Auditing and Assurance Standards and Guidance

Ethical Standards for Auditors

Ethical Standard(s) for Auditors - applicable in Ireland - applicable for periods beginning before 17 June 2016

ES 4 Fees, remuneration and evaluation policies, litigation, gifts and hospitality (Revised 2010)

Fees

The audit engagement partner shall be satisfied and able to demonstrate that the audit engagement has assigned to it sufficient partners and staff with appropriate time and skill to perform the audit in accordance with all applicable Auditing and Ethical Standards, irrespective of the audit fee to be charged.

Paragraph 5 is not intended to prescribe the approach to be taken by audit firms to the setting of audit fees, but rather to emphasise that there are no circumstances where the amount of the audit fee can justify any lack of appropriate resource or time taken to perform a proper audit in accordance with applicable Auditing and Ethical Standards.

7	The audit engagement partner shall ensure that audit fees are not influenced or determined by the provision of non-audit services to the audited entity.

The audit fee ordinarily reflects the time spent, the skills and experience of the personnel performing the audit in accordance with all the relevant requirements, and the competitive situation in the audit market. Paragraph 7 is intended to prevent any relationship between the appropriate cost of the audit and the actual or potential provision of non-audit services.

Paragraph 7 is not intended to prohibit proper cost savings that can be achieved as a result of providing non-audit services in accordance with APB Ethical Standard 5 to the audited entity, for example, where information gained through undertaking a non-audit service is referred to by audit staff when carrying out the audit of the financial statements.

10	An audit shall not be undertaken on a contingent fee basis.

11	A contingent fee basis is any arrangement made under which a fee is calculated on a pre-determined basis relating to the outcome or result of a transaction, or other event, or the result of the work performed. A fee that is established by a court or other public authority is not a contingent fee.

12	Contingent fee arrangements in respect of audit engagements create self-interest threats to the auditor's objectivity and independence that are so significant that they cannot be eliminated or reduced to an acceptable level by the application of any safeguards.

The audit fee does not depend on whether the auditor's report on the financial statements is qualified or unqualified. The basis for the calculation of the audit fee is agreed with the audited entity each year before significant audit work is undertaken. Arrangements under which estimated audit fees are agreed with the audited entity on terms where the fees may be varied based on the level of audit work required do not constitute contingent fee arrangements.

Contingent fee arrangements in respect of non-audit services provided by the auditor in respect of an audited entity can create significant self-interest threats to the auditor's objectivity and independence as the auditor may have, or may appear to have, an interest in the outcome of the non-audit service.

15	The audit firm shall not undertake an engagement to provide non-audit services in respect of an audited entity on a contingent fee basis where:

(a)

the contingent fee is material to the audit firm, or that part of the firm by reference to which the audit engagement partner's profit share is calculated; or

(b)

the outcome of those non-audit services (and, therefore, the amount of the fee) is dependent on a future or contemporary audit judgment relating to a material matter in the financial statements of an audited entity.

Where non-audit services are provided on a contingent fee basis, there may be a perception that the audit firm's interests are so closely aligned with the audited entity that the auditor's objectivity and independence is threatened. The significance of the self-interest threat is primarily determined by the materiality of the contingent fee to the audit firm or to the part of the firm by reference to which the audit engagement partner's profit share is calculated. Where the contingent fee and the outcome of the non-audit service is dependent on a future or contemporary audit judgment on a material matter included in the financial statements of an audited entity, the self interest threat cannot be eliminated or reduced to an acceptable level by the application of safeguards.

Paragraph 15 is not intended to prohibit an audit firm from charging a lower fee where the engagement relates to a transaction or engagement that was either aborted or prematurely terminated for whatever reason and where the rationale for the lower fee is to take account of either the reduced risk and responsibility involved or the fact that less work was undertaken than had been anticipated.

For non-audit services provided on a contingent fee basis, other than those prohibited under paragraph 15, the audit engagement partner assesses the significance of the self-interest threat and considers whether there are safeguards that could be applied which would be effective to eliminate the threat or reduce it to an acceptable level. The significance of the self-interest threat will depend on factors such as:

the range of possible fee amounts;

the nature of the non-audit service;

the effect of the outcome of the non-audit service on the financial statements of the audited entity.

19	Examples of safeguards that might be applied to reduce to an acceptable level any self-interest threats arising from the provision of non-audit services on a contingent fee basis (other than those set out in paragraph 15 above) include:

the provision of such non-audit services by partners and staff who have no involvement in the external audit of the financial statements;

review of the audit of the financial statements by an audit partner who is not involved in the audit engagement to ensure that the subject matter of the non-audit service engagement has been properly and effectively addressed in the context of the audit of the financial statements.

