded from providing a non-recurring internal audit service to evaluate a particular matter (e.g. assist in a fraud investigation), provided services otherwise permitted under Section 290 and conditions in 290.189 are met

11. 11 Fees Relative Size – ED Proposal Non PIEs – threats and safeguardsNon PIEs – threats and safeguards PIEs – If total fees >15% for two years disclose to those charged with governance and either:PIEs – If total fees >15% for two years disclose to those charged with governance and either: –Post issuance review by accountant who is not a member of the firm; or –Pre-issuance review by accountant who is not a member of the firm PIEs – In subsequent years in determining which of these safeguards should be applied consideration to be given to relative size of fee. At a minimum a post issuance review once every three yearsPIEs – In subsequent years in determining which of these safeguards should be applied consideration to be given to relative size of fee. At a minimum a post issuance review once every three years

12. 12 Fees Relative Size – ED Responses Mixed as to whether a bright-line test is appropriateMixed as to whether a bright-line test is appropriate In Favor (eleven)In Favor (eleven) –Reasonable threshold –Necessary for clarity and consistent application Against (fourteen)Against (fourteen) –Not consistent with a conceptual framework approach –Might have a disproportionate impact on smaller firms and on firm concentration

13. 13 Fees Relative Size – ED Responses Disclosure to those charged with governance – general supportDisclosure to those charged with governance – general support Pre and post issuance review – general support though some expressed the view that only a pre- issuance review was strong enough - some stated review could be performed by a regulatory bodyPre and post issuance review – general support though some expressed the view that only a pre- issuance review was strong enough - some stated review could be performed by a regulatory body Insufficient guidance on size relative to partner or officeInsufficient guidance on size relative to partner or office

14. 14 Fees Relative Size – Proposed Changes Require the application of safeguards to the second year’s audit opinionRequire the application of safeguards to the second year’s audit opinion Indicate review could be performed by a professional regulatory bodyIndicate review could be performed by a professional regulatory body Require firm to discuss with those charged with governance the safeguard that will be appliedRequire firm to discuss with those charged with governance the safeguard that will be applied If fees significantly exceed 15% firm should determine whether pre-issuance review is the necessary safeguard (not-post issuance)If fees significantly exceed 15% firm should determine whether pre-issuance review is the necessary safeguard (not-post issuance) Expand guidance on size relative to partner or officeExpand guidance on size relative to partner or office

15. 15 Contingent fees – ED Position Should not perform an assurance service for a contingent feeShould not perform an assurance service for a contingent fee Should not perform a non-assurance service for an audit client if:Should not perform a non-assurance service for an audit client if: –Amount of fee is material to the firm; or –Fee is dependent upon the outcome of a future or contemporary audit judgment related to a material amount in the financial statements

16. 16 Contingent fees – ED Responses Generally supportiveGenerally supportive Four respondents of view should not charge any contingent fee to an audit clientFour respondents of view should not charge any contingent fee to an audit client Two respondents of view there should be specific guidance on taxTwo respondents of view there should be specific guidance on tax Two respondents of view guidance should include prohibition on contingent fee arrangements between a firm and a third partyTwo respondents of view guidance should include prohibition on contingent fee arrangements between a firm and a third party One respondent of view should address contingent fees charged by a network firmOne respondent of view should address contingent fees charged by a network firm Several noted Section 291 not aligned to 290Several noted Section 291 not aligned to 290

17. 17 Contingent fees – Proposed Changes Clarify contingent fee cannot be charged directly or indirectlyClarify contingent fee cannot be charged directly or indirectly Expand guidance to include a prohibitions on:Expand guidance to include a prohibitions on: –Network firms that participate in a significant part of the audit from charging a material contingent fee; and –No contingent fee for non-assurance service where the financial statement amounts are material and will be subject of significant future or contemporary audit judgment Align guidance in Section 291 with 290 on providing an assurance service for a contingent feeAlign guidance in Section 291 with 290 on providing an assurance service for a contingent fee

18. 18 Discussion