PKF methodology
IPSM (International Professional Standards Manual)‐
IPSM (International Professional Standards Manual)
Ethical standards ‐1
PKF S&S SEP 14
Confidential – Not for Circulation
Requirement for the firm #
PKF Sridhar & Santhanam
• As member of PKFI, firm has to comply with IESBA (International
ethics standards committee of IFAC) code of ethics (IFAC) * / and as
ICAI
C member,, Code
C
of ethics ((of ICAI)
C ) requirements
q
– New IPSM effective Jul 1, 2014 is now available –pl refer to that
• IPSM * (International professional standards manual) of PKFI which
takes care of IFAC code of ethics is adopted by PKF S&S –suitably
suitably
modified for ICAI code (in this presentation marked in red)-and needs
to be followed
• We will need to follow whichever requirement is more strict (IPSM
105.02) unless prohibited by law–in letter and spirit
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About IPSM
PKF Sridhar & Santhanam
• Minimum standards Part 1 applies to all member firms irrespective
of area of specialisation.
• Other parts apply to individual areas of practice.
practice
• Part 3 applies to Tax practice
• IPSM is available at all offices and in Intranet- ensure you read it
carefully and apply it fully
• Current IPSM is based on IFAC 2012
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Partner in charge-Quality
PKF Sridhar & Santhanam
• S.Ramakrishnan
• Please ask him when in doubt
• Can send mail
– [email protected]
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Transnational audits and entities #
PKF Sridhar & Santhanam
• For network conflict checking we need to use -Transnational entities list
(new from 14-15)
– Transnational entities (TNE) are:
• All transnational audits (TNA) and
• Any other client or entity that is registered , or has facilities, operations, branches , subsidiaries or joint
arrangements in more than one country.
• Type of service does not matter here
• We need to report on all TNE in PKF 365 (PKFI website)
• Transnational audits (TNA) are (same as before) :
• Audit of financial statements which are or may be relied upon for the purposes of significant lending, investment or
regulatory decisions including listed (public) equity or debt and other public interest entities which attract particular
attention because of size, products or services provided including banks and insurance companies.
• In TNE list we need to identify TNA in PKF 365
• If in doubt regarding conflict contact Managing partner.
• Specific provisions applicable to Public interest entities (TNA):
– Partner Joining audit client, rotation after 7 years, prohibition of writing books
of a/cs,
a/cs valuation,
valuation tax /deferred tax calculations
calculations, internal audit relating to
significant part of internal controls and significant financial accounting
systems, amounts and disclosures that are material, design and
implementation of IT systems, recurring HR related services, other fees/ fees
group
p (where
(
fees for 2 years
y
exceed 15% -disclosure to
from one g
TCWG)
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PKF Sridhar & Santhanam
ETHICAL STANDARDS
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Areas where ICAI code/co law is stricter #
PKF Sridhar & Santhanam
• Books of accounts can not be written for the client as per ICAI
regulations and there is a specific prohibition. (IFAC states merely
writing
g books creates a self-review threat when the firm subsequently
q
y
audits the financial statements and prohibits such services only in
public interest entities) (S 144(a) of cos act 2013 prohibits
accounting and book keeping services for Company, holding
and subsidiary cos)
• Internal audit cannot be done by a statutory auditor as per ICAI
regulations. (IFAC code states a firm’s personnel shall not assume a
management responsibility when providing internal audit services to
an audit client. In public interest entities it prohibits internal audit
relating to significant part of internal controls, significant financial
accounting
ti systems,
t
and
d amounts
t and
d di
disclosures
l
th
thatt are material.)
t i l)
(S 144(b) of cos act 2013 prohibits internal audit services for
Company, holding and subsidiary cos)
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Areas where ICAI code/co law is stricter contd.#
PKF Sridhar & Santhanam
• Contingent fees- ICAI prohibits contingent fees except where
specifically permitted by regulation 192. (IFAC code states the
significance
g
of any
y threat arising
g out of contingent
g
fees shall be
evaluated and safeguards applied when necessary to eliminate or
reduce them to an acceptable level.)