The audit firm shall establish policies and procedures to ensure that the audit engagement partner and the Ethics Partner are notified where others within the audit firm propose to adopt contingent fee arrangements in relation to the provision of non-audit services to the audited entity or its affiliates.

Contingent fee arrangements in respect of non-audit services provided by the auditor may create a threat to the auditor's objectivity and independence. The circumstances in which such fee arrangements are not permitted for non-audit services are dealt with in paragraph 15 of this standard and paragraph 95 of APB Ethical Standard 5.

22	In the case of listed companies the audit engagement partner shall disclose to the audit committee, in writing, any contingent fee arrangements for non-audit services provided by the auditor or its network firms.

23	In the case of a group audit of a listed company, which involves other auditors, the letter of instruction sent by the group audit engagement partner to the other auditors requests disclosure of any contingent fees for non-audit services charged or proposed to be charged by the other auditors.

24	The actual amount of the audit fee for the previous audit and the arrangements for its payment shall be agreed with the audited entity before the audit firm formally accepts appointment as auditor in respect of the following period.

25	Ordinarily, any outstanding fees for the previous audit period are paid before the audit firm commences any new audit work. Where they are not, it is important for the audit engagement partner to understand the nature of any disagreement or other issue.

26	Where fees for professional services from the audited entity are overdue and the amount cannot be regarded as trivial, the audit engagement partner, in consultation with the Ethics Partner, shall consider whether the audit firm can continue as auditor or whether it is necessary to resign.

Where fees due from an audited entity, whether for audit or for non-audit services, remain unpaid for a long time - and, in particular, where a significant part is not paid before the auditor's report on the financial statements for the following year is due to be issued - a self-interest threat to the auditor's objectivity and independence is created because the issue of an unqualified audit report may enhance the audit firm's prospects of securing payment of such overdue fees.

Where the outstanding fees are in dispute and the amount involved is significant, the threats to the auditor's objectivity and independence may be such that no safeguards can eliminate them or reduce them to an acceptable level. The audit engagement partner therefore considers whether the audit firm can continue with the audit engagement.

Where the outstanding fees are unpaid because of exceptional circumstances (including financial distress), the audit engagement partner considers whether the audited entity will be able to resolve its difficulties. In deciding what action to take, the audit engagement partner weighs the threats to the auditor's objectivity and independence, if the audit firm were to remain in office, against the difficulties the audited entity would be likely to face in finding a successor, and therefore the public interest considerations, if the audit firm were to resign.

30	In any case where the audit firm does not resign from the audit engagement, the audit engagement partner applies appropriate safeguards (such as a review by an audit partner who is not involved in the audit engagement) and notifies the Ethics Partner of the facts concerning the overdue fees.

Where it is expected that the total fees for both audit and non-audit services receivable from a listed audited entity and its subsidiaries audited by the audit firm¹ will regularly exceed 10% of the annual fee income of the audit firm² or, where profits are not shared on a firm-wide basis, of the part of the firm by reference to which the audit engagement partner's profit share is calculated, the firm shall not act as the auditor of that entity and shall either resign as auditor or not stand for reappointment, as appropriate.³

Where it is expected that the total fees for both audit and non-audit services receivable from a non-listed audited entity and its subsidiaries audited by the audit firm will regularly exceed 15% of the annual fee income of the audit firm or, where profits are not shared on a firm-wide basis, of the part of the firm by reference to which the audit engagement partner's profit share is calculated, the firm shall not act as the auditor of that entity and shall either resign as auditor or not stand for reappointment, as appropriate.

Where it is expected that the total fees for both audit and non-audit services receivable from an audited entity and its subsidiaries that are audited by the audit firm will regularly exceed 10% in the case of listed companies and 15% in the case of non-listed entities of the annual fee income of the part of the firm by reference to which the audit engagement partner's profit share is calculated, it may be possible to assign the engagement to another part of the firm.

Paragraphs 31 and 32 are not intended to require the audit firm to resign as auditor or not stand for reappointment as a result of an individual event or engagement, the nature or size of which was unpredictable and where a reasonable and informed third party would regard ceasing to act as detrimental to the shareholders (or equivalent) of the audited entity. However, in such circumstances, the auditor discloses full details of the position to the Ethics Partner and to those charged with governance of the audited entity and discusses with both what, if any, safeguards may be appropriate.

