1. International Federation of Accountants545 Fifth Avenue, 14th FloorNew York, New York 10017 USAThis publication was prepared by the International Federation of Accountants (IFAC).Its mission is to serve the public interest, strengthen the worldwide accountancyprofession and contribute to the development of strong international economies byestablishing and promoting adherence to high-quality professional standards, furtheringthe international convergence of such standards and speaking out on public interestissues where the professions expertise is most relevant.This publication may be downloaded free-of-charge from the IFAC websitehttp://www.ifac.org. The approved text is published in the English language.IFAC welcomes any comments you may have regarding this handbook. Comments maybe sent to the address above or emailed to IAASBpubs@ifac.org.Copyright January 2006 by the International Federation of Accountants (IFAC). Allrights reserved. Permission is granted to make copies of this work provided that suchcopies are for use in academic classrooms or for personal use and are not sold ordisseminated and provided further that each copy bears the following credit line:Copyright by the International Federation of Accountants. All rights reserved. Usedby permission. Otherwise, written permission from IFAC is required to reproduce,store or transmit this document, except as permitted by law. Contactpermissions@ifac.org.ISBN: 1-931949-52-2

2. HANDBOOK OF INTERNATIONAL AUDITING, ASSURANCE, AND ETHICSPRONOUNCEMENTS2006 EDITIONScope of the HandbookThis handbook brings together for continuing reference background information on theInternational Federation of Accountants (IFAC) and the currently effectivepronouncements on auditing, assurance, and ethics issued by IFAC as of January 1,2006. In this handbook, the text of pronouncements that become effective at a date afterJanuary 1, 2006 has been shaded.How this Handbook is ArrangedThe contents of the handbook are arranged by section as follows:Changes of Substance from the 2005 Edition of the Handbook and Recent Developments ...................................................................... 1Background Information on the International Federation of Accountants ..... 5Ethics ............................................................................................................. 11Auditing, Assurance, and Related Services ...................................................219 3. CHANGESCHANGES OF SUBSTANCE FROM THE 2005 EDITION OFTHE HANDBOOK AND RECENT DEVELOPMENTSReferencesThis handbook contains references to the International Auditing Practices Committee(IAPC) of the International Federation of Accountants (IFAC). As of April 1, 2002 theInternational Auditing and Assurance Standards Board (IAASB) of IFAC replaced theIAPC.This handbook also contains references to the International Accounting StandardsCommittee (IASC). As of April 1, 2002 the International Financial Reporting Standards(IFRSs) (previously referred to as International Accounting Standards (IASs)) are issuedby the International Accounting Standards Board (IASB). References to IASs andIFRSs are to the IASs and IFRSs in effect at the date of preparing a pronouncement.Accordingly, readers are cautioned that, where a revised IAS or IFRS has been issuedsubsequently, reference should be made to the most recent IAS or IFRS.Pronouncements Issued by the IAASBAdditionsThe following additions have been made in this edition of the handbook:The Glossary of Terms has been updated.International Standard on Auditing (ISA) 230 (Revised), Audit Documentation. ISA 230 (Revised) is effective for audits of financial information for periods beginning on or after June 15, 2006. ISA 230, Documentation, remains in effect and is retained in this handbook, but will be withdrawn when ISA 230 (Revised) becomes effective.ISA 230 (Revised) gave rise to conforming amendments1 to ISA 200, Objective and General Principles Governing an Audit of Financial Statements, ISA 330, The Auditors Procedures in Response to Assessed Risks, and International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Services Engagements. The conforming amendments are reflected in the appendices to ISA 200, ISA 330 and ISQC 1. The conforming amendments to ISA 200 and ISA 330 are effective for audits of financial statements for periods beginning on or after June 15, 2006. Systems for quality control in compliance with ISQC 1, as amended, are required to be established by June 15, 2006.1Conforming amendment means an amendment to an existing Standard arising from the revision of an other Standard or the development of a new Standard.1 CHANGES 4. CHANGES OF SUBSTANCE AND RECENT DEVELOPMENTS International Standard on Review Engagements (ISRE) 2410, Review of InterimFinancial Information Performed by the Independent Auditor of the Entity iseffective for reviews of interim financial information for periods beginning on orafter December 15, 2006. ISRE 2410 gave rise to conforming amendments to ISA 210, Terms of AuditEngagements, and ISRE 2400, Engagements to Review Financial Statements.The conforming amendments are reflected in the appendices to ISA 210 and ISRE2400. The conforming amendments to ISA 210 are effective for audits of financialstatements for periods beginning on or after December 15, 2006. The conformingamendments to ISRE 2400 are effective for reviews of financial statements forperiods beginning on or after December 15, 2006.Withdrawals ISA 220, Quality Control for Audit Work was withdrawn in June 2005 when ISA220 (Revised), Quality Control for Audits of Historical Financial Informationbecame effective.Small Entity Audit ConsiderationsFor ISAs issued subsequent to March 2003, whenever necessary, small entity auditconsiderations are included in the body of those ISAs. Guidance contained in IAPS1005, The Special Considerations in the Audit of Small Entities is withdrawn whenrevisions to related ISAs become effective. Accordingly, readers are cautioned that, inaddition to the guidance in IAPS 1005, reference should be made to the small entityaudit considerations included in ISAs issued subsequent to March 2003.Exposure DraftsThe IAASB has issued exposure drafts on the following: ISA 260 (Revised), Communications with Those Charged with Governance ISA 320 (Revised), Materiality in the Identification and Evaluation ofMisstatements ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures(Other than Those Involving Fair Value Measurements and Disclosures) ISA 550 (Revised), Related Parties ISA 600 (Revised), The Audit of Group Financial Statements ISA 701, The Independent Auditors Report on Other Historical FinancialInformation ISA 705, Modifications to the Opinion in the Independent Auditors Report ISA 706, Emphasis of Matter Paragraphs and Other Matters Paragraphs in theIndependent Auditors