• Other fees: in companies
p
above stated size ICAI states other fees
cannot exceed statutory audit fees; In government companies/ bank
audits , no other fee can be charged as per CAG/RBI . (IFAC states
fees above 15% for 2 years to be reported to TCWG ) (S 144(c) to(i)
of cos act 2013 prohibits for Company, holding and subsidiary
cos- c) design and implementation of any financial info.
Systems; d) actuarial services; e) investment advisory services;
f) iinvestment
t
tb
banking
ki
services;
i
g)) rendering
d i
outsourced
t
d
financial services; h) management services and i) any other
service that may be prescribed)
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Areas where ICAI code is stricter contd.
PKF Sridhar & Santhanam
• Publicity and advertisement ICAI (thru Clause 6 Part 1 of I schedule
to Chartered accountants act) strictly prohibits advertisement and
p
publicity
y
• Prohibited are e.g :
– 1. ads and notes in press
– 2.
2 application for empanelment by roving enquiries
– 3. listing in telephone directory not as per rules
– 4. naming association with firm in books or articles
– 5. issue of greeting cards
– 6. giving interviews
– 7. website not as p
per rules
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Ethical conflict resolutionIPSM 105.04 (IESBA 100.17-100.22)
PKF Sridhar & Santhanam
• First Engagement partner to Consider:
– (a) Relevant facts;
– (b) Ethical issues involved;
– (c) Fundamental principles related to the matter in question;
– (d) Established internal procedure –viz. consult Managing partner
– (e ) Alternative course of action
• Next engagement partner to take following steps in order:
– 1. Clarification from ICAI ethical standards committee;;
– 2. legal advise (like when fraud discovered)
• Next decide need to consult TCWG
• Document this in detail
• if issue can't be resolved
– resign
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Professional developmentIPSM 105.05 (IESBA 130)
PKF Sridhar & Santhanam
• As we say in ‘how to make them say wow’, continuous improvement
a basic need –Kaizen
• Maintain professional knowledge
– Technical
– Professional
– business
b i
d
development
l
t
• See our Intranet for latest materials
• Act diligently
– responsibly
ibl
– as required by assignment
– carefully
– thoroughly
– Timely
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Confidentiality –
IPSM 105.06 (IESBA 140)
PKF Sridhar & Santhanam
•
•
•
•
•
Client or prospective client
During and after relationship
Don't discuss any confidential info even inadvertently
Never use info. acquired for personal purposes
disclosure ok when:
– permitted /required by law
– quality review
– regulator
g
investigation
g
– protect professional interest of professional accountant
– comply with technical standards/ethics
• When in doubt
– consult managing partner
– Firm will seek legal advise where required
• Give annual disclosure to firm
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PKF Sridhar & Santhanam
Outside India
• We don’t do any statutory audits outside our PKF jurisdiction viz.
India
• In Internal audits etc :
– Take care of local ethical requirements
– Take care of Visa regulations/Expat employee taxes
• General:
– Check Tax implications on billing
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Independence- IPSM 105.08 (IESBA 290)
PKF Sridhar & Santhanam
• Ensure annual written confirmation regarding following
independence regulations given
– Applicable to all partners
partners, employees
employees, associates
– Covering yourself and immediate family members
• Be independent in fact and in appearance
• Maintain
M i t i an independent
i d
d t mental
t l attitude
ttit d
• Notify any circumstances of threat to independence
• Notify any breaches of independence to engagement partner who
shall take action
– Also inform Managing partner of this
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Independence contd.
