Source: https://www.iesbaecode.org/part/1/120
Timestamp: 2020-01-20 01:30:22
Document Index: 223460868

Matched Legal Cases: ['art 2', 'art 3', 'art 4', 'art 4', 'arts 4', 'art 1']

Section 120: THE CONCEPTUAL FRAMEWORK | IESBA Code of Ethics for Professional Accountants
Introduction (120.1 to 120.2)
The circumstances in which professional accountants operate might create threats to compliance with the fundamental principles. Section 120 sets out requirements and application material, including a conceptual framework, to assist accountants in complying with the fundamental principles and meeting their responsibility to act in the public interest. Such requirements and application material accommodate the wide range of facts and circumstances, including the various professional activities, interests and relationships, that create threats to compliance with the fundamental principles. In addition, they deter accountants from concluding that a situation is permitted solely because that situation is not specifically prohibited by the Code.
The conceptual framework specifies an approach for a professional accountant to:
Evaluate the threats identified; and
Address the threats by eliminating or reducing them to an acceptable level.
General (R120.3 to 120.5 A4)
R120.3
The professional accountant shall apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles set out in Section 110.
120.3 A1
Additional requirements and application material that are relevant to the application of the conceptual framework are set out in:
Part 2 - Professional Accountants in Business;
Part 3 - Professional Accountants in Public Practice; and
International Independence Standards, as follows:
Part 4A - Independence for Audit and Review Engagements; and
Part 4B - Independence for Assurance Engagements Other than Audit and Review Engagements.
R120.4
R120.5
When applying the conceptual framework, the professional accountant shall:
Exercise professional judgment;
Remain alert for new information and to changes in facts and circumstances; and
Use the reasonable and informed third party test described in paragraph 120.5 A4.
120.5 A1
Professional judgment involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, including the nature and scope of the particular professional activities, and the interests and relationships involved. In relation to undertaking professional activities, the exercise of professional judgment is required when the professional accountant applies the conceptual framework in order to make informed decisions about the courses of actions available, and to determine whether such decisions are appropriate in the circumstances.
120.5 A2
An understanding of known facts and circumstances is a prerequisite to the proper application of the conceptual framework. Determining the actions necessary to obtain this understanding and coming to a conclusion about whether the fundamental principles have been complied with also require the exercise of professional judgment.
120.5 A3
In exercising professional judgment to obtain this understanding, the professional accountant might consider, among other matters, whether:
There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the accountant.
There is an inconsistency between the known facts and circumstances and the accountant's expectations.
The accountant's expertise and experience are sufficient to reach a conclusion.
There is a need to consult with others with relevant expertise or experience.
The information provides a reasonable basis on which to reach a conclusion.
The accountant's own preconception or bias might be affecting the accountant's exercise of professional judgment.
120.5 A4
The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant's conclusions in an impartial manner.
Identifying Threats (R120.6 to 120.6 A4)
R120.6
The professional accountant shall identify threats to compliance with the fundamental principles.
120.6 A1
An understanding of the facts and circumstances, including any professional activities, interests and relationships that might compromise compliance with the fundamental principles, is a prerequisite to the professional accountant's identification of threats to such compliance. The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organization that can enhance the accountant acting ethically might also help identify threats to compliance with the fundamental principles. Paragraph 120.8 A2 includes general examples of such conditions, policies and procedures which are also factors that are relevant in evaluating the level of threats.
120.6 A2
Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. It is not possible to define every situation that creates threats. In addition, the nature of engagements and work assignments might differ and, consequently, different types of threats might be created.
120.6 A3
Threats to compliance with the fundamental principles fall into one or more of the following categories:
Self-interest threat - the threat that a financial or other interest will inappropriately influence a professional accountant's judgment or behavior;
Self-review threat - the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made; or an activity performed by the accountant, or by another individual within the accountant's firm or employing organization, on which the accountant will rely when forming a judgment as part of performing a current activity;
Advocacy threat - the threat that a professional accountant will promote a client's or employing organization's position to the point that the accountant's objectivity is compromised;
Familiarity threat - the threat that due to a long or close relationship with a client, or employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work; and
Intimidation threat - the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant.
120.6 A4
A circumstance might create more than one threat, and a threat might affect compliance with more than one fundamental principle.
Evaluating Threats (R120.7 to 120.9 A2)
R120.7
When the professional accountant identifies a threat to compliance with the fundamental principles, the accountant shall evaluate whether such a threat is at an acceptable level.
120.7 A1
An acceptable level is a level at which a professional accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles.
