1. IESBA CAG Meeting September 14, 2016
Safeguards Phases 1 and 2
Gary Hannaford, Task Force Chair
IESBA CAG Meeting
September 14, 2016

2. Project Overview Proposed Restructured Code Safeguards Phases 1 and 2
Safeguards ED-1
NAS Enhancements
Conforming Amendments
Proposed Restructured Code

3. Session Objectives
Report-back on March 2016 and June 2016 CAG discussions
Provide a summary of the significant issues raised by respondents to Safeguards ED-1 and obtain CAG views on the revisions made
To obtain CAG views on proposals pertaining the non-assurance (NAS) section of the extant Code
Provide an update on other Phase 2 activities

4. Outline Project timeline
Recap of Safeguards ED-1 and summary of issues raised by respondents
Key Revisions Made
Interaction between independence and the fundamental principles
Clarifications to the CF, including clarifications about stages
Description of reasonable and informed third party and acceptable level
Other refinements, including matters relevant to Section 300
Proposals for NAS
Other Phase 2 activities
Gary to note that “Interaction between independence and the fundamental principles” is dealt with by Structure and remind the CAG that it was addressed as part of Don’s presentation (session B). Don and Gary to agree on when to obtain input on paragraphs A1 and A2 as well as the roadmap para at A1.

5. Project Timeline Dec 2015 March 2016 June 2016 Sept 2016 Dec 2016
Safeguards ED-1 Released
March 2016
CAG Meeting
Phase 2
IESBA Meeting
June 2016
CAG Teleconference
Phase 1
NSS Meeting
Phases 1 and 2
Discussion
Sept 2016
Dec 2016
Planned approval of “agreement in principle” for Phase 1 text
Planned approval for Phase 2 ED*
Q2-Q4
2017
Consideration of Comments on ED-2
Planned approval of text Phases 1 and 2
* 90-day comment period for ED-2

6. Recap of Safeguards ED-1
Enhanced guidance for applying the CF
More robust provisions to identify, evaluate and address threats
New requirement that emphasize the need for PAs to re-evaluate threats
New requirement for PAs to perform an overall assessment (step-back)
Improved descriptions of key terms and concepts
Reasonable and informed third party
Acceptable level
Safeguards
Streamlined examples of safeguards that are linked to threats

7. Significant Issues Raised by Respondents
Strong support for project objectives, but some
Expressed reservations about the extent of changes to the CF
Asked for clarification regarding who should perform the reasonable and informed third party test
Raised practical challenges with the requirements for reevaluating threats and performing the overall assessment
Concerns raised about safeguards
Examples of safeguards in in S300 should be revisited for appropriateness
Explicit statement needed to indicate that there are some situations when the application of safeguards will not address threats

8. General Comments and TF Responses
Some believe that proposals are more prescriptive than the extant Code, while others question whether certain changes to the CF are within scope
TF affirms that clarifications needed to be made to the CF in order to assist PAs apply the CF in an a more consistent and appropriate manner
Some requests for guidance regarding documentation
TF believes extant documentation provisions are adequate
Some believe that IESBA should align its efforts to relevant initiatives being undertaken by the IAASB and others
TF agrees and has deferred certain aspects of its project

9. June 2016 CAG Teleconference
Highlights of respondents’ feedback on Safeguards ED-1 was presented to the CAG during a June 2016 teleconference
CAG provided input on Task Force proposed revisions to Safeguards ED-1 in advance of June 2016 IESBA meeting
Agenda Item C includes report backs, including the June CAG teleconference
Representatives are asked to note and provide any comments on CAG report backs

10. Matter for CAG Consideration
1. Do Representatives agree with the TF’s response to the general comments on Safeguards ED-1?

11. Stages in Conceptual Framework
Identifying Threats
Understand facts and circumstances – relationships and interests
Conditions, policies and procedures help identity threats
Evaluating Threats
Conditions, policies and procedures might affect the level of threats
Re-evaluate threats when new information arise or facts or circumstances change
Addressing Threats
Either:
Eliminate circumstance;
Apply safeguard; or
Decline/end professional activity
Perform overall assessment (step-back)
June 2016 CAG call participants generally supported retaining a simple three-stage CF that require PAs to identify, evaluate and address threats

12. Re-evaluating Threats and Overall Assessment
Clarifications made to indicate that the requirement to:
Re-evaluate threats involves a consideration of new information or changes in facts and circumstances as part of the evaluating threats stage
Perform overall assessment involves a consideration of significant judgments and overall conclusions reached as part of the addressing threats stage
PA thinks about/ reviews conclusions reached and judgments made, and asks “would someone else with the same information, at the time, reach the same conclusions?”
New information might include corroborating, as well as, contradictory information
See refinements in R120.7 and R120.8 in Agenda Item C-2
Also 120