PKF Sridhar & Santhanam
• Prohibited relationships with clients(105.09)
– Direct financial interest or material indirect interest by partner,
his family or other partners/ managers doing non audit services or
team member having significant influence
• In India in statutory audit clients, many restrictions/disqualifications are provided like auditor or
relative etc holding security, being indebted, giving guarantee /providing security, business
relationships employment,
relationships,
employment relative being director /KMP etc (SEE Section 141 Companies act 2013;
Rule 10 of Companies (Audit and Auditors Rules, 2014)
– Loan from firm or team member
– Loan to firm or team member
– Material close business relationship
– Team member having relationship with a person with significant
influence
– Recent service as employee, director or officer
• Refer 290.102 to 290.149 of IESBA code of ethics
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Fee dependence limit
PKF Sridhar & Santhanam
• Fee dependence on a single client, either for the Member Firm or a
single partner
– If exceeds 10% of total for firm or partner recurring fee income
• Partner to Inform Managing partner
– Safeguards to be taken
• Safeguard (Engagement quality control) review of files
• Rotation
• Documentation as to why independence is not threatened (IESBA
290 220 221)
290.220-221)
• In case of TNE
– Disclose to TCWG fact that fee represents more than 15% of total
fees –(IESBA
(IESBA 290.222)
290 222)
• ICAI voluntary ceiling on fees –Self regulatory:
Fee from companies under the same management not to exceed 40%
of gross annual fees
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Rotation
PKF Sridhar & Santhanam
• Partner handling transnational audit to be rotated after 7 years
– Applicable to engagement as well as Engagement Quality control
review partner
• Exempt: Subsidiary which accounts for less than 15% in terms of turnover, assets or audit hours.
– After rotation 2 years shall lapse before same partner comes back
– During the two years: no participation in audit
audit, no quality review ,
no consultation , no influencing the outcome of engagement by the
outgoing partner.
• Earlier rotation is encouraged
– IESBA 290.150-290.155
• We follow 7 year rule; e.g Shreyas shipping
– Firm
Fi rotation
t ti is
i also
l now provided
id d after
ft 10 years iin C
Companies
i
act, 2013 S 139 and Rules 3-6 of Companies (Audit and Auditors)
Rules, 2014
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Network firms of PKFI-same as firm #
PKF Sridhar & Santhanam
• No investments in any transnational audit clients of PKFI member firms
– Or related entities
• List of Transnational audit clients available on PKF 365 ( as part of
TNE list)
• Loan from firm or team member to such entity /related entities
• Loan to firm or team member from such entity/ related entities
• Material close business relationship with such entity /related entities
• Partner as officer /director of such entity/related entities
• Other
Oth work
k ffor such
h entity
tit etc.
t
– As In India investments/loans abroad are severely restricted
under FEMA this is not likely to pose any issues – but we should
be aware
• IESBA 290.100 to 290.149
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Network conflict checking for provision of
services (105.10) #
PKF Sridhar & Santhanam
• THIS IS A MAJOR CHANGE FROM THE PAST#
• For network conflict checking for provision of services, (both first time
and for continuing existing engagements) we now need to check
list of all transnational entities (TNE) not only TNA
• Provision of new service to an existing client is also covered i.e if an
audit client requires a consulting service
• Read 105.10 carefully
• It is summarised in the next few slides
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19
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Proposing for non audit services (105.10) #
PKF Sridhar & Santhanam
• For proposing a non-assurance engagement we need to use form Appendix 5D
–non assurance engagements : firm and network firm independence to
supplement our own procedures under Companies act 2013.
• If p
potential client is listed or there are other listed companies
p
in the g
group
p
– we shall investigate whether we/PKFI member firms are providing audit or
review services to these listed entities by
• Doing direct enquiry with client management
• Review of TNE listing in PKF 365 through TV Balu and
g email to the local PKF firm
• Sending
• If potential client is not listed and there are no other listed entities in the group or
if there are listed entities but firm/PKFI member firms do not provide audit/review
services
– We shall enquire whether firm/PKFI member firms provide audit or review
services
i
tto potential
t ti l client
li t or entities
titi th
thatt h
have di
directt or iindirect
di t control
t l over
the potential client by
• Doing direct enquiry with client management
• Review of TNE listing in PKF 365 through TV Balu and
• Sending email to the local PKF firm
– If the PKFI member firm pro
provide
ide ssuch
ch ser
service
ice we
e shall e
evaluate
al ate significance of
threat and take steps to eliminate or reduce threat to acceptable level.