Factors Relevant in Evaluating the Level of Threats
120.8 A1
The consideration of qualitative as well as quantitative factors is relevant in the professional accountant's evaluation of threats, as is the combined effect of multiple threats, if applicable.
120.8 A2
The existence of conditions, policies and procedures described in paragraph 120.6 A1 might also be factors that are relevant in evaluating the level of threats to compliance with fundamental principles. Examples of such conditions, policies and procedures include:
Educational, training and experience requirements for the profession.
Effective complaint systems which enable the professional accountant and the general public to draw attention to unethical behavior.
An explicitly stated duty to report breaches of ethics requirements.
R120.9
If the professional accountant becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, the accountant shall re-evaluate and address that threat accordingly.
120.9 A1
Remaining alert throughout the professional activity assists the professional accountant in determining whether new information has emerged or changes in facts and circumstances have occurred that:
Affect the accountant's conclusions about whether safeguards applied continue to be appropriate to address identified threats.
120.9 A2
If new information results in the identification of a new threat, the professional accountant is required to evaluate and, as appropriate, address this threat. (Ref: Paras. R120.7 and R120.10).
Addressing Threats (R120.10 to R120.11)
If the professional accountant determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the accountant shall address the threats by eliminating them or reducing them to an acceptable level. The accountant shall do so by:
Eliminating the circumstances, including interests or relationships, that are creating the threats;
Declining or ending the specific professional activity.
Actions to Eliminate Threats
120.10 A1
Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat. However, there are some situations in which threats can only be addressed by declining or ending the specific professional activity. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level.
120.10 A2
Safeguards are actions, individually or in combination, that the professional accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level.
Consideration of Significant Judgments Made and Overall Conclusions Reached
The professional accountant shall form an overall conclusion about whether the actions that the accountant takes, or intends to take, to address the threats created will eliminate those threats or reduce them to an acceptable level. In forming the overall conclusion, the accountant shall:
Review any significant judgments made or conclusions reached; and
Use the reasonable and informed third party test.
Considerations for Audits, Reviews and Other Assurance Engagements (120.12 A1 to 120.13 A2)
120.12 A1
Professional accountants in public practice are required by International Independence Standards to be independent when performing audits, reviews, or other assurance engagements. Independence is linked to the fundamental principles of objectivity and integrity. It comprises:
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 firm's or an audit or assurance team member's integrity, objectivity or professional skepticism has been compromised.
120.12 A2
International Independence Standards set out requirements and application material on how to apply the conceptual framework to maintain independence when performing audits, reviews or other assurance engagements. Professional accountants and firms are required to comply with these standards in order to be independent when conducting such engagements. The conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles applies in the same way to compliance with independence requirements. The categories of threats to compliance with the fundamental principles described in paragraph 120.6 A3 are also the categories of threats to compliance with independence requirements.
120.13 A1
Under auditing, review and other assurance standards, including those issued by the IAASB, professional accountants in public practice are required to exercise professional skepticism when planning and performing audits, reviews and other assurance engagements. Professional skepticism and the fundamental principles that are described in Section 110 are inter-related concepts.
120.13 A2
In an audit of financial statements, compliance with the fundamental principles, individually and collectively, supports the exercise of professional skepticism, as shown in the following examples:
Integrity requires the professional accountant to be straightforward and honest. For example, the accountant complies with the principle of integrity by:
Being straightforward and honest when raising concerns about a position taken by a client; and
Pursuing inquiries about inconsistent information and seeking further audit evidence to address concerns about statements that might be materially false or misleading in order to make informed decisions about the appropriate course of action in the circumstances.
In doing so, the accountant demonstrates the critical assessment of audit evidence that contributes to the exercise of professional skepticism.
Objectivity requires the professional accountant not to compromise professional or business judgment because of bias, conflict of interest or the undue influence of others. For example, the accountant complies with the principle of objectivity by:
Recognizing circumstances or relationships such as familiarity with the client, that might compromise the accountant's professional or business judgment; and
Considering the impact of such circumstances and relationships on the accountant's judgment when evaluating the sufficiency and appropriateness of audit evidence related to a matter material to the client's financial statements.
In doing so, the accountant behaves in a manner that contributes to the exercise of professional skepticism.
Professional competence and due care requires the professional accountant to have professional knowledge and skill at the level required to ensure the provision of competent professional service, and to act diligently in accordance with applicable standards, laws and regulations. For example, the accountant complies with the principle of professional competence and due care by:
Applying knowledge that is relevant to a particular client's industry and business activities in order to properly identify risks of material misstatement;
Designing and performing appropriate audit procedures; and
Applying relevant knowledge when critically assessing whether audit evidence is sufficient and appropriate in the circumstances.