13. Matter for CAG Consideration
2. Do Representatives agree with the TF’s revisions to clarify the various stages of the CF, including the revisions made to explain the timing for re-evaluating threats and performing the overall assessment?
See refinements in R120.7 and R120.8 in Agenda Item C-2

14. Participants in the June CAG teleconference noted that:
Reasonable and Informed Third Party (RITP)
Participants in the June CAG teleconference noted that:
Proposals should clarify who might be able to perform the RITP test
Test should be done from the perspective of another person who does not have to be a PA (maybe a user)
TF should consider whether the same description of RITP test should apply for all situations in the Code
TF should focus on describing the characteristics of the RITP as well as the RITP test

15. TF revisions emphasize the concept of RITP and explain that:
Revisions to RITP Concept
TF revisions emphasize the concept of RITP and explain that:
The RITP test involves consideration by the PA about whether the same conclusions would likely be reached by another person
Such a person, a RITP would possess sufficient knowledge and experience to objectively evaluate the appropriateness of the PA’s conclusions, and weigh all the relevant facts and circumstances that the PA knows, or could reasonably be expected to know, at the time the conclusions were made
Respondents urged IESBA to avoid the use of the word “hypothetical”
See paragraphs of C-1.

16. Matter for CAG Consideration
3. Do Representatives agree with the TF’s revisions to clarify the description of reasonable and informed third party?
See refinements in R120.7 and R120.8 in Agenda Item C-2

17. RITP’s view that that PA comply with FPs
Acceptable Level
Level of Threat
RITP’s view that that PA comply with FPs
A level at which a PA applying the RITP test would likely conclude that the PA complies with the fundamental principles (FPs)

18. Matter for CAG Consideration
4. Do Representatives agree with the TF’s conclusions about how the term acceptable level should be described in the proposed restructured Code?
See refinements in R120.7 and R120.8 in Agenda Item C-2

19. Addressing Threats
As proposed in Safeguards ED-1, TF believes that threats are addressed by either:
Eliminating circumstance, including interests or relationships creating the threat
Applying safeguards, where available and capable of being applied
Declining or ending the professional activity
Proposal to withdraw certain activities which were formerly characterized as safeguards in the extant Code is retained

20. Description of safeguards in the Safeguards ED-1 retained
Safeguards are actions, individually or in combination, that the PA takes that effectively eliminate threats to compliance with the fundamental principles or reduce them to an acceptable level
Revised proposals clarify
There are some situations in which the circumstances creating the threats cannot be eliminated and there are no safeguards to eliminate the threats created or reduce them to an acceptable level
PA is required to decline or end the specific professional activity
See A2

21. Matters for CAG Consideration
5. Representatives are asked to consider the feedback on Safeguards ED-1 and indicate whether they agree with the TF’s conclusions to:
Make no change to the description of safeguards.
Retain proposals to withdraw certain activities which were formerly characterized as safeguards in the extant Code.
See refinements in R120.7 and R120.8 in Agenda Item C-2

22. Revisions to Section 300
Structure TF developed proposed introductory text to clarify that PAs in public practice should apply the CF set out in Section 120
Section 300 set out considerations for PAs in public practice to apply the CF
Requirements in CF are not repeated in Section 300 (para A2 of the ED is dropped)
Most revisions are to align to the proposed revisions in the CF
Examples of safeguards revisited and TF has dropped as a safeguard “…consulting or seeking with approval with TCWG…”

23. Matters for CAG Consideration
6. Representatives are for views about the TF’s proposed revisions to Section 300
7. Representatives are asked to share any further comments on matters relevant to Safeguards ED-1

24. Proposed Section 600, NAS
Agenda Items C-4 and C-5

25. Overview of NAS Enhancements
April Release
Prohibits assumption of mgt. resp.
Removal of certain exclusions
Introduction of guidance to explain “routine and mechanical” services
Dec 2015 ED
New drafting convention establish clearer provisions (Structure ED-1)
More robust CF with more explicit req’ts and application material (Safeguards ED-1)
Sept 2016
Extant NAS provisions restructured
CAs arising from Safeguards ED-1
Added new and enhanced general provisions for all NAS
PIEs vs Non-PIEs
No changes made to change the types of NAS permitted

26. Enhanced General Provisions
New introductory text:
Emphasize the need to comply with the fundamental principles, as well as independence, when providing NAS to audit clients
Explain that subsections set out requirements and application material that are relevant to specific types of NAS
Indicate that in some cases, the Code prohibits a firm or network firm from providing a NAS to an audit client because there can be no safeguards to eliminate the threats created or reduce them to an acceptable level

27. Enhanced General Provisions
New application material:
For evaluating and addressing threats created by providing any NAS to an audit client, including those not specified in the Code.
To explain materiality in relation to an audit client’s financial statements
To explain that a firm or network should consider the combined effects of threats created by providing multiple NAS to the same audit client

28. Avoiding the Assumption of Mgt Responsibilities
Extant provisions for management responsibilities retained, but restructured under new drafting guidelines
Firms and network firms are still prohibited from assuming management responsibilities when providing NAS to an audit client
Moved requirements and application material to the general provisions section to clarify that they are applicability when providing all NAS to audit clients
TF continues to believe that it is appropriate for firms and network firms to provide advice and recommendations to assist management of an audit client in discharging its responsibilities
See R & R along with related application materials.

