Agreed-Upon Procedures Engagements Eric Turner, IAASB Member and Task Force Chair IAASB Meeting June 18, 2019 Agenda Item 3

Task Force Members and Staff Support Eric Turner – Chair Isabelle Tracq-Sengeissen Viviene Bauer Roger Simnett Staff Jasper van den Hout Phil Minnaar Chi Ho Ng Introduce TF and staff [Read from slide]

Objectives of this session are to: Introduction IAASB issued Exposure Draft of ISRS 4400 (Revised), Agreed-Upon Procedures Engagements (ED-4400), in November 2018 Objectives of this session are to: Provide a summary of the feedback received Obtain the Board’s views on the Task Force’s preliminary views of the issues presented ED-4400 was issued in Nov 2018. ED-4400requested responses to 11 questions, covering: Public interest Professional judgment Practitioner’s independence Use of the term “Findings” Engagement acceptance and continuance Practitioner’s expert AUP Report Translations Effective date Objectives of this session [Read the slide]

Responses Global: 14 Europe: 12 N. America: 7 Asia Pacific: 9 MEA: 8 S. America: 2 Total of 52 responses: Wide variety of stakeholder groups Span across the globe

Overall Summary of Responses Wide support for the proposals All key aspects of the ED are supported by a majority or significant majority of respondents

Responding to stakeholders’ needs Public Interest Responding to stakeholders’ needs Providing clarity in the agreed-upon procedures report Promoting consistency in practice Public interests issues addressed by ED-4400 Responding to stakeholders' needs ED-4400 meets the needs of users for AUP engagements on financial and non-financial subject matters by: Broadening the scope to include financial and non-financial subject matters; and Adding examples of AUP engagements. Providing clarity in the AUP report ED-4400 enhances the AUP report for clarity and transparency by: Adding requirements and application material to help the practitioner avoid using terminology that is unclear, misleading or subject to varying interpretations; Adding requirements and application material to the AUP report, including statements addressing circumstances when the practitioner is (or is not) required to be independent, and whether the practitioner is (or is not) independent; and Adding a requirement and application material to clearly distinguish the AUP report from other engagement reports. Promoting consistency in the performance of AUP engagements ED-4400 is drafted using a drafting convention called the “clarity format”, which helps to promote consistency in the performance of AUP engagements. ED-4400 further promotes consistency by: Clarifying the role professional judgment plays in an AUP engagement; and Explaining the distinctions between AUP engagements and assurance engagements.

Task Force’s preliminary views Public Interest Q1. Has ED-4400 been appropriately clarified and modernized to respond to the needs of stakeholders and address public interest issues? A significant majority agreed that ED-4400 has been appropriately clarified and modernized. Task Force’s preliminary views Continue to place public interest in the forefront when finalizing ISRS 4400 (Revised) Subject to comments on specific aspects of ED-4400, a significant majority agreed that ED-4400 has been appropriately clarified and modernized TF will continue to place public interest in the forefront as we finalize ISRS 4400 (Revised).

Professional Judgment Q2. Do the definition, requirement and application material on professional judgment in paragraphs 13(j), 18 and A14-A16 of ED-4400 appropriately reflect the role professional judgment plays in an AUP engagement? Significant support for the proposed requirement and application material on professional judgment (PJ), particularly as they relate to engagement acceptance. ED-4400 requires the practitioner to apply professional judgment in accepting and conducting an AUP engagement, taking into account the circumstances of the engagement. Application material is included to provide examples of areas where professional judgment may be applied, and to explain the unique role that professional judgment plays in an AUP engagement. A significant majority agreed that professional judgment is not suspended in an AUP engagement, particularly at the engagement acceptance stage.

