Applying the Conceptual Framework to Independence in Audit and Review Engagements

Independence is a foundational pillar of the auditing profession, essential to maintaining public trust and credibility of financial reporting. For audit and review engagements, the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code), issued by the International Ethics Standards Board for Accountants (IESBA), requires professional accountants to apply a conceptual framework, and required by the Code, that professional accountants in public practice remain independent when performing audit or review engagements. Independence is tied to the principles of objectivity and integrity, and consists of two elements:

• Independence of mind: the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.
• Independence in appearance, the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firms, or an audit team member’s, integrity, objectivity or professional skepticism has been compromised.

When performing audit engagements, the code requires firms to comply with the fundamental principles and be independent.

This article sets out specific requirements and application material on how to apply the conceptual framework to maintain independence when performing such engagements.

Engagement Team and Responsibilities

An engagement team for an audit engagement includes:

• all partners and staff in the firm who perform audit work on the engagements, and
• any other individuals who perform audit work on the engagement, and
• any other individuals who perform audit procedures who are from a network firm or a firm that is not a network firm, or another service provider.

Neither the firm nor the network shall assume a management responsibility for an audit client. Management responsibilities involve controlling, leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, technological, physical and intangible resources.

When a firm or a network firm assumes management responsibility for an audit client, self-review, self -interest and familiarity threats are created. Assuming a management responsibility might also create an advocacy threat because the firm or network firm becomes too closely aligned with the views and interests of managements.

When performing a professional activity for an audit client, the firm shall be satisfied that client management makes all judgments and decisions that are the proper responsibility of management.

The Conceptual Framework

The conceptual framework is a risk-based approach designed to support ethical decision-making and promote professional skepticism. It requires professional accountants to:

1. Identify threats to compliance with the fundamental principles of ethics.
2. Evaluate the significance of those threats.
3. Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level.

In the context of independence, this process focuses on threats that could compromise an auditor’s ability to act with objectivity and integrity.

Types of Threats to Independence

The IESBA Code outlines five categories of threats that auditors must be vigilant about:

• Self-interest threat: A financial or other interest that could inappropriately influence the auditor’s judgment. Example: Owning shares in an audit client
• Self-review threat: Occurs when the auditor is in a position of reviewing their own work. Example: Providing tax services to a client and later auditing those same tax calculations
• Advocacy threat: Arises when the auditor promotes a client’s position or opinion. Example: Representing a client in a tax dispute.
• Familiarity threat: Results from a close or long-standing relationship with a client. Example: Auditing a long-time family friend who is CFO.
• Intimidation threat: When the auditor is deterred from acting objectively due to actual or perceived pressures. Example: Management threatening to replace the auditor if a certain issue is raised.

Each of these threats must be evaluated in terms of their nature and significance. The presence of one or more threats does not automatically imply a breach of independence, but it does require thorough evaluation and, if necessary, the application of safeguards.

Applying Conceptual Framework

1. Identifying Threats

Auditors must assess the nature of their relationship with the client. Key considerations include: Financial interests in the audit client

• Long association with senior personnel.
• Provision of non-assurance services.
• Employment relationships.

For example, if a firm provides tax services to an audit client, this might create a self-review or advocacy threat.

2. Evaluating the Significance of Threats

This involves a qualitative assessment, considering factors such as:

• The magnitude and nature of the interest or relationship.
• Whether the client is a Public Interest Entity (PIE).
• The role of the individual within the firm.

If threats are more than clearly insignificant, safeguards must be considered.

3. Implementing Safeguards

• Where threats are identified, appropriate safeguards must be applied, such as:
• Having a different team perform non-assurance services.
• Rotating senior personnel on the engagement.
• Independent reviews of work performed.
• Documenting the assessment and safeguards applied.

If no safeguards can reduce a threat to an acceptable level, the engagement should be declined or discontinued.

Applying the conceptual framework to independence is essential for ensuring the integrity and objectivity of audit and review engagements. Rather than relying solely on prescriptive rules, the framework promotes a principles-based, risk-focused approach that requires professional accountants to exercise sound judgment in identifying, evaluating, and addressing threats to independence.

By adhering to this structured process supported by appropriate safeguards and thorough documentation, auditors can uphold the ethical standards of the profession, enhance the credibility of their work, and reinforce public confidence in financial reporting.

Ultimately, a well-applied conceptual framework is not only a compliance tool but a cornerstone for ethical and high-quality assurance engagements. Applying the conceptual framework to independence in audit and review engagements ensures that auditors maintain both independence of mind and independence in appearance, which are essential for upholding public trust and professional integrity.