29. Types of NAS Addressed in the Code
Subsection
Type of NAS
603
Accounting and bookkeeping services, including preparing accounting records and f/s
604
Valuations services
605
Taxation services
606
Internal audit services
607
Information technology services
608
Litigation support services
609
Legal services
610
Recruiting services
611
Corporate finance services

30. Ordering of Provisions in Subsections
TF worked closely with Structure TF to develop a consistent layout for each NAS subsection as follows:
Description of the type of NAS
Description of the type of threat created
Consistent with the approach taken in Structure ED-1
Requirements generally appear before the AM, except for when AM support applying the CF (i.e., AM for evaluating and addressing specific threats)

31. Ordering of Provisions – Prohibitions
Certain NAS are prohibited for audit clients that are not PIEs and for audit clients that are PIEs
When a subsection includes a prohibition, the TF believe that it should come after the following:
Specific examples of factors to help firms and network firms evaluate the level of a threat
Examples of actions that might be safeguards to address the specific type of threats created

32. Explicit Link Between Threats and Safeguards
TF proposals retain many of the “examples of safeguards” in extant Code, but clarify that they are “actions that might be safeguards to address the specific threat created by providing the specific type of NAS
TF aims to refocus firms and network firms to be mindful of other actions that might be more appropriate depending on the facts and circumstances to address threats

33. Matters for CAG Consideration
Representatives are asked for views on:
The new introductory material set out in paragraphs 600.1–600.2.
The enhanced general provisions set out in paragraphs A1–R600.11; and
The ordering of the provisions in Section 600 and the subsections that follow.
Do Representatives agree with the new placement for the requirements and application material for management responsibilities (i.e., paragraphs R600.10–R600.11)?

34. Significance of Threats Vs Level of Threats
The EM to Safeguards ED-1 note that the words “material,” “significant” or “significance” are not appropriate for establishing the overarching requirements and principles about threats and safeguards
IESBA agreed to replace the words “…significance of the threat…,” with the words “…level of the threat…”
“… Level of the threat…” aligns more closely with the defined term “acceptable level”
“Significance” and “significant” will continue to be used in the Code in a manner that is consistent with the concept of “materiality”

35. New AM explains that the determination of materiality:
New AM relevant to the NAS section only to explain materiality in relation to an audit’s client’s f/s
Draws from material in a 2012 IESBA Staff Q&A
Includes a pointer to IAASB’s ISA 320
New AM explains that the determination of materiality:
Involves the exercise of professional judgment and impacted by both quantitative and qualitative factors
Is affected by perceptions of the financial information needs of users

36. Summary of Other Substantive Revisions to NAS
Litigation support services – New AM to explain that the audit client’s legal and regulatory environment in which the service is performed is a factor that is important to evaluating the level of any threat created
Recruiting Services – The requirement in the extant Code that prohibits firms and network firms from providing recruiting services to audit clients that are PIEs is extended to audit clients that are not PIEs
Gary to indicate that reference to extant Code in para 38 of paper should be to paragraph vs

37. Other Phase 2 Activities
Safeguards-specific conforming amendments to other areas in the Code, including to the:
Shaded and italicized paragraphs that formed part of Structure ED-1, including those that explain how to apply the CF to independence
Part C Phase 1 addressing the preparation and presentation of information and pressure to breach the fundamental principles
Proposed restructured text of the Long Association proposals
No safeguards-specific conforming amendments to NOCLAR

38. Matters for CAG Consideration
3. Representatives are asked to provide reactions to:
The new application material pertaining to materiality in relation to an audit client’s financial statements (see paragraph A5);
The requirements and application material in each subsection (602–611).
Representatives are asked to comment on any other matters that are relevant to Phase 2 of the Safeguards project more broadly.

39. Matters that Go Beyond the Safeguards Project Scope
Exploration of how to minimize the duplication of the same “examples of safeguards” in the NAS section of the Code
Considerations of the role of TCWG in the Code
Assessing whether the Code should continue to have differential requirements for PIEs vs non PIEs
Consideration of how to addressing evolving trends in taxation that might affect threats and safeguards
Consideration of documentation requirements in light of revisions to the CF