Other comments included: Professional Judgment (cont’d) However, many respondents indicated PJ cannot be exercised when performing the procedures Other comments included: Further examples of when professional judgment may be exercised Definition of professional judgment Limited or no PJ when performing a procedure Explicitly agreed or did not express disagreement with proposals in ED-4400 Unclear position re. PJ when performing a procedure 19 respondents / ~37% 25 respondents / ~49% 7 respondents / ~14% However, many respondents (including respondents who expressed general agreement and those who disagreed with the proposals on PJ) indicated that professional judgment cannot be exercised when performing the procedures. A summary of the respondents’ comments and the TF’s analyses are set out in para. 11 to 21 of the Feedback Report The TF met over the weekend and had further discussions on PJ. Key views expressed include the following: There is PJ surrounding the performance of the procedure such as determining actions to take if the practitioner becomes aware of inappropriate procedures However, there is no PJ in the actual performance of the procedure The procedures are agreed with the engaging party There are no alternative courses of action when it comes to how the procedure is performed To that end, the TF intends to: Require the practitioner to apply PJ, except when performing the procedures as agreed upon in the terms of the engagement AM will include examples of how PJ is exercised at each stage of the engagement: Accepting engagement, planning the engagement, determining appropriate actions to take (if becomes aware of certain matters), and reporting

Task Force’s preliminary views Professional Judgment (cont’d) Q1. The IAASB is asked for its views on the application of professional judgment in an AUP engagement Task Force’s preliminary views Take a closer look at where, and how, professional judgment is applied when performing procedures Further clarify the role of professional judgment by: Adding introductory paragraphs to explain the differences between an AUP engagement and an assurance engagement (including how professional judgment is applied differently) Clarifying whether, and if so, how, professional judgment is applied at each stage of an AUP engagement [Read TF’s preliminary views and pause for question]

Independence – Precondition for, and Determination of, Independence Q3. Do you agree with not including a precondition for the practitioner to be independent when performing an AUP engagement (even though the practitioner is required to be objective)? If not, under what circumstances do you believe a precondition for the practitioner to be independent would be appropriate, and for which the IAASB would discuss the relevant independence considerations with the IESBA? Significant support for not including a precondition for the practitioner to be independent Some suggested that the practitioner should be required to determine independence (regardless of whether the practitioner is required to be independent) Consistent with the IESBA Code, ED-4400 did not include a precondition for the practitioner to be independent when performing an AUP engagement nor a requirement for the practitioner to determine independence. A significant majority agreed that there should not be a precondition for the practitioner to be independent Of the respondents who agreed that there should not be a precondition for the practitioner to be independent, some nonetheless suggested that there should be a requirement for the practitioner to be independent A summary of the respondents’ comments and the TF’s analyses are set out in para. 22 to 29 of the Feedback Report

Task Force’s preliminary views Independence – Precondition for, and Determination of, Independence (cont’d) Q2. The IAASB is asked for its views on the precondition for, and determination of, independence Task Force’s preliminary views No precondition for the practitioner to be independent No requirement for the practitioner to determine independence [Read TF’s preliminary views and pause for question] Ask if anyone DISAGREES.

Independence – Disclosure of Independence Q4. What are your views on the disclosures about independence in the AUP report in the various scenarios described in the table in para. 22 of the EM, and the related requirements and application material in ED-4400? Do you believe that the practitioner should be required to make an independence determination when not required to be independent for an AUP engagement? If so, why and what disclosures might be appropriate in the AUP report in this circumstance? Support for enhanced transparency regarding the practitioner’s independence However, many disagreed with the requirement to state that the practitioner is not independent when the practitioner is not required to be independent While ED-4400 did not require the practitioner to be independent, the practitioner may be required to be independent, for example, by the terms of the engagement or by relevant ethical requirements applicable in a particular jurisdiction. ED-4400 addressed the need for transparency regarding independence by requiring certain disclosures depending on whether: (a) the practitioner is required to be independent; and (b) whether the practitioner is, indeed, independent. A majority agreed with the enhanced transparency regarding the practitioner’s independence However, many respondents disagreed with the requirement to state that the practitioner is not independent in the circumstance when: The practitioner is not required to be independent; and The practitioner is aware that the practitioner is not independent The statement that the practitioner is not required to be independent and is not independent may cause confusion.

