Defining Independence The final pro...

Defining Independence

The final propos strange Canadian independence standard is now available online at www.ica.bc.ca. Each member will be asked to promised on this standard at a special general meeting that will be held later this fall (the date had not been announced at the time of this writing).

The final propos novel standard contains many amendments from the original front draft released for comment in September 2002 The CICA's Public Interest and Integrity Committee (PIIC) received a nearrecord number of replications to the initial draft in October and November of 2002 and subsequently made considerable revisions.

Here's an overview of the propos standard as it now stands.

The of recent origin and the familiar

It's important to note that while the propos independence standard may be "new" the general [i]or[/i] abstract notions about independence contained within it are not. Instead, these general [i]or[/i] abstract notions are the same as what principally members learned in Auditing 101 What is novel is a systematic, principles-based framework for analysing independence for each engagement.

Most members are familiar with the existing rules-based framework, which is addition ed by examples of problematic situations. The fresh principles-based approach provides a basis for analysing novel circumstances as they arise. As like it is designed to be a "living" standard.

Also recent is terminology: Most members will be unfamiliar with boundarys like "threats to independence" and "safeguards," nevertheless familiar with what they signify. It's wait fored that the new standard will be more readily applied as familiarity with this just discovered terminology emerges.

Application to all assurance engagements

Both the existing and propos standards mandate independence for all assurance engagements: audits, review engagements, other assurance engagements, and specified auditing acts engagements. If independence is compromised, a member may solitary be involved with a compilation engagement (assuming a compilation engagement is appropriate for the client's needs) Moreover, the nature and volume of the compromise to independence must be disclosed in an additional paragraph in the Notice to Reader report (current order 204.3).

Defining threats

The requirement for auditor objectivity/ independence is already a cornerstone principle for all assurance and specified auditing conducts engagements, and is well stake out in the Foreword to the orders of Professional Conduct.

In the CICA publication Terminology for Accountants, objectivity is defined as "a state of mind that eventuates in the application of unbiased estimate in arriving at an opinion or decision in a given situation," while independence is defined as "circumstances that would favour the application of unbiased long head in arriving at an opinion or decision in a given situation." According to these definitions, objectivity is a necessary precursor to independence.

Another requirement is "professional scepticism," which stipulates that the auditor have a "questioning mind" and be "alert for evidence that contradicts or brings into question the reliability of documents or management representations."

As defined according to both the new and existing standards, anything that would contribute to an actual or perceived diminution of objectivity, independence, or professional scepticism would constitute a threat to independence.

Threats to independence are not of recent origin Consideration of these threats has always been part of CAs' background work for assurance engagements. What is of the present day is the way the propos standard incites the consideration of independence explicitly to the foreground, instilling a positive requirement to:

* Consider independence at the inception and from one extremity to the other of each assurance engagement;

* Document whether or not threats to independence exist;

* Document (where threats are identified) the safeguards identified and applied to eliminate the threat or bring into it to an acceptable level; and

* Document to what degree in the member or firm's professional judgement the safeguards eliminate or decrease the threat to an acceptable level

There's no question that these proactive requirements will place a further carrying capacity on practitioners by requiring additional documentation-but these requirements will also help practitioners better deal with threats to independence.

Type of threats1

The propos strange standard identifies the following broad categories of threats to independence:

* Self-interest threats appear when practitioners could benefit from a financial interest in a client;

* Self-review threats take place when practitioners audit their possess work;

* Advocacy threats happen when practitioners promote a client's position or opinion;

* Familiarity threats take place when practitioners become too sympathetic to a client's interests; and

* Intimidation threats come to pass when practitioners are deterred from acting objectively by the agency of actual or perceived threats from a client.

Because threats can be to a high degree subtle, considerable care must be taken when considering their carriage or absence. For instance, a member may think no threats exist, still its possible an outsider would disagree. The "reasonable observer" touchstone is therefore necessary to assess situations from the public's perspective.