ReportCHANGES2 5. CHANGES OF SUBSTANCE AND RECENT DEVELOPMENTSCHANGES ISA 800, The Independent Auditors Report on Summary Audited FinancialStatements Improving the Clarity of IAASB Standards a draft of four ISAs written in animproved styleOn the basis of consultations, the IAASB is confident that the basis for improving theclarity of its Standards explained in the Exposure Draft is appropriate and will receivesufficiently wide acceptance. The comment period for the Exposure Draft closes onFebruary 28, 2006. It can be downloaded from the IAASBs website athttp://www.iaasb.org.Once finalized, the IAASB intends to apply the new drafting conventions to as manyStandards as practicable in the shortest possible time, without compromising dueprocess. The IAASBs initial focus will be on ISAs, as opposed to the otherInternational Standards, reflecting the importance that audits conducted in accordancewith ISAs have to the public interest.The IAASB project to improve the clarity of its Standards will have a significant effecton the ISAs to be included in future editions of this handbook.For additional information on recent developments and to obtain final pronouncementsissued subsequent to December 31, 2005 or outstanding exposure drafts visit theIAASBs website at http://www.iaasb.org.Pronouncements Issued by the International Ethics StandardsBoard for AccountantsAdditionsDuring 2005 the International Ethics Standards Board for Accountants (IESBA) issued arevised Code of Ethics for Professional Accountants (the Code) establishing aconceptual framework for all professional accountants to ensure compliance with thefive fundamental principles of professional ethics. The revised Code is effective on June30, 2006. Section 290 is applicable to assurance engagements when the assurance reportis dated on or after June 30, 2006. Earlier application is encouraged.Recent Exposure DraftsThe IESBA has issued as exposure draft proposing a revision to the network firmdefinition contained in Section 290.For additional information on recent developments and to obtain final pronouncementsissued subsequent to December 31, 2005 or outstanding exposure drafts visit theIESBAs page on the IFAC website at http://www.ifac.org/. 3 CHANGES 6. CHANGES OF SUBSTANCE AND RECENT DEVELOPMENTSInternational Professional Practice Statement 1International Professional Practice Statement (IPPS) 1, Assuring the Quality ofProfessional Services was issued by the IFAC Council in August 1999. IPPS 1 wassuperseded by Statement of Membership Obligation 1, Quality Assurance, when itbecame effective on December 31, 2005. The Statements of Membership Obligationscan be downloaded from IFACs website at http://www.ifac.org.CHANGES4 7. BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTSThe OrganizationThe International Federation of Accountants (IFAC) is the worldwide organization forthe accountancy profession. Founded in 1977, its mission is to serve the public interest,IFAC will continue to strengthen the worldwide accountancy profession and contributeto the development of strong international economies by establishing and promotingadherence to high-quality professional standards, furthering the internationalconvergence of such standards and speaking out on public interest issues where the IFACprofessions expertise is most relevant.IFACs governing bodies, staff and volunteers are committed to the values of integrity,transparency and expertise. IFAC also seeks to reinforce professional accountantsadherence to these values, which are reflected in the IFAC Code of Ethics forProfessional Accountants.Primary ActivitiesServing the Public InterestIFAC provides leadership to the worldwide accountancy profession in serving the publicinterest by: Developing, promoting and maintaining global professional standards and a Codeof Ethics for Professional Accountants of a consistently high-quality; Actively encouraging convergence of professional standards, particularly, auditing,assurance, ethics, education, and financial reporting standards; Seeking continuous improvements in the quality of auditing and financialmanagement; Promoting the values of the accountancy profession to ensure that it continuallyattracts high caliber entrants; Promoting compliance with membership obligations; and Assisting developing and emerging economies, in cooperation with regionalaccounting bodies and others, in establishing and maintaining a professioncommitted to quality performance and in serving the public interest.Contributing to the Efficiency of the Global EconomyIFAC contributes to the efficient functioning of the international economy by: Improving confidence in the quality and reliability of financial reporting; Encouraging the provision of high-quality performance information (financial andnon-financial) within organizations;5IFAC 8. BACKGROUND INFORMATION ON THEINTERNATIONAL FEDERATION OF ACCOUNTANTS Promoting the provision of high-quality services by all members of the worldwideaccountancy profession; and Promoting the importance of adherence to the Code of Ethics for ProfessionalAccountants by all members of the accountancy profession, including members inindustry, commerce, the public sector, the not-for-profit sector, academia, andpublic practice.Providing Leadership and SpokesmanshipIFAC is the primary spokesperson for the international profession and speaks out on awide range of public policy issues, especially those where the professions expertise ismost relevant, as well as on regulatory issues related to auditing and financial reporting.This is accomplished, in part, through outreach to numerous organizations that rely onor have an interest in the activities of the international accountancy profession.MembershipIFAC is comprised of 163 member bodies from every part of the globe, representingmore than 2.5 million accountants in public practice, industry and commerce, the publicsector, and education. No other accountancy body in the world and few otherprofessional organizations have the broad-based international support that characterizesIFAC.IFACs strengths derive not only from its international representation, but also from thesupport and involvement of its individual member bodies, which are themselvesdedicated to promoting integrity, transparency, and expertise in the accountancyprofession, as well as from the support of regional accountancy bodies.Standard-Setting InitiativesIFAC has long recognized the need for a globally harmonized framework to meet theincreasingly international demands that are placed on the accountancy profession,whether from the business, public sector or education communities. Major componentsof this framework are the Code of Ethics for Professional Accountants, InternationalStandards on Auditing (ISAs), International Education Standards and InternationalPublic Sector Accounting Standards (IPSASs).IFAC standard-setting boards, described below, follow a due process that supports thedevelopment of high-quality standards in the public interest in a transparent, efficient,and effective manner. These standard-setting boards all have Consultative AdvisoryGroups, which provide public interest perspectives, and include public members.IFACs Public Interest Activity Committees (PIACs) the International Auditing andAssurance Standards Board, International Accounting Education Standards Board,International Ethics Standards Board for Accountants and the Compliance AdvisoryPanel are subject to oversight by the international Public Interest Oversight Board(PIOB) for the accountancy profession (see below).IFAC6 9. BACKGROUND INFORMATION ON THEINTERNATIONAL FEDERATION OF ACCOUNTANTSThe terms of reference, due process and operating procedures of the IFAC standard-setting boards are available from the IFAC website at http://www.ifac.org.IFAC actively supports convergence to ISAs and other standards developed by theIFAC standard-setting boards and the International Accounting Standards Board.Auditing and Assurance ServicesThe International Auditing and Assurance Standards Board (IAASB) develops ISAs andInternational Standards on Review Engagements, which deal with the audit and reviewof historical financial statements; and International Standards on AssuranceEngagements, which deal with assurance engagements other than the audit or review of IFAChistorical financial information. The IAASB also develops related practice statements.These standards and statements serve as the benchmark for high-quality auditing andassurance standards and statements worldwide. They establish standards and provideguidance for auditors and other professional accountants, giving them the tools to copewith the increased and changing demands for reports on financial information, andprovide guidance in specialized areas.In addition, the IAASB develops quality control standards for firms and engagementteams in the practice areas of audit, assurance and related services.EthicsThe Code of Ethics for Professional Accountants, developed by IFACs InternationalEthics Standards Board for Accountants (formerly the Ethics Committee), establishesethical requirements for professional accountants and provides a conceptual frameworkfor all professional accountants to ensure compliance with the five fundamentalprinciples of professional ethics. These principles are integrity, objectivity, professionalcompetence and due care, confidentiality, and professional behavior. Under theframework, all professional accountants are required to identify threats to thesefundamental principles and, if there are threats, apply safeguards to ensure that theprinciples are not compromised. A member body of IFAC or firm may not apply lessstringent standards than those stated in the Code.Public Sector AccountingIFACs International Public Sector Accounting Standards Board (IPSASB) focuses onthe development of high-quality financial reporting standards for use by public sectorentities around the world. It has developed a comprehensive body of IPSASs setting outthe requirements for financial reporting by governments and other public sectororganizations. The IPSASs represent international best practice in financial reporting bypublic sector entities. In many jurisdictions, the application of the requirements ofIPSASs will enhance the accountability and transparency of the financial reportsprepared by governments and their agencies.The IPSASs are contained in the 2006 edition of IFACs Handbook of InternationalPublic Sector Accounting Pronouncements and are also available from the IFAC 7 IFAC 10. BACKGROUND INFORMATION ON THE INTERNATIONAL FEDERATION OF ACCOUNTANTSwebsite at http://www.ifac.org. French and Spanish translations of the IPSASs are alsoavailable for download from the IFAC website.EducationWorking to advance accounting education programs worldwide, IFACs InternationalAccounting Education Standards Board (IAESB) (formerly the Education Committee)develops International Education Standards, setting the benchmarks for the education ofmembers of the accountancy profession. All member bodies are required to comply withthose standards, which address the education process leading to qualification as aprofessional accountant as well as the ongoing continuing professional development ofmembers of the profession. The IAESB also develops other guidance to assist memberbodies and accounting educators implement and achieve best practice in accountingeducation.This handbook does not contain the International Education Standards, which areavailable from the IFAC website at http://www.ifac.org.Support for Professional Accountants in BusinessBoth IFAC and its member bodies face the challenge of meeting the needs of anincreasing number of accountants employed in business and industry, the public sector,education and the not-for-profit sector. These accountants now comprise more than 50percent of the membership of member bodies. IFACs Professional Accountants inBusiness (PAIB) Committee develops guidance to assist member bodies in addressing awide range of professional issues, encourages and supports high-quality performance byprofessional accountants in business and strives to build public awareness andunderstanding of the work they provide.Small- and Medium-Sized PracticesIFAC is also focused on providing best practice guidance to another growingconstituency: small- and medium-sized practices (SMPs). IFACs SMP Committee(formerly the SMP Permanent Task Force) develops papers on topics of global concernand provides input in the development of international standards and on the work of theIFAC standard-setting boards. The committee also investigates ways in which IFAC,together with its member bodies, can respond to the needs of accountants operating insmall and medium enterprises and practices.Developing NationsIFACs Developing Nations Committee (formerly the Developing Nations PermanentTask Force) supports the development of the accountancy profession in all regions ofthe world by representing and addressing the interests of developing nations and byproviding guidance to strengthen the accountancy profession worldwide. The committeealso seeks resources and development assistance from member bodies and otherorganizations on their behalf.IFAC8 11. BACKGROUND INFORMATION ON THEINTERNATIONAL FEDERATION OF ACCOUNTANTSIFAC Member Body Compliance ProgramAs part of the Member Body Compliance Program, IFAC members and associates(mostly national professional institutes) are required to demonstrate how they have usedbest endeavors, subject to national laws and regulations, to implement the standardsissued by IFAC and the International Accounting Standards Board. The program, whichis overseen by IFACs Compliance Advisory Panel, also seeks to