Where it is expected that the total fees for both audit and non-audit services receivable from a listed audited entity and its subsidiaries audited by the audit firm will regularly exceed 5% of the annual fee income of the audit firm or the part of the firm by reference to which the audit engagement partner's profit share is calculated, but will not regularly exceed 10%, the audit engagement partner shall disclose that expectation to the Ethics Partner and to those charged with governance of the audited entity and consider whether appropriate safeguards need to be applied to eliminate or reduce to an acceptable level the threat to the auditor's objectivity and independence.

It is fundamental to the auditor's objectivity that the auditor be willing and able, if necessary, to disagree with the directors and management, regardless of the consequences to its own position. Where the auditor is, to any significant extent, economically dependent on the audited entity, this may inhibit the auditor's willingness or constrain the auditor's ability to express a qualified opinion on the financial statements, since this could be viewed as likely to lead to the auditor losing the audit engagement and the entity as a client.

An audit firm is deemed to be economically dependent on a listed audited entity if the total fees for audit and all other services from that entity and its subsidiaries which are audited by the audit firm represent 10% of the total fees of the audit firm or the part of the firm by reference to which the audit engagement partner's profit share is calculated. Where such fees are between 5% and 10%, the audit engagement partner and the Ethics Partner consider the significance of the threat and the need for appropriate safeguards.

38	Such safeguards might include:

taking steps to reduce the non-audit work to be undertaken and therefore the fees earned from the audited entity;

applying independent internal quality control reviews.

Where it is expected that the total fees for both audit and non-audit services receivable from a non-listed audited entity and its subsidiaries audited by the audit firm will regularly exceed 10% of the annual fee income of the audit firm or the part of the firm by reference to which the audit engagement partner's profit share is calculated, but will not regularly exceed 15%, the audit engagement partner shall disclose that expectation to the Ethics Partner and to those charged with governance of the audited entity and the firm shall arrange an external independent quality control review of the audit engagement to be undertaken before the auditor's report is finalised.

A quality control review involves discussion with the audit engagement partner, a review of the financial statements and the auditor's report, and consideration of whether the report is appropriate. It also involves a review of selected working papers relating to the significant judgments the engagement team has made and the conclusions they have reached. The extent of the review depends on the complexity of the engagement and the risk that the report might not be appropriate in the circumstances. The review includes considering the following:

Significant risks identified during the audit and the responses to those risks.

Judgments made, particularly with respect to materiality and significant risks.

Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters, and the conclusions arising from those consultations.

The significance and disposition of corrected and uncorrected misstatements identified during the audit.

The appropriateness of the report to be issued.

Where the quality control reviewer makes recommendations that the audit engagement partner does not accept and the matter is not resolved to the reviewer's satisfaction, the report is not issued until the matter is resolved by following the audit firm's procedures for dealing with differences of opinion.

41	A new audit firm seeking to establish itself may find the requirements relating to economic dependence difficult to comply with in the short term. In these circumstances, such firms would:

(a)

not undertake any audits of listed companies, where fees from such an audited entity would represent 10% or more of the annual fee income of the firm; and

(b)

for a period not exceeding two years, require external independent quality control reviews of those audits of unlisted entities that represent more than 15% of the annual fee income before the audit opinion is issued.

The firm might also develop its practice by accepting work from entities not audited by the firm so as to bring the fees payable by each audited entity below 15%.

42	A self-interest threat may also be created where an audit partner in the engagement team:

is employed exclusively or principally on that audit engagement; and

is remunerated on the basis of the performance of part of the firm which is substantially dependent on fees from that audited entity.

43	Where the circumstances described in paragraph 42 arise, the audit firm assesses the significance of the threat and applies safeguards to reduce the threat to an acceptable level. Such safeguards might include:

reducing the dependence of the office, partner or person in a position to influence the conduct and outcome of the audit by reallocating the work within the practice;

a review by an audit partner who is not involved with the audit engagement to ensure that the auditor's objectivity and independence is not affected by the self-interest threat.

¹ Total fees will include those billed by others where the audit firm is entitled to the fees, but will not include fees billed by the audit firm where it is acting as agent for another party.

² In the case of a sole practitioner, annual fee income of the audit firm includes all earned income received by the individual.

³ Paragraphs 31 to 40 do not apply to the audits of those public sector bodies where the responsibility for the audit is assigned by legislation. In such cases, the auditor cannot resign from the audit engagement, irrespective of considerations of economic dependence.