– All such documentation where some conflicting work is done by firm/PKFI
member firms shall require approval of Managing partner
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20
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Proposing for audit /review services(105.10) #
PKF Sridhar & Santhanam
• For proposing audit/ review engagement we need to use form Appendix 5C –Audit
and review engagements : firm and network firm independence to supplement our
own procedures under Companies act 2013.
• If potential client is listed or there are other listed companies in the group
– we shall investigate whether we/PKFI member firms are providing audit or review
services to these listed entities by
•
•
•
Doing direct enquiry with client management
Review of TNE listing in PKF 365 through TV Balu and
Sending email to the local PKF firm
– If PKFI member firms also provide audit /review services then independence
considerations apply to all related entities. Hence we shall enquire whether we or
PKFI member firms provide any non assurance services to the potential client or
any related entities.
• If potential client is not listed and firm/PKFI member firms do not provide audit/review
services
i
tto any listed
li t d companies
i iin th
the group
– We shall enquire whether firm/PKFI member firms provide non assurance services
to potential client or entities that have direct or indirect control over the potential
client by
•
•
•
Doing direct enquiry with client management
Review of TNE listing in PKF 365 through TV Balu and
Sending email to the local PKF firm
• If the PKFI member firm provide conflicting service we shall evaluate significance of
threat and take steps to eliminate or reduce threat to acceptable level.
– All such documentation where some conflicting work is done by firm/PKFI member
fi
firms
shall
h ll require
i approvall off M
Managing
i partner
t
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21
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Client continuance decisions #
Client continuance decisions #
•
•
•
This is another major change#
For continuing existing clients also we need to be alert to changes that may alter original assessment of the acceptability of client and engagement including network independence y
We will need to check if there were any:
–
–
–
–
–
Changes in controlling ownership interest over the entity
Changes in controlling interests held by the entity
New listings in the group
A k
Any known change in service providers that may impact independence or h
i
i
id th t
i
ti d
d
Changes in the classification of the entity as public interest entity • As a one time exercise we can now use Appendix 5C and Appendix 5D for all TNE clients –
other than referral work from PKFI where obviously there cannot be conflict unless the relationship of PKF referring firm with client group has changed
relationship of PKF referring firm with client group has changed • Every year we shall use Appendix 5C and Appendix 5D for all TNE clients as part of client continuance exercise ; Appendix 5C and Appendix 5D shall be part of PKF documentation in all TNE audits ‐ other than referral work from PKFI where obviously there cannot be conflict unless the relationship of PKF referring firm with client group g
has changed Confidential – Not for Circulation
Specific IESBA requirements- non audit services
PKF Sridhar & Santhanam
• As we mainly do Internal audit as non audit service it is better to
know what IESBA code says regarding that.
• 290.200 In the case of an audit client that is a p
public interest entity,
y, a firm shall not
provide internal audit services that relate to:
– (a) A significant part of the internal controls over financial reporting;
– (b) Financial accounting systems that generate information that is, separately or in the
aggregate, significant to the client
client’s
s accounting records or financial statements on which
the firm will express an opinion; or
– (c) Amounts or disclosures that are, separately or in the aggregate, material to the
financial statements on which the firm will express an opinion.
• In other cases this is not prohibited
– if we do not assume management responsibility for Internal audit. 290.197
– If we check that conditions on 290.198 are satisfied. Mainly these are:
• Senior person from company is in charge of IA
• Scope determined by TCWG/management
• Management evaluates adequacy of IA and which recommendations to implement
• Management reports findings to TCWG
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Non audit services in TNE audit clients
PKF Sridhar & Santhanam
• IESBA code provisions prohibit following services (to the extent
relevant to our firm)
• 1.