determine howmember bodies have met their obligations with respect to quality assurance andinvestigation and disciplinary programs for their members as set out in IFACsStatements of Membership Obligations (SMOs). The SMOs serve as the foundation ofthe Compliance Program and provide clear benchmarks to current and potential member IFACbodies to assist them in ensuring high-quality performance by professional accountants.This handbook does not contain the SMOs, which are available from the IFAC websiteat http://www.ifac.org.Regulatory FrameworkIn November 2003, IFAC, with the strong support of member bodies and internationalregulators, approved a series of reforms to increase confidence that the activities ofIFAC are properly responsive to the public interest and will lead to the establishment ofhigh-quality standards and practices in auditing and assurance.The reforms provide for the following: more transparent standard-setting processes,greater public and regulatory input into those processes, regulatory monitoring, publicinterest oversight, and ongoing dialogue between regulators and the accountancyprofession. This is accomplished through the following structures:Public Interest Oversight Board (PIOB)Established in February 2005, the PIOBoversees IFACs standard-setting activities in the areas of auditing and assurance, ethics including independence and education, as well as the IFAC Member BodyCompliance Program. The PIOB is comprised of eight representatives and two observermembers nominated by international regulators and institutions.Monitoring Group (MG)The MG comprises international regulators and relatedorganizations. Its role is to update the PIOB regarding significant events in theregulatory environment. It is also the vehicle for dialogue between regulators and theinternational accountancy profession.IFAC Regulatory Liaison Group (IRLG)The IRLG includes the IFAC President,Deputy President, Chief Executive, the Chairs of the IAASB, the Transnational AuditorsCommittee, the Forum of Firms, and up to four other members designated by the IFACBoard. It works with the MG and addresses issues related to the regulation of theprofession.IFAC Structure and OperationsGovernance of IFAC rests with its Board and Council. The IFAC Council comprisesone representative from each member body. The Board is a smaller group responsible9IFAC 12. BACKGROUND INFORMATION ON THEINTERNATIONAL FEDERATION OF ACCOUNTANTSfor policy setting. As representatives of the worldwide accountancy profession, Boardmembers take an oath of office to act with integrity and in the public interest.IFAC is headquartered in New York City and is staffed by accounting and otherprofessionals from around the world.IFAC Website, Copyright and TranslationIFAC makes its guidance widely available by enabling individuals to freely downloadall publications from its website (http://www.ifac.org) and by encouraging its memberbodies, regional accountancy bodies, standard setters, regulators and others to includelinks from their own websites, or print materials, to the publications on IFACs website.The IFAC Policy Statement, Permissions Policy for Publications Issued by theInternational Federation of Accountants, outlines its policy with regard to copyright.IFAC recognizes that it is important that preparers and users of financial statements,auditors, regulators, lawyers, academia, students, and other interested groups in non-English speaking countries have access to its standards in their native language. TheIFAC Policy Statement, Translation of Standards and Guidance Issued by theInternational Federation of Accountants, outlines its policy with regard to translation ofits standards.This handbook does not contain these policy statements. However, they are availablefrom the IFAC website at http://www.ifac.org. The website also features additionalinformation about IFACs structure and activities.IFAC 10 13. ETHICS CONTENTSPageCode of Ethics for Professional Accountants (Issued July 1996; Revised January 1998, November 2001 and June 2004) ......................................12Code of Ethics for Professional Accountants (Issued June 2005) ..................109For additional information on recent developments and to obtain final pronouncementsissued subsequent to December 31, 2005 or outstanding exposure drafts visit theIESBAs page on the IFAC website at http://www.ifac.org/.ETHICS TABLE OF CONTENTS11 ETHICS 14. July 1996 Revised January 1998, November 2001 and June 2004CODE OF ETHICS FORPROFESSIONAL ACCOUNTANTS(This Code is effective but will be withdrawn on June 30, 2006 when the Code issued in June 2005 becomes effective) CONTENTS PageDefinitions ......................................................................................................14Introduction .................................................................................................... 19The Public Interest ......................................................................................... 20Objectives ...................................................................................................... 21Fundamental Principles .................................................................................. 22The Code ........................................................................................................ 23PART AAPPLICABLE TO ALL PROFESSIONAL ACCOUNTANTS1. Integrity and Objectivity................................................................... 252. Resolution of Ethical Conflicts ........................................................ 263. Professional Competence .................................................................284. Confidentiality .................................................................................295. Tax Practice ..................................................................................... 316. Cross Border Activities ...................................................................337. Publicity ...........................................................................................34PART BAPPLICABLE TO PROFESSIONAL ACCOUNTANTSIN PUBLIC PRACTICE8. Independence ................................................................................... 35 Application of Principles to Specific Situations ..............................50 Section 8 Interpretations .................................................................. 859. Professional Competence and Responsibilities Regarding the Use of Non-Accountants.............................................................8710.Fees and Commissions ..................................................................... 88See page 109. The Code issued in June 2005 is effective on June 30, 2006.ETHICS12 15. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS11. Activities Incompatible with the Practice of Public Accountancy .......9112. Clients Monies ................................................................................ 