The provisions in Section 120 are not intended to be a “step-by-step checklist.” Rather, they specify a logical and systematic approach for PAs to identify, evaluate and address threats to compliance with the fundamental principles. All the provisions in the subsequent sections of the Code build on the provisions in the conceptual framework, and provide general and context-specific guidance that might be relevant depending on the specific facts and circumstances of a particular professional activity or service. Therefore, those subsequent provisions are incremental in nature and generally do not repeat the material in Section 120.
Incremental application material for evaluating threats is provided for professional accountants in business (PAIBs) in paragraphs 200.7 A1 to 200.7 A3 and for professional accountants in public practice (PAPPs) in paragraphs 300.7 A1 to 300.7 A2.
IESBA Safeguards Task Force Chair Gary Hannaford explains key revisions to the conceptual framework and enhancements in relation to safeguards throughout the Code of Ethics.
Stages in the Conceptual Framework
The IESBA reaffirmed that the three-stage conceptual framework remains appropriate and, as described in the BFAP, refined the proposals in Safeguards ED-1, to clarify the three stages as follows:
Evaluating the threats, including a requirement to re-evaluate and address new threats identified as part of the PA’s responsibility to properly evaluate threats; and
Addressing the threats, including a new requirement to “step back” to review the overall conclusion about whether the threats have been addressed as part of the PA’s responsibility to properly address threats.
[Paragraph 25]
Improving the Structure Basis for Conclusions (April 2018)
Evaluating the Level of Threats, Including Re-evaluating and Addressing New threats Identified
"The enhanced conceptual framework stresses the importance of remaining alert throughout the process of identifying, evaluating and addressing threats. It includes a requirement for PAs to “remain alert for new information and to changes in facts and circumstances” (see paragraph R120.5 (b)). This means that if a PA becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, the accountant is required to re-evaluate and address that threat accordingly. New application material explains that remaining alert throughout the professional activity assists the PA in determining whether new information has emerged or changes in facts and circumstances have occurred (see paragraphs 120.9 A1-120.9 A2)."
Professional Skepticism & Professional Judgement Basis for Conclusions (April 2018)
Application Material Relating to Professional Judgment
Having given due consideration to respondents’ comments and drafting suggestions, the IESBA reaffirmed that it is the public interest to include the new application material relating to professional judgment in the restructured Code. The IESBA determined that is was not necessary to elevate the application material to a requirement because the restructured Code already includes a requirement to exercise professional judgment in paragraph R120.5.
[Paragraph 27]
The words “professional” and “skill” are used in order to be consistent with existing terminology that is already used in the Code (see description of professional competence and due care in paragraphs 110.1 A1 and R113.1).
Reasonable and informed third party (RITP)
"It is important that the Code explain the characteristics of the RITP in a manner that is clear. The application material clarifies that the RITP test is:
Applied from the perspective of a third party who is objective, and one who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made.
A consideration by the PA about whether the same conclusions would likely be reached by that third party."
[Paragraph 23]
"The Board reaffirmed its view that:
The RITP does not need to be an accountant but rather applies the lens of an objective third party.
The RITP test should be broad enough to apply to all situations covered by the Code. Accordingly, a focus only on an investor’s perspective would be too narrow and might not, for example, address situations in the public and non-profit sectors.
The RITP is not expected to be knowledgeable about all the matters in the Code. However, the RITP cannot be an uninformed member of the public, but rather someone who “would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner.”
The Board considered that the meaning of the word “objective” as suggested by a respondent is not substantively different from “impartial” as used in the revised text."
"From a practical perspective, it is expected that PAs would apply the provisions for evaluating threats by considering the factors that are relevant to evaluating threats provided in Section 120 as well as those included in subsequent sections of the restructured Code. The factors that are relevant to evaluating threats would likely be considered:
When a threat is identified to determine whether it is at an acceptable level. No further action need be taken for threats that are at an acceptable level; and
To determine whether an action taken by the PA is effective in reducing the threat to an acceptable level, and therefore qualifies as a safeguard."
[Paragraph 29]
Description of Acceptable Level
"The IESBA reaffirmed that the new description of the term “acceptable level” in paragraph 120.7 A1 is appropriate. The IESBA did not take on the suggestion to replace the word “likely” with “probably”, because the IESBA determined that these two words mean essentially the same thing. The IESBA, however, agreed to give the concept of “acceptable level” greater prominence in the restructured Code by positioning it under its own subheading titled “Acceptable Level”."
