The firm’s policies should emphasise the fundamental ethical principles as per ICAI’s code of ethics (integrity, objectivity, professional competence and due care, confidentiality and professional behaviour) which are reinforced by ► Firm leadership ► Education and training ► Monitoring ► Process for dealing with non compliance.
Such policies and procedures should enable the firm to ► Communicate its independence requirements to its personnel and others ► Identify and evaluate circumstances and relationships that create a threat to independence and take appropriate action to mitigate the threat, reduce it to an acceptable level or withdraw from the engagement ► SQC1 specifically requires such procedures to include ► Procedures to enable partners to provide firm with relevant information on client engagements ► Personnel to promptly notify firm of circumstances & relationships that create an independence threat ► Accumulation & communication of information to personnel so that the firm and its personnel – can determine if they satisfy independence requirements, firm can maintain and update its independence records and can take appropriate action regarding identified threats to independence.
Appropriate action comprises – elimination of the independence threat, reducing it to an acceptable level (eg changing personnel on an engagement if certain team members are not independent, altering scope of other services which may pose an independence threat to assurance services) or withdrawing from the engagement ► Requires the firm to obtain at least annually a written confirmation of compliance with independence from all relevant personnel ► The policy should address the familiarity threat by setting criteria to mitigate threat by using the same senior personnel on an assurance engagement and requiring audit partner rotation for listed entities (currently rotation required every 7 years; sole practitioners excluded).
Ensure it will undertake client relationships and engagements only where ► It has considered integrity of the client and does not have information that leads it to believe client lacks integrity ► Is competent to perform the engagement and has the time and resources to do so (eg complex industries, highly regulated entities, etc) ► Can comply with ethical requirements ► Firm should obtain such information as considered necessary and if client is accepted after issues have been identified during acceptance, should document how the issues were resolved.
Matters to be considered for considering client integrity ► Identity/business reputation of the owners, KMP, related parties & those charged with governance ► Nature of client operations (eg gambling companies, etc) and its business practices ► Information regarding attitude of owners, KMP & those charged with governance towards matters such as aggressive interpretation of accounting standards and attitude to internal control ► Whether the client is aggressively concerned with maintaining fees at a low level ► Indications of inappropriate limitation on scope of work ► Indications that client may be involved in money laundering or other criminal activities (business environment in India v/s requirements in overseas countries for MNC client – FCPA, UK Corrupt Practices Act) ► Reasons for proposed appointment of firm v/s continuation of the earlier firm ► Such information can be obtained from previous accountancy service providers, third parties, inquiry of firm personnel, bankers, legal counsel, industry peers and background searches.
Whether firm has capability, competence, time and resources to undertake the new client/engagement following to be considered ► Knowledge of firm personnel for the relevant industry/subject matter ► Experience with relevant regulatory/reporting requirements or ability to gain the necessary skills and knowledge ► Availability of sufficient personnel with necessary capability and competence ► Availability of experts as needed These matters may generally be complied with but the SQC now requires the ability to demonstrate compliance with these matters. May require/increase documentation requirements In case firm obtains information after commencement of work which would have caused it to decline the engagement policies on continuance of engagement should include consideration of the professional and legal responsibilities that apply and whether there are any external reporting requirements and possibility of withdrawal from the engagement.
Ensure that is has sufficient personnel with ► Capabilities ► Competence and ► Commitment to ethical principles to enable it to perform its engagements ► Such policies address the following issues (SQC does not say should but inclusion of these matters would enable demonstration of compliance with SQC requirements) ► Recruitment ► Performance evaluation ► Capabilities, competence ► Career development, promotion and compensation and ► Estimation of personnel needs.
Capabilities and competence are developed through professional education, continuing professional development including training, work experience and coaching by more experienced members ► Can be achieved by training and states where internal technical training resources are unavailable suitably qualified external persons could be used (eg ICAI’s training on IND AS, external professional development courses, etc).
Firm’s performance evaluation, compensation and promotion procedures give due recognition to and reward the development and maintenance of competence and commitment of ethical principles.
Assignment of appropriate staff to the engagement. Following criteria considered for the same ► Understanding and experience with similar engagements through training and participation (in past engagements) ► Understanding of professional standards, regulatory and legal requirements and appropriate technical knowledge ► Ability to apply professional judgement ► Understanding of the firm’s SQC.