9213. Relations with Other Professional Accountants inPublic Practice .................................................................................9414. Advertising and Solicitation ............................................................ 100PART CAPPLICABLE TO EMPLOYED PROFESSIONALACCOUNTANTS15. Conflict of Loyalties ........................................................................10516. Support for Professional Colleagues ............................................... 10617. Professional Competence ................................................................10718. Presentation of Information ............................................................. 108 ETHICS 13 ETHICS 16. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSDefinitionsIn this Code of Ethics for Professional Accountants the following expressions appearin bold type when they are first used and have the following meanings assigned tothem:Advertising The communication to the public of information as tothe services or skills provided by professionalaccountants in public practice with a view to procuringprofessional business.Audit clientAn entity in respect of which a firm conducts an auditengagement. When the audit client is a listed entity,audit client will always include its related entities.Audit engagementAn assurance engagement to provide a high level ofassurance that financial statements are free of materialmisstatement, such as an engagement in accordance withInternational Standards on Auditing. This includes astatutory audit which is an audit required by nationallegislation or other regulation.Assurance clientAn entity in respect of which a firm conducts anassurance engagement.Assurance engagementAn engagement conducted to provide:(a) A high level of assurance that the subject matterconforms in all material respects with identifiedsuitable criteria; or(b) A moderate level of assurance that the subjectmatter is plausible in the circumstances.This would include an engagement in accordance withthe International Standard on Assurance Engagementsissued by the International Auditing and AssuranceStandards Board or in accordance with specificstandards for assurance engagements issued by theInternational Auditing and Assurance Standards Boardsuch as an audit or review of financial statements inaccordance with International Standards on Auditing.Assurance team(a) All professionals participating in the assuranceengagement;(b) All others within a firm who can directlyinfluence the outcome of the assuranceengagement, including: 14ETHICS 17. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Those who recommend the compensation of, or who provide direct supervisory, management or other oversight of the assurance engagement partner in connection with the performance of the assurance engagement. For the purposes of an audit engagement this includes those at all successively senior levels above the lead engagement partner through the firms chief executive; Those who provide consultation regarding technical or industry specific issues, transactions or events for the assurance engagement; and Those who provide quality control for the assurance engagement; and(c) For the purposes of an audit client, all those withina network firm who can directly influence theETHICSoutcome of the audit engagement.Client accountAny bank account which is used solely for the bankingof clients monies.Clients monies Any monies including documents of title to moneye.g., bills of exchange, promissory notes, and documentsof title which can be converted into money e.g., bearerbonds received by a professional accountant in publicpractice to be held or paid out on the instruction of theperson from whom or on whose behalf they arereceived.Close familyA parent, non-dependent child or sibling.Direct financial interest A financial interest: Owned directly by and under the control of anindividual or entity (including those managed on adiscretionary basis by others); or Beneficially owned through a collective investmentvehicle, estate, trust or other intermediary overwhich the individual or entity has control.Directors and officersThose charged with the governance of an entity,regardless of their title, which may vary from country tocountry.15ETHICS 18. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSEmployed professional A professional accountant employed in industry,accountantcommerce, the public sector or education.Existing accountant A professional accountant in public practice currentlyholding an audit appointment or carrying outaccounting, taxation, consulting or similar professionalservices for a client.Financial interestAn interest in an equity or other security, debenture, loanor other debt instrument of an entity, including rightsand obligations to acquire such an interest andderivatives directly related to such interest.Firm(a) A sole practitioner, partnershiporcorporation of professional accountants;(b) An entity that controls such parties; and(c) An entity controlled by such parties.Immediate familyA spouse (or equivalent) or dependent.IndependenceIndependence is:(a) Independence of mind the state of mind thatpermits the provision of an opinion without beingaffected by influences that compromiseprofessional judgment, allowing an individual toact with integrity, and exercise objectivity andprofessional skepticism; and(b) Independence in appearance the avoidance offacts and circumstances that are so significant areasonable and informed third party, havingknowledge of all relevant information, includingany safeguards applied, would reasonablyconclude a firms, or a member of the assuranceteams, integrity, objectivity or professionalskepticism had been compromised.Indirect financialA financial interest beneficially owned through ainterestcollective investment vehicle, estate, trust or otherintermediary over which the individual or entity has nocontrol.Lead engagement In connection with an audit, the partner responsible forpartner signing the report on the consolidated financialstatements of the audit client, and, where relevant, thepartner responsible for signing the report in respect ofany entity whose financial statements form part of theETHICS 16 19. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSconsolidated financial statements and on which aseparate stand-alone report is issued. When noconsolidated financial statements are prepared, the leadengagement partner would be the partner responsible forsigning the report on the financial statements.Listed entity An entity whose shares, stock or debt are quoted orlisted on a recognized stock exchange, or are marketedunder the regulations of a recognized stock exchange orother equivalent body.Network firmAn entity under common control, ownership ormanagement with the firm or any entity that areasonable and informed third party having knowledgeof all relevant information would reasonably conclude asbeing part of the firm nationally or internationally.Objectivity A combination of impartiality, intellectual honesty and afreedom from conflicts of interest.OfficeA distinct sub-group, whether organized on geographicalor practice lines.ETHICSPracticeA sole practitioner, a partnership or a corporation ofprofessional accountants which offers professionalservices to the public.Professional accountant Those persons, whether they be in public practice,(including a sole practitioner, partnership or corporatebody), industry, commerce, the public sector oreducation, who are members of an IFAC member body.Professional accountant Each partner or person occupying a position similar toin public practicethat of a partner, and each employee in a practiceproviding professional services to a client irrespective oftheir functional classification (e.g., audit, tax orconsulting) and professional accountants in a practicehaving managerial responsibilities. This term is alsoused to refer to a firm of professional accountants inpublic practice.Professional services Any service requiring accountancy or related skillsperformed by a professional accountant includingaccounting, auditing, taxation, management consultingand financial management services.Publicity The communication to the public of facts about aprofessional accountant which are not designed for thedeliberate promotion of that professional accountant. 17 ETHICS 20. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSReceiving accountantA professional accountant in public practice to whomthe existing accountant or client of the existingaccountant has referred audit, accounting, taxation,consulting or similar appointments, or who is consultedin order to meet the needs of the client.Related entityAn entity that has any of the following relationshipswith the client:(a) An entity that has direct or indirect control overthe client provided the client is material to suchentity;(b) An entity with a direct financial interest in theclient provided that such entity has significantinfluence over the client and the interest in theclient is material to such entity;(c) An entity over which the client has direct orindirect control;(d) An entity in which the client, or an entity relatedto the client under (c) above, has a direct financialinterest that gives it significant influence oversuch entity and the interest is material to the clientand its related entity in (c); and(e) An entity which is under common control with theclient (hereinafter a sister entity) provided thesister entity and the client are both material to theentity that controls both the client and sister entity.SolicitationThe approach to a potential client for the purpose ofoffering professional services.ETHICS 18 21. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSIntroduction 1. The International Federation of Accountants (IFAC) believes that due tonational differences of culture, language, legal and social systems, the taskof preparing detailed ethical requirements is primarily that of the memberbodies in each country concerned and that they also have the responsibilityto implement and enforce such requirements. 2. However, IFAC believes that the identity of the accountancy profession ischaracterized worldwide by its endeavor to achieve a number of commonobjectives and by its observance of certain fundamental principles for thatpurpose. 3. IFAC, therefore, recognizing the responsibilities of the accountancyprofession as such, and considering its own role to be that of providingguidance, encouraging continuity of efforts, and promoting harmonization,has deemed it essential to establish an international Code of Ethics forProfessional Accountants to be the basis on which the ethical requirements(code of ethics, detailed rules, guidelines, standards of conduct, etc.) forprofessional accountants* in each country should be founded. 4. This international Code is intended to serve as a model on which to baseETHICSnational ethical guidance. It sets standards of conduct for professionalaccountants and states the fundamental principles that should be observedby professional accountants in order to achieve common objectives. Theaccountancy profession throughout the world operates in an environmentwith different cultures and regulatory requirements. The basic intent of theCode, however, should always be respected. It is also acknowledged that, inthose instances where a national requirement is in conflict with a provisionin the Code, the national requirement would prevail. For those countries thatwish to adopt the Code as their own national Code, IFAC has developedwording which may be used to indicate the authority and applicability in thecountry concerned. The wording is contained in the IFAC Statement ofPolicy of Council** Preface to Ethical Requirements of (Name of MemberBody).Section 8 of this Code establishes a conceptual framework forindependence* requirements for assurance engagements* that is theinternational standard on which national standards should be based.Accordingly, no member body or firm* is allowed to apply less stringentstandards than those stated in that section. However, if member bodies orfirms are prohibited from complying with certain parts of Section 8 by lawor regulation, they should comply with all other parts of that section.* See Definitions.** Effective May 2000, the IFAC Council was renamed the IFAC Board. 19ETHICS 22. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 5. Further, the Code is established on the basis that unless a limitation isspecifically stated, the objectives and fundamental principles are equallyvalid for all professional accountants, whether they be in public practice,*industry, commerce, the public sector or education. 6. A profession is distinguished by certain characteristics including:Mastery of a particular intellectual skill, acquired by training and education;1Adherence by its members to a common code of values and conduct established by its administrating body, including maintaining an outlook which is essentially objective; andAcceptance of a duty to society as a whole (usually in return for restrictions in use of a title or in the granting of a qualification). 7. Members duty to their profession and to society may at times seem toconflict with their immediate self interest or their duty of loyalty to theiremployer. 