The International Ethics Standards Board for Accountants (IESBA) has released the Exposure Draft (ED)-Proposed Revisions to the Code Relating to the Definition of Engagement Team and Group Audits. The ED establishes provisions that comprehensively address independence considerations for firms and individuals involved in an engagement to perform an audit of group financial statements. Some of the key proposals introduced are:
Revised definition of ‘Engagement Team’: The IESBA has proposed to revise the definition of Engagement Team (ET) specified in the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code) in order to align it with the definition specified by ISA 220 (Revised): Quality Management for an Audit of Financial Statements. The revised definition of ET in ISA 220 (Revised) is as follows:
All partners and staff performing the audit engagement, and any other individuals who perform audit procedures on the engagement, excluding an auditor’s external expert10 and internal auditors who provide direct assistance on an engagement11.
This revision will ensure that all individuals, regardless of their location or employment status, who have performed audit procedures on the engagement, would be considered as part of the engagement team.
- Independence considerations for Engagement Quality Reviewers (EQRs): Another key change proposed in the ED pertains to the independence considerations for EQRs. The extant definition of terms ‘audit team’, ‘review team’ and ‘assurance team’ scoped in only the EQRs within the firm or its network. However, as per the ED, EQRs would be subject to the same independence requirements, regardless of whether they are within or outside the firm or its network.
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Independence in a group audit: The ED clarifies and enhances the independence principles that apply to:
- Individuals involved in a group audit and
- Firms engaged in the group audit, including firms within and outside the group auditor firm’s network.
- Breach of Independence by a component auditor firm: The ED more explicitly sets out the process to address a breach of an independence provision at a component auditor firm, including reinforcing the need for appropriate communication between the relevant parties and with Those Charged With Governance (TCWG) of the group.
- Other proposed consequential and conforming amendments to the Code: The ED aims to align a number of provisions in the Code to conform to changes in the IAASB’s Quality Management standards.
IESBA aims to coordinate the effective date of this standard with the effective date of ISA 600 (Revised)12, Group Audits.
The IESBA invites all stakeholders to comment on the Exposure Draft by 31 May 2022.
- ISA 620, Using the Work of an Auditor’s Expert, paragraph 6(a), defines the term “auditor’s expert.”
- ISA 610 (Revised 2013), Using the Work of Internal Auditors, establishes limits on the use of direct assistance. It also acknowledges that the external auditor may be prohibited by law or regulation from obtaining direct assistance from internal auditors. Therefore, the use of direct assistance is restricted to situations where it is permitted.
- . ISA 600 (Revised) will be effective for audits of financial statements for periods beginning on or after December 15, 2023.
To access the text of IESBA ED, please click here
Action points for auditors
- Independence of auditors has been a point of discussion and debate by regulators worldwide. As engagement team structure is evolving with individuals working from different locations of the world. This proposal aims to make the independence requirements applicable to all individuals who have performed audit procedures on an audit client irrespective of whether they are engaged by the audit client. Auditors who are involved in such group audit engagements should consider the impact of the proposals with regard to their independence requirements.
- Some of the proposals introduced might require significant changes to the policies and methodologies of firms and networks that perform or are otherwise involved in group audits. This might result in increased costs, including with respect to the deployment of updated policies and procedures, and awareness raising and training initiatives. Thus, auditors should evaluate the impact of the proposed changes on their overall policy framework.
- The ICAI Code of Ethics applicable to all chartered accountants in India has been aligned with the International Code of Ethics issued by IESBA. Thus, the proposals issued by IESBA are likely to be considered by ICAI.
- The proposals suggested by IESBA would be effective for audits of financial statements for periods beginning on or after 15 December 2023. In order to ensure smooth transition to the new requirements, auditors should engage in greater interactions with the management and TCWG, discussing about potential impacts of the proposals on independence requirements of the group audit firm and component auditors and implications of breach of independence by the component auditors.