Independence – Disclosure of Independence (cont’d) Suggestions include: Alternative 1 – Removing the requirement to state that the practitioner is not independent Alternative 2 – Enhancing transparency by providing additional disclosures as to why the practitioner is not independent   Alt 1: Removing requirement to state that the practitioner is not independent As proposed in ED-4400: Statement that the practitioner is not independent but no explanation as to why Alt 2: Enhancing transparency by providing additional disclosures as to why the practitioner is not independent Respondents who commented 16 respondents 28 respondents 7 respondents There are 2 ways to address the potential confusion: Alternative 1 –Just state that the practitioner is not required to be independent [period]. Do not further state that the practitioner is not independent. Alternative 2 – Add disclosures on why the practitioner is not independent. However, views are split on the 2 alternatives

Independence – Disclosure of Independence (cont’d)   Is practitioner required to be independent? Yes No Is practitioner independent? Unknown (i.e., not determined) Not Applicable: Practitioner is unable to perform the agreed-upon procedures engagement because the practitioner has not determined independence. Alternative 1: Statement that the practitioner is not required to be independent. Alternative 2: Statement that the practitioner is not required to be independent and that the practitioner has not determined independence. Statement that the practitioner is independent and the basis therefor (i.e., the independence criteria against which the practitioner determined independence). Not applicable: Practitioner is not able to perform the agreed-upon procedures engagement because the practitioner is not independent. Alternative 2: Statement that, although the practitioner is not required to be independent, the practitioner is not independent. Explanation as to why the practitioner is not independent. The 2 alternatives are illustrated on the right column A summary of the respondents’ comments and the TF’s analyses are set out in para. 22 to 39. The TF met over the weekend and had further discussions on the independence disclosures. Key views expressed include the following: Alternative 2 involves enhancing transparency. Question is how much more information should be required:, for example Statement of compliance with RER Add explanation of objectivity under RER Alternative 2 may be confusing because it combines “positive” and “negative” statements pertaining to independence: Statement that we met RER but we are not independent; or The statement that we met RER, we are objective but we are not independent

Task Force’s preliminary views Independence – Disclosure of Independence (cont’d) Q3. The IAASB is asked for its views on the independence disclosure requirements Task Force’s preliminary views Lean towards enhancing transparency (Alternative 2) [Read TF’s preliminary views and pause for question] 2 parts to the question: Do you prefer Alternative 1 or Alternative 2 If Alternative 2, how much transparency should we require? E.g., Do we require statement on objectivity?

Support for using the term “findings” Q5. Do you agree with the term “findings” and the related definitions and application material in para. 13(f) and A10-A11 of ED-4400? Support for using the term “findings” However, several respondents preferred to revert to the term “factual findings.” A few of these respondents suggested that, if the term “findings” is retained, an explanation of the term “findings” be included in the engagement letter and the AUP report To address a concern that the term “factual findings” may imply that there might be findings that are “not factual” and to better communicate that the results from performing the AUP must be factual, ED-4400: Uses the term “findings” instead of “factual findings;” Includes a definition that “findings are the factual results of procedures performed; and Includes application material to explain that factual results are capable of being objectively described and objectively verified, which means that different practitioners performing the same procedures are expected to arrive at the same results. A majority of respondents agreed with the proposals. However, several respondents disagreed and suggested that we should revert back to “factual findings”. A key reason is that the engaging party and other intended users may not know what “findings” mean. A summary of the respondents’ comments and the TF’s analyses are set out in para. 40 to 47.

Q4. The IAASB is asked for its views on the use of the term “findings Findings (cont’d) Q4. The IAASB is asked for its views on the use of the term “findings Task Force’s preliminary views Retain the use of the term “findings” Retain the ability of some jurisdictions to use the term “factual findings” Require the practitioner to include in the engagement letter and the AUP report an explanation of the term “findings” [Read TF’s preliminary views and pause for question]

Engagement Acceptance and Continuance Q6. Are the requirements and application material regarding engagement acceptance and continuance, as set out in para. 20-21 and A20-A29 of ED-4400, appropriate? Significant support for the proposals on the engagement acceptance and continuance conditions Some expressed a concern that the engagement acceptance and continuance conditions seem to imply that the procedures to be performed are “set in stone” at the beginning of the engagement Many provided suggestions on additional acceptance and continuance conditions ED-4400 proposed that three engagement acceptance and continuance conditions be met before accepting the engagement to reinforce the unique characteristics of an AUP engagement, namely: That the engaging party acknowledges that the expected procedures to be performed by the practitioner are appropriate for the purpose of the engagement; That the procedures and related findings can be described objectively, in terms that are clear, not misleading, and not subject to varying interpretations; and That the practitioner obtains an understanding of the purpose of the engagement and not accept the engagement if the practitioner is aware of any facts or circumstances suggesting that the procedures the practitioner is being asked to perform are inappropriate for the purpose of the AUP engagement. A significant majority agreed with the proposals and also provided many suggestions on additional acceptance and continuance conditions. A key concern expressed is that the engagement acceptance and continuance and conditions seem to imply that the procedures are “set in stone” at the beginning of the engagement. Many provided suggestions on additional acceptance and continuance conditions such as the engagement having a rational purpose A summary of the respondents’ comments and the TF’s analyses are set out in para. 48 to 57.

Task Force’s preliminary views Engagement Acceptance and Continuance (cont’d) Q5. The IAASB is asked for its views on the engagement acceptance and continuance conditions Task Force’s preliminary views On the issue that these conditions are seemingly “set in stone”: The practitioner should be required to agree the terms of the engagement Emphasize that meeting the engagement acceptance and continuance conditions remains an iterative process during the AUP engagement The Task Force will consider other suggestions to improve the engagement acceptance and continuance conditions [Read TF’s preliminary views and pause for question] Para. 23 and A30 deals with iterative process

Practitioner’s Expert Q7. Do you agree with the proposed requirements and application material on the use of a practitioner’s expert in para. 28 and A35-A36 of ED-4400, and references to the use of the expert in an AUP report in para. 31 and A44 of ED-4400? Significant support for addressing the use of the work of a practitioner’s expert in ED-4400 However, there were concerns regarding whether: The practitioner possesses the competencies necessary to evaluate the expert’s work; and The use of an expert would involve the application of significant professional judgment beyond that contemplated in an AUP engagement ED-4400 included requirements and application material to provide guidance on how a practitioner’s expert can assist the practitioner in an AUP engagement. A significant majority agreed with the proposals but concerns were expressed regarding: The practitioner’s competencies; and The application of professional judgment when an AUP engagement involves an expert.

Practitioner’s Expert (cont’d) Some commented on the issue of referring to a practitioner’s expert in an AUP report Views are split between requiring a reference to the expert and prohibiting a reference to the expert Require reference to an expert in the AUP report Permit (neither require nor prohibit) reference to an expert (as proposed in ED- 4400) Prohibit reference to an expert in the AUP report 3 respondents / ~6% 45 respondents / ~88% On the issue of referring to a practitioner’s expert in an AUP report, ED-4400 proposed a similar approach as ISAE 3000 (Revised) – requiring the wording of the AUP report to not imply that the practitioner’s responsibility is reduced because of the involvement of the expert. A significant majority agreed with the proposal. However: Some respondents suggested that a reference to an expert should be required; While some suggested that reference to an expert should be prohibited A summary of the respondents’ comments and the TF’s analyses are set out in para. 58 to 69.

Task Force’s preliminary views Practitioner’s Expert (cont’d) Q6. The IAASB is asked for its views on the using the work of a practitioner’s expert Task Force’s preliminary views On the issue of referring to the practitioner’s expert in the AUP report: Retain the proposed approach of neither requiring nor prohibiting a reference to the practitioner’s expert. Further clarifications to the requirements and the application material to address other concerns expressed [Read TF’s preliminary views and pause for question]

AUP report – Restrictions Q8. Do you agree that the AUP report should not be required to be restricted to parties that have agreed to the procedures to be performed, and how para. A43 of ED-4400 addresses circumstances when the practitioner may consider it appropriate to restrict the AUP report? Significant support for not restricting the AUP report to parties that have agreed to the procedures to be performed To address broad concerns that AUP reports are often required to be provided to users who are not parties to the terms of the engagement, ED-4400 no longer requires the AUP report to include a statement that the report is restricted. Of course, the practitioner can always decide to restrict the report (or the engaging party can request that it be restricted) A significant majority agreed with this proposal.

AUP report – Content and Structure Q9. Do you support the content and structure of the proposed AUP report as set out in para. 30-32 and A37-A44 and Appendix 2 of ED-4400? What do you believe should be added or changed, if anything? Support for the proposed structure and content of the AUP report Many provided suggestions to enhance the AUP report ED-4400 also sets out additional matters to be included in an AUP report to enhance the transparency of the engagement. In addition, ED-4400 includes new illustrative reports to provide examples of how the procedures and findings may be described in an AUP report. A majority of respondents agreed with the proposals and many provided suggestions to further enhance the AUP report. One of the suggestions raised by respondents is to re-order the AUP report in a similar manner as the new auditor’s report. The TF discussed this suggestion over the weekend and decided not to place the procedures and findings upfront because: The positioning of the procedures & findings at the end – substantive difference in look & feel compared to the auditor’s report The “standard wording” dealing with compliance with ethics and QC are key aspects of the value a practitioner brings to an AUP engagement – these should be upfront The “standard wording” is only about a page long while the procedures and findings can be tens or hundreds of pages long. The standard wording can be easily missed if placed at the end. In any case, it is important to note that the positioning of the material in an AUP report is not mandated. A summary of the respondents’ comments and the TF’s analyses are set out in para. 70 to 82.

Q7. The IAASB is asked for its views on the AUP report. AUP Report (cont’d) Q7. The IAASB is asked for its views on the AUP report. Task Force’s preliminary views Not requiring a restriction of distribution or use to be placed on the AUP report Further requirements or application material to enhance the structure and content of the AUP report Retain the overall structure of the AUP report [Read TF’s preliminary views and pause for question]

Written representations Other Matters Written representations Retain with minor change to require the practitioner to consider requesting written representations Clarify in the application material that written representations are not generally required Consider providing guidance on when written representations may be appropriate Responsible party Define “responsible party” Consider developing requirements and application material pertaining to the practitioner’s responsibilities as they relate to the responsible party Fraud and non-compliance with laws and regulations Consider developing guidance, including clearer linkages to the practitioner’s responsibilities as set out in relevant ethical requirements, if the practitioner becomes aware of fraud and non-compliance with laws and regulations There are a number of areas that have garnered some discussions even though ED-4400 did not specifically pose a question on these areas. Written Representations On written reps, ED-4400 requires the practitioner to consider whether it is necessary to request written representations from the engaging party. Some respondents indicated that this requirement seem overly onerous A few suggested that written reps should be required in all cases A few suggested guidance on circumstances when written reps may be appropriate. The TF’s preliminary views are [Read the slide] Responsible Party ED-4400 included references to the responsible party. However, this term is not defined. Several respondents suggested including a definition of the responsible party. In addition, the respondents encouraged the IAASB to further consider the implications when the engaging party is not the responsible party. Fraud and NOCLAR ED-4400 addressed fraud and non-compliance with laws and regulations in the introductory paragraphs Several respondents suggested that this area be expanded, including adding requirements or application material on specific actions that the practitioner may take if the practitioner becomes aware of actual or suspected fraud or NOCLAR

Other Matters (cont’d) Documentation Consider developing further documentation requirements or application material on documentation Education Consider developing introductory paragraphs to better explain the differences between an AUP engagement and an assurance engagement Address issues in the Basis for Conclusions and other common communications accompanying the issuance of a standard Global consistency Continue to strive for flexibility when finalizing ISRS 4400 (Revised) so that the revised ISRS can be appropriately applied in accordance with different national standards Documentation ED-4400 set out a requirement and application material on documentation. These paragraphs are derived from ISAE 3000 (Revised). A few respondents provided suggestions on additional documentation requirements TF’s prelim views [Read from the slide] Education and Global Consistency Several respondents emphasized the importance of educating the public on the value and limitations of an AUP engagement, and how it differs from an assurance engagement. Global Consistency Some respondents pointed out that a number of jurisdictions have recently promulgated national standards on AUP engagements. The respondents encouraged the IAASB to consider the implications of such national standards when finalizing ISRS 4400 (Revised). A summary of the respondents’ comments on these other issues and the TF’s analyses are set out in para. 83 to 96.