1 Preparing accounting records and FS:
– Exemption is provided when a) service is routine like payroll
preparation; and b) division for which service rendered is
collectively immaterial; or c) service relates to matters that are
collectively immaterial to FS of the division or entity or when there
is an emergency situation-290.172 to 174
• Also S 144 of Companies act 2013 for company, holding and subsidiary co
• 2. Valuation services if valuation would have a material effect
separately or in aggregate on the FS -290.180
• Also S 144 of Companies act 2013 for Company, holding and subsidiary co (Investment advisory
services Investment banking services
services,
services, Management services prohibited)
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Non audit services in TNE audit clients contd.
PKF Sridhar & Santhanam
• 3. Tax calculation: except in emergency, tax calculations of current
and DT- 290.185
• 4.
4 Tax advise: Where a tax advise depends on a particular
accounting treatment and audit team has reasonable doubt as to
appropriateness of that and outcome of tax advice will have material
effect on FS ,,- 290.190
• 5. IT systems: Firm not to provide services involving design or
implementation of IT systems that a) form significant part of Internal
control over FR or b)) g
generate info. that is significant
g
to accounting
g
records or FS-290.206
– Also S 144 of Companies act 2013 for company, holding and
subsidiary
y co ((Design
g and implementation
p
of any
y financial
information system)
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Gifts
PKF Sridhar & Santhanam
• Do not accept Gifts and hospitality (except those whose value is
clearly insignificant e.g diaries) from clients
– Partners to disclose any gifts received
received, to other partners
– Leaders to disclose any gifts received to the engagement partner
concerned
• IESBA 290
290.230
230
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Threatened litigation
PKF Sridhar & Santhanam
• Report any actual or threatened litigation to Managing partner
• He will evaluate the threat and take appropriate action
• IPSM 132.01 (f) requires a firm to:
–Notify the regional member of the IPSC (Oliver in EMEI) of
anyy significant
g
p
possible litigation
g
which may
y reach the p
public
domain as soon as is practically possible, and include
relevant information in the Member Firm Compliance Report
• Actions may include:
–Disclosing to TCWG
–Removing involved person from the assurance team
–Involving an additional person to review the work done
• IESBA 290.231
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PKF Sridhar & Santhanam
Case studies
• 1. What is IPSM and how is related to IESBA code of ethics?
• 2. Should we follow IESBA code or ICAI code of ethics? What if
IESBA code and ICAI code allow something prohibited by
Companies act, 2013?
• 3. What are public interest entities?
• 4.
4 In a non TNE in India,
India can a statutory auditor also be internal
auditor?
• 5. Company says we can charge a fee based on turnover achieved
by the company
company. can we accept?
• 6. We are asked to do a valuation of Intangibles which is material
figure in the BS in a public unlisted co; the fee for it is Rs 2 lakhs;
the statutory audit fee is Rs 3 lakhs.
lakhs can we accept the work?
• 7. Can we say in our visiting card that we represent PKFI in India?
• 8. You find that your brother in law has been appointed as CFO in a
company we audit.
dit what
h t will
ill you d
do?
?
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Case studies contd.
PKF Sridhar & Santhanam
• 9. A company
•
•
•
•
•
•
•
•
•
after audit gives you an air ticket to go to your home town in
HP on a week end ; will you accept?
10. A friend approaches you to find out what is the EPS of a company which
i a private
is
i t company client
li t off PKF s&s
& -what
h t will
ill you d
do?
?
11. How often do you have to give independence confirmation to office?
12. Manager of PKF S&S handling audit of a client has taken an advance of
Rs 50000 which is not for travel expenses. what will you do?
13. The company is subsidiary of a listed company but has 10% of group
turnover and assets; is it a Transnational audit?
14. A partner claims he has been continuously auditing a listed co for nine
years
ears in a ro
row; what
hat will
ill you
o do?
15. There is a tendering opportunity for introducing a new ERP IT system in
MNC in India ? what should you do before tendering?
16. You have been approached
pp
by
y an unlisted company
p y with international
operations whose group includes a listed company, to accept statutory
auditt. What should you do? (what if it is internal audit?)
17.What is the difference between TNE and TNA?
18 Are all TNA also TNE?
18.
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