8. Against this background it is beholden on member bodies to lay downethical requirements for their members to ensure the highest quality ofperformance and to maintain public confidence in the profession.The Public Interest 9. A distinguishing mark of a profession is acceptance of its responsibility tothe public. The accountancy professions public consists of clients, creditgrantors, governments, employers, employees, investors, the business andfinancial community, and others who rely on the objectivity* and integrityof professional accountants to maintain the orderly functioning ofcommerce. This reliance imposes a public interest responsibility on theaccountancy profession. The public interest is defined as the collective well-being of the community of people and institutions the professionalaccountant serves. 10.A professional accountants responsibility is not exclusively to satisfy theneeds of an individual client or employer. The standards of the accountancyprofession are heavily determined by the public interest, for example:1 For details of the education requirements recommended and prescribed by IFAC, reference should bemade to the statements developed by the Accounting Education Standards Board, includingInternational Education Standards, International Education Guidelines and International EducationPapers.* See Definitions.ETHICS20 23. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Independent auditors help to maintain the integrity and efficiency of the financial statements presented to financial institutions in partial support for loans and to stockholders for obtaining capital; Financial executives serve in various financial management capacities in organizations and contribute to the efficient and effective use of the organizations resources; Internal auditors provide assurance about a sound internal control system which enhances the reliability of the external financial information of the employer; Tax experts help to establish confidence and efficiency in, and the fair application of, the tax system; and Management consultants have a responsibility toward the public interest in advocating sound management decision making. 11. Professional accountants have an important role in society. Investors, creditors, employers and other sectors of the business community, as well as the government and the public at large rely on professional accountants for sound financial accounting and reporting, effective financial management and competent advice on a variety of business and taxation matters. The ETHICS attitude and behavior of professional accountants in providing such services have an impact on the economic well-being of their community and country. 12. Professional accountants can remain in this advantageous position only by continuing to provide the public with these unique services at a level which demonstrates that the public confidence is firmly founded. It is in the best interest of the worldwide accountancy profession to make known to users of the services provided by professional accountants that they are executed at the highest level of performance and in accordance with ethical requirements that strive to ensure such performance. 13. In formulating their national code of ethics, member bodies should therefore consider the public service and user expectations of the ethical standards of professional accountants and take their views into account. By doing so, any existing expectation gap between the standards expected and those prescribed can be addressed or explained.Objectives 14. The Code recognizes that the objectives of the accountancy profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirement set out above. These objectives require four basic needs to be met:21ETHICS 24. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSCredibility In the whole of society there is a need for credibility in information and information systems.Professionalism There is a need for individuals who can be clearly identified by clients, employers and other interested parties as professional persons in the accountancy field.Quality of Services There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance.Confidence Users of the services of professional accountants should be able to feel confident that there exists a framework of professional ethics which governs the provision of those services.Fundamental Principles 15.In order to achieve the objectives of the accountancy profession,professional accountants have to observe a number of prerequisites orfundamental principles. 16.The fundamental principles are:Integrity A professional accountant should be straightforward and honest in performing professional services.*Objectivity A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity.Professional Competence and Due Care A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent* See Definitions.ETHICS 22 25. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS professional service based on up-to-date developments in practice, legislation and techniques.Confidentiality A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.Professional Behavior A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The obligation to refrain from any conduct which might bring discredit to the profession requires IFAC member bodies to consider, when developing ethical requirements, the responsibilities of a professional accountant to clients, third parties, other members of the accountancy profession, staff, employers, and the general public. ETHICSTechnical Standards A professional accountant should carry out professional services in accordance with the relevant technical and professional standards. Professional accountants have a duty to carry out with care and skill, the instructions of the client or employer insofar as they are compatible with the requirements of integrity, objectivity and, in the case of professional accountants in public practice,* independence (see Section 8 below). In addition, they should conform with the technical and professional standards promulgated by: IFAC (e.g., International Standards on Auditing); International Accounting Standards Board; The members professional body or other regulatory body; and Relevant legislation.The Code 17.The objectives as well as the fundamental principles are of a general natureand are not intended to be used to solve a professional accountants ethicalproblems in a specific case. However, the Code provides some guidance asto the application in practice of the objectives and the fundamental* See Definitions. 23 ETHICS 26. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSprinciples with regard to a number of typical situations occurring in theaccountancy profession. 18.The Code set out below is divided into three parts: Part A applies to all professional accountants unless otherwisespecified. Part B applies only to those professional accountants in public practice. Part C applies to employed professional accountants, and may alsoapply, in appropriate circumstances, to accountants employed in publicpractice. See Definitions.ETHICS24 27. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSPART AAPPLICABLE TO ALL PROFESSIONALACCOUNTANTSSECTION 1Integrity and Objectivity 1.1 Integrity implies not merely honesty but fair dealing and truthfulness. The principle of objectivity imposes the obligation on all professional accountants to be fair, intellectually honest and free of conflicts of interest. 1.2 Professional accountants serve in many different capacities and should demonstrate their objectivity in varying circumstances. Professional accountants in public practice undertake assurance engagements, and render tax and other management advisory services. Other professional accountants prepare financial statements as a subordinate of others, perform internal auditing services, and serve in financial management capacities in industry, commerce, the public sector and education. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, professional accountants should protect the integrity of their professional services, and maintain objectivity in their judgment.ETHICS 1.3 In selecting the situations and practices to be specifically dealt within ethics requirements relating to objectivity, adequate consideration should be given to the following factors: (a)Professional accountants are exposed to situations which involve thepossibility of pressures being exerted on them. These pressures mayimpair their objectivity. (b)It is impracticable to define and prescribe all such situations wherethese possible pressures exist. Reasonableness should prevail inestablishing standards for identifying relationships that are likely to,or appear to, impair a professional accountants objectivity. (c)Relationships should be avoided which allow prejudice, bias orinfluences of others to override objectivity. (d)Professional accountants have an obligation to ensure that personnelengaged on professional services adhere to the principle ofobjectivity. (e)Professional accountants should neither accept nor offer gifts orentertainment which might reasonably be believed to have asignificant and improper influence on their professional judgment orthose with whom they deal. What constitutes an excessive gift oroffer of entertainment varies from country to country butprofessional accountants should avoid circumstances which wouldbring their professional standing into disrepute. 25ETHICS 28. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 2Resolution of Ethical Conflicts2.1 From time to time professional accountants encounter situations which giverise to conflicts of interest. Such conflicts may arise in a wide variety ofways, ranging from the relatively trivial dilemma to the extreme case offraud and similar illegal activities. It is not possible to attempt to itemize acomprehensive check list of potential cases where conflicts of interest mightoccur. The professional accountant should be constantly conscious of and bealert to factors which give rise to conflicts of interest. It should be noted thatan honest difference of opinion between a professional accountant andanother party is not in itself an ethical issue. However, the facts andcircumstances of each case need investigation by the parties concerned.2.2 It is recognized, however, that there can be particular factors which occurwhen the responsibilities of a professional accountant may conflict withinternal or external demands of one type or another. Hence:There may be the danger of pressure from an overbearing supervisor, manager, director* or partner; or when there are family or personal relationships which can give rise to the possibility of pressures being exerted upon them. Indeed, relationships or interests which could adversely influence, impair or threaten a professional accountants integrity should be discouraged.A professional accountant may be asked to act contrary to technical and/or professional standards.A question of divided loyalty as between the professional accountants superior and the required professional standards of conduct could occur.Conflict could arise when misleading information is published which may be to the advantage of the employer or client and which may or may not benefit the professional accountant as a result of such publication.2.3 In applying standards of ethical conduct professional accountants mayencounter problems in identifying unethical behavior or in resolving anethical conflict. When faced with significant ethical issues, professionalaccountants should follow the established policies of the employingorganization to seek a resolution of such conflict. If those policies do notresolve the ethical conflict, the following should be considered:* See Definitions.ETHICS 26 29. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS(a) Review the conflict problem with the immediate superior. If theproblem is not resolved with the immediate superior and theprofessional accountant determines to go to the next highermanagerial level, the immediate superior should be notified of thedecision. If it appears that the superior is involved in the conflictproblem, the professional accountant should raise the issue with thenext higher level of management. When the immediate superior isthe Chief Executive Officer (or equivalent) the next higher reviewinglevel may be the Executive Committee, Board of Directors, Non-Executive Directors, Trustees, Partners Management Committee orShareholders.(b) Seek counseling and advice on a confidential basis with anindependent advisor or the applicable professional accountancy bodyto obtain an understanding of possible courses of action.(c) If the ethical conflict still exists after fully exhausting all levels ofinternal review, the professional accountant as a last resort may haveno other recourse on significant matters (e.g., fraud) than to resignand to submit an information memorandum to an appropriaterepresentative of that organization.ETHICS2.4 Furthermore, in some countries local laws, regulations or professionalstandards may require certain serious matters to be reported to an externalbody such as an enforcement or supervisory authority.2.5 Any professional accountant in a senior position should endeavor to ensurethat policies are established within his or her employing organization toseek resolution of conflicts.2.6 Member bodies are urged to ensure that confidential counseling and adviceis available to members who experience ethical conflicts. 27ETHICS 30. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 3Professional Competence 3.1 Professional accountants should not portray themselves as having expertise or experience they do not possess. 3.2 Professional competence may be divided into two separate phases: (a) Attainment of professional competence The attainment of professional competence requires initially a high standard of general education followed by specific education, training and examination in professionally relevant subjects, and whether prescribed or not, