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Breach of a Requirement of the Code
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  1. Breach of a Requirement of the Code Ken Dakdduk CAG Brussels March 2012 Brussels, Belgium March 5, 2012

  2. Exposure Draft proposals (1): General Provision • Breach unrelated to independence • Take action as soon as possible • Satisfactorily address the consequences of the breach • Determine whether to report the breach to affected parties • IESBA tentative conclusion – will consider providing more context and rationale for the approach

  3. Exposure Draft proposals (2): • Breach of an independence requirement • Termination of audit engagement may be necessary • Communicate the matter to those charged with governance • Terminate, suspend, or eliminate the interest or relationship • Comply with legal/regulatory requirements • Evaluate significance of the breach • Impact on the firm’s objectivity and ability to issue an audit report; • Objectivity has been compromised (3rd party test) • Discuss with TCWG and take steps to terminate audit engagement • Objectivity has not been compromised (3rd party and TCWG tests) • Determine whether action can be taken to satisfactorily address the consequences of the breach,and ensure objectivity is maintained

  4. Exposure Draft proposals (3): • If action can be taken • Discuss the breach and the action proposed with those charged with governance as soon as possible; • If those charged with governance agree that the proposed action will satisfactorily address the consequences of the breach, continue the audit engagement. • If those charged with governance do not agree, terminate the audit engagement; • Documentation • Actions taken • All matters discussed with those charged with governance • All matters discussed with relevant regulators, if applicable

  5. Responses to Exposure Draft General Support • Almost all respondents were supportive of the Code addressing breaches. • Almost all respondents supported the reasonable 3rd party test • IESBA will consider a comment suggesting clarity is needed that a 3rd party is not another auditor • Almost all respondents supported the matters to be discussed with those charged with governance.

  6. Responses to Exposure Draft Agreement of those charged with governance • Majority of respondents • Supported overall approach of continuing only with the agreement of TCWG • Minority of respondents (about 25%) • Did not support the overall approach of continuing only with the agreement of TCWG • Some said the decision must lie with the auditor. • IESBA tentative conclusion • TCWG must agree that firm can continue with the audit • Consider ISA 260, Communication with TCWG • Definition of TCWG and timing of communication

  7. Responses to Exposure Draft Reporting of all breaches and the timing • Respondents views were mixed • Majority - all breaches should be reported • Minority - insignificant breaches need not be reported. • Many respondents commented on the timing of reporting • Should not be required to report insignificant breaches ASAP • Recent input from audit committee members • IESBA tentative conclusion - report all breaches • Some flexibility may be appropriate for less significant breaches • Less significant breaches communicated as part of regular communication or in accordance with established protocol • Will consider whether communication should be in writing

  8. Responses to Exposure Draft Reporting to a regulator • Three respondents suggested reporting breaches to a regulator in certain circumstances • IESBA tentative conclusion – not appropriate for the Code to require reporting to a regulator • Will consider acknowledging instances where reporting is encouraged or a best practice in a jurisdiction

  9. Breaches of a Requirement Questions?