Q8. The IAASB is asked for its views on: (a) Written representations; Other Significant Issues (cont’d) Q8. The IAASB is asked for its views on: (a) Written representations; (b) Responsible party; (c) Fraud and non-compliance with laws and regulations; (d) Documentation; and (e) Education and global consistency. [Ask the question]

General Comments - Translations Q10(a). Recognizing that many respondents may intend to translate the final ISRS for adoption in their own environments, the IAASB welcomes comment on potential translation issues respondents note in reviewing the ED-4400. Respondents who raised potential translation issues are mostly concerned that the word “findings” may not be properly translated Other words that may present potential translation issues include the word “therefor” or the listing of words or terms in para. A22-A23 of ED-4400 A significant majority of respondents did not raise any concern with translation Respondents who raised potential translation issues are mostly concerned that the word “findings” may not be properly translated. Other words that may present potential translation issues include the word “therefor” or the listing of words or terms in paragraphs A22-A23 of ED-4400 (i.e., examples of appropriate and inappropriate terminology).

General Comments – Effective Date Q10(b). Recognizing that ED-4400 is a substantive revision and given the need for national due process and translation, as applicable, the IAASB believes that an appropriate effective date for the standard would be for AUP engagements for which the terms of engagement are agreed approximately 18–24 months after the approval of the final ISRS. Earlier application would be permitted and encouraged. The IAASB welcomes comments on whether this would provide a sufficient period to support effective implementation of the ISRS. Respondents are also asked to comment on whether a shorter period between the approval of the final ISRS and the effective date is practicable? Majority did not raise any concern with the proposed effective date On the Effective Date, a majority agreed with the proposed effective date.

General Comments – Effective Date (cont’d) Basing the effective date on the engagement agreement date may not be practical for recurring engagements or when there has been an amendment in the terms of engagement Basing the effective date on the AUP report date could result in circumstances when the AUP engagement is performed under extant ISRS 4400 but the AUP report issued after the effective date However, some respondents indicated that basing the effective date on when the engagement is agreed is unclear for recurring engagements or when there are modifications to the engagement agreement. The TF did consider that but also thought that basing the effective date on the date of Report may be problematic in some cases as well. A summary of the respondents’ comments on Translation and Effective Date, and the TF’s analyses are set out in para. 97 to 105. The TF discussed this issue over the weekend and is now of the view that the position in the ED should be retained – i.e., effective date should be based on when the terms of engagement is agreed. This is because: Public sector often requires a multi-year engagement May place some firms in a difficult position if engagement agreed before effective date and report date (if effective date is based on date of report) is after effective date) Often difficult to amend engagement letter (especially in the public sector)

Q9. The IAASB is asked for its views on: (a) Effective date; General Comments Q9. The IAASB is asked for its views on: (a) Effective date; (b) Translation issues Task Force’s preliminary views On the Effective Date, the Task Force did not reach a conclusion on the issue On Translations, the Task Force: Notes that para. A11 of ED-4400 would address potential jurisdictional differences and translation issues Plans to replace the word “therefor” Notes that the respondent did not identify any specific issues with the listing of words in para. A22-A23, and that many of these words are used in other IAASB pronouncements [Read TF’s preliminary views and pause for question]

ISRS 4400 (Revised) – The Way Forward Jun 2019 Q4 2019 1st read of post-ED ISRS 4400 (Revised) Discuss stakeholders’ input and issues Q4/2019- Q1/2020 Anticipated approval of final ISRS 4400 (Revised) The TF expects to have the 1st read of the post-ED draft ready in September. As long as we have time on the IAASB’s agenda, we will be ready to go. Page 34

The Way Forward (cont’d) Q10. The IAASB is asked whether it supports the Task Force’s planned next steps. Q11. Are there other significant matters raised by respondents that the Task Force have not covered in this paper? Task Force’s preliminary views The Task Force will develop the 1st read of the post-ED ISRS 4400 (Revised) based on analyses of the respondents’ comments. The Task Force will consider using the “What, Why and How” of the practitioner’s responsibilities (similar to the approach taken in the ISA 315 agenda papers) in developing the 1st read of the post-ED ISRS 4400 (Revised)

March 2014 IAASB Agenda Item 6