| 7 | When undertaking non-audit services for a Small Entity audited entity, the audit firm is not required to apply safeguards to address a self-review threat provided: |
| (a) | the audited entity has 'informed management'; and |
| (b) | the audit firm extends the cyclical inspection of completed engagements that is performed for quality control purposes. |
| 8 | APB Ethical Standard 5 requires that, when an audit firm provides non-audit services to an audited entity, appropriate safeguards are applied in order to reduce any self-review threat to an acceptable level. APB Ethical Standard 5 provides examples of safeguards that may be appropriate when non-audit services are provided to an audited entity (for example in paragraphs 92 for tax services and 168 for accounting services). In the case of an audit of a Small Entity, alternative procedures involve discussions with 'informed management', supplemented by an extension of the firm's cyclical inspection of completed engagements that is performed for quality control purposes. |
| 9 | The audit firm extends the number of engagements inspected under the requirements of ISQC (UK and Ireland) 1 'Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and other Assurance and Related Services Engagements'4 to include a random selection of audit engagements where non-audit services have been provided. Particular attention is given to ensuring that there is documentary evidence that 'informed management' has made such judgments and decisions that are needed in relation to the presentation and disclosure of information in the financial statements. |
| 10 | Those inspecting the engagements are not involved in performing the engagement. Small audit firms may wish to use a suitably qualified external person or another firm to carry out engagement inspections. |
| 11 | In addition to the documentation requirements of ISQC (UK and Ireland) 1, those inspecting the engagements document their evaluation of whether the documentary evidence that 'informed management' made such judgments and decisions that were needed in relation to the presentation and disclosure of information in the financial statements. |
| 4 ISQC (UK and Ireland) 1 requires audit firms to establish policies and procedures which include a periodic inspection of a selection of completed engagements. Engagements selected for inspection include at least one engagement for each engagement partner over the inspection cycle, which ordinarily spans no more than three years. |
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