[Paragraph 52]
"The IESBA reaffirmed its Phase 1 decision that conditions, policies and procedures are no longer safeguards under the revised description of a safeguard because they are not specific actions that the PA, firm or network firm takes to reduce threats to an acceptable level. However, a practical consideration that will factor into a PA’s evaluation of the level of a specific threat is the PA’s judgment about whether those conditions, policies and procedures contribute in reducing the threat to an acceptable level.
In response to feedback received from respondents, the IESBA has made a refinement to refer to those conditions, policies and procedures as “factors that are relevant in evaluating the level of threats…” (refer to paragraph 120.8 A2). This change is intended to clarify the role of conditions, policies and procedures in applying the conceptual framework. The refinement also improves the connectivity between Phases 1 and 2 of the project because it introduces the phrase “…factors that are relevant in evaluating the level of threats…” (which is used throughout the Code) into the conceptual framework set out in Section 120.
The IESBA acknowledges that some firms, particularly those in the SMP community, might continue to face practical challenges in applying appropriate safeguards given resource constraints."
[Paragraphs 42-44]
"The application material clarifies that if new information results in the identification of a new threat, the PA is required to evaluate and, as appropriate, address the threat. With respect to the suggestion to set a specific timeframe for re-evaluating threats in the Code, the IESBA determined that a principles-based approach based on the re-evaluation being triggered by the PA’s knowledge of new information or changes in facts and circumstances, coupled with the requirement to remain alert throughout the professional activity to such changes, would be more robust."
[Paragraph 31]
"In response to the feedback from respondents, the IESBA determined to make the following enhancements:
Amending the description of a safeguard to emphasize that safeguards are applied to reduce threats to an acceptable level. The idea that a safeguard reduces threats implies that safeguards are addressing specific threats.
Repositioning examples of actions that might eliminate threats before examples of actions that might be safeguards.
Clarifying that safeguards cannot eliminate threats. Accordingly, revised application material under a sub-heading “Actions to Eliminate Threats” explains that there are some situations in which threats can only be addressed by declining or ending the specific professional activity.
A more consistent approach is used across the various sections in the Code to achieve the objective of increasing the connectivity of the examples of actions that might be safeguards to specific types of threats. This includes having:
An introductory paragraph that emphasizes the specific type or category of threats that might be created by a particular circumstance (unless it is determined that all threats are likely to be created);
Tailored application material to assist in evaluating and addressing specific threats that might be created. This application material provides:
Examples of factors that might be relevant in evaluating threats;
Examples of actions that might eliminate threats; and
Examples of actions that might be safeguards to address the specific type or category of threat(s).
Regarding the examples of actions that might be safeguards in the restructured Code, in most situations where the facts and circumstances are similar to those described in the Code, the IESBA expects that such actions would be effective in reducing threats to an acceptable level and would therefore be safeguards. However, the list of examples in the Code is not intended to be all-inclusive, and the examples of actions included therein are not guaranteed to be safeguards in all situations."
[Paragraphs 47-49]
Overarching requirements versus ethical outcomes
The new application material in paragraphs 120.12 A1-120.12 A2 under the section heading Considerations for Audits, Reviews and Other Assurance Engagements in Section 120:
Gives greater prominence to the overarching requirement for PAPPs to be independent when providing audit and assurance services and enhances the linkage between independence and the conceptual framework.
Explains the interaction between the fundamental principles and the independence sections relative to the PA’s responsibility to apply the provisions in the conceptual framework to maintain independence. To provide adequate context, this new application material repeats the description of independence that is included in Parts 4A and 4B of the restructured Code. [Paragraph 22]
Application Material Relating to Professional Skepticism
The IESBA determined that the overriding public interest objective is to promote the application of professional skepticism in audits, reviews and other assurance engagements. Accordingly, the IESBA reaffirmed its decisions to (a) supplement the few references to professional skepticism with new application material to explain how compliance with the fundamental principles supports the exercise of professional skepticism, and (b) illustrate this linkage in the context of an audit of financial statements.
The explicit reference to Section 110 emphasizing the location of the description of the fundamental principles is intended to minimize the risk of users of the Code misreading the material in paragraph 120.13 A2 to be a description of the fundamental principles.
[Paragraph 20]
With respect to the placement of the professional skepticism application material, the IESBA reaffirmed that the material should be prominently positioned in paragraphs 120.13 A1 to 120.13 A2 in Part 1, Section 120. As a practical matter, the IESBA determined that any elaboration of professional skepticism in the Code should be made in close proximity to the first mention of professional skepticism, which is in paragraph 120.12 A1 as part of the description of independence under the heading titled “Considerations for Audits, Reviews and Other Assurance Engagements.”
[Paragraph 22]