1 Independence II Dave Winetroub Task Force Chair

2 Overview Comment period ended October 15, 2007Comment period ended October 15, 2007 Task Force met early December and held two conference calls in JanuaryTask Force met early December and held two conference calls in January 44 responses received44 responses received Internal auditInternal audit Fees relative sizeFees relative size Contingent feesContingent fees

3 Internal Audit – ED Position Self-review threat may be created when a firm provides internal audit services to an audit clientSelf-review threat may be created when a firm provides internal audit services to an audit client Should not perform management functionsShould not perform management functions

4 Internal Audit – ED Position Should only provide assistance to an audit client’s internal audit function if:Should only provide assistance to an audit client’s internal audit function if: –Client responsible activities and acknowledges responsibility for establishing, maintaining and monitoring internal control –Client designates competent employee to be responsible for activities –Client, or those charged with governance, approve scope, risk and frequency of work –Client evaluates adequacy of procedures and findings –Findings and recommendations are reported appropriately to those charged with governance

5 Internal Audit – ED Responses Majority of respondents supported approachMajority of respondents supported approach Eight respondents not supportiveEight respondents not supportive –No internal audit to any audit client (2 responses) –No internal audit to a PIE audit client (3 responses) –No internal audit if going to place significant reliance in external audit (1 response) –Safeguards not sufficiently robust (1 response) –Proposals not sufficiently restrictive (1 response)

6 Internal Audit – ED Responses More clarity needed on definition/description of internal audit servicesMore clarity needed on definition/description of internal audit services

7 Internal Audit – TF Proposals New paragraph describing internal audit activities – consistent with ISA 610 Auditor’s Consideration of the Internal Audit FunctionNew paragraph describing internal audit activities – consistent with ISA 610 Auditor’s Consideration of the Internal Audit Function More guidance on types of internal audit services that involve assuming a management responsibilityMore guidance on types of internal audit services that involve assuming a management responsibility

8 Internal Audit – TF Proposals If auditor uses internal audit work in external audit self-review threat created because of risk that results will be used without an appropriate evaluationIf auditor uses internal audit work in external audit self-review threat created because of risk that results will be used without an appropriate evaluation When auditor uses work of internal audit function, auditing standards require performance of procedures to evaluate the adequacy of that workWhen auditor uses work of internal audit function, auditing standards require performance of procedures to evaluate the adequacy of that work

9 Internal Audit – TF Proposals If auditor intends to use results of internal audit services the firm provided - the procedures performed to evaluate the adequacy of the work should be no less rigorous than if service performed by an individual who is not a member of the firmIf auditor intends to use results of internal audit services the firm provided - the procedures performed to evaluate the adequacy of the work should be no less rigorous than if service performed by an individual who is not a member of the firm Individuals who provided internal audit services should not be given external audit responsibility for any internal audit function or activity with which they were involved as part of performing internal audit servicesIndividuals who provided internal audit services should not be given external audit responsibility for any internal audit function or activity with which they were involved as part of performing internal audit services

10 Internal Audit – TF Proposals Additional paragraph to address self interest threat created if procedures performed to evaluate the work identifies a deficiencyAdditional paragraph to address self interest threat created if procedures performed to evaluate the work identifies a deficiency Threat is similar to threat that may be created when deficiency in an external audit procedure is identified as a result of performance of a subsequent external audit procedureThreat is similar to threat that may be created when deficiency in an external audit procedure is identified as a result of performance of a subsequent external audit procedure Individuals assigned to evaluate adequacy of firm’s internal audit services should have appropriate level of expertise and stature within the firmIndividuals assigned to evaluate adequacy of firm’s internal audit services should have appropriate level of expertise and stature within the firm

11 Fees Relative Size – ED Proposal If total fees >15% for two years disclose to those charged with governance and either:If total fees >15% for two years disclose to those charged with governance and either: –Post issuance review by accountant who is not a member of the firm; or –Pre-issuance review by accountant who is not a member of the firm In subsequent years in determining which of these safeguards should be applied consideration to be given to relative size of fee. At a minimum a post issuance review once every three yearsIn subsequent years in determining which of these safeguards should be applied consideration to be given to relative size of fee. At a minimum a post issuance review once every three years

12 Fees Relative Size – ED Responses Mixed as to whether a bright-line test is appropriateMixed as to whether a bright-line test is appropriate In Favor (eleven)In Favor (eleven) –Reasonable threshold –Necessary for clarity and consistent application Against (fourteen)Against (fourteen) –Not consistent with a conceptual framework approach –Might have a disproportionate impact on smaller firms and on firm concentration

13 Fees Relative Size – ED Responses Disclosure to those charged with governance – general supportDisclosure to those charged with governance – general support Pre and post issuance review – general support though some expressed the view that only a pre-issuance review was strong enough - some stated review could be performed by a regulatory bodyPre and post issuance review – general support though some expressed the view that only a pre-issuance review was strong enough - some stated review could be performed by a regulatory body

14 Fees Relative Size – TF Proposals Require the application of safeguards to the second year’s audit opinionRequire the application of safeguards to the second year’s audit opinion Indicate review could be performed by a professional regulatory bodyIndicate review could be performed by a professional regulatory body Require firm to discuss with those charged with governance the safeguard that will be appliedRequire firm to discuss with those charged with governance the safeguard that will be applied If fees significantly exceed 15% firm should determine whether pre-issuance review is the necessary safeguard (not-post issuance)If fees significantly exceed 15% firm should determine whether pre-issuance review is the necessary safeguard (not-post issuance)

15 Contingent fees – ED Position Should not perform an assurance service for a contingent feeShould not perform an assurance service for a contingent fee Should not perform a non-assurance service for an audit client if:Should not perform a non-assurance service for an audit client if: –Amount of fee is material to the firm; or –Fee is dependent upon the outcome of a future or contemporary audit judgment related to a material amount in the financial statements

16 Contingent fees – ED Responses Generally supportiveGenerally supportive Four respondents of view should not charge any contingent fee to an audit clientFour respondents of view should not charge any contingent fee to an audit client Two respondents of view there should be specific guidance on taxTwo respondents of view there should be specific guidance on tax Two respondents of view guidance should include prohibition on contingent fee arrangements between a firm and a third partyTwo respondents of view guidance should include prohibition on contingent fee arrangements between a firm and a third party One respondent of view should address contingent fees charged by a network firmOne respondent of view should address contingent fees charged by a network firm Several noted Section 291 not aligned to 290Several noted Section 291 not aligned to 290

17 Contingent fees – TF Proposals Expand guidance to include a prohibition on network firms charging contingent fees that would be material to the audit firm, if the audit firm charged the feeExpand guidance to include a prohibition on network firms charging contingent fees that would be material to the audit firm, if the audit firm charged the fee Align guidance in Section 291 with 290 on providing an assurance service for a contingent feeAlign guidance in Section 291 with 290 on providing an assurance service for a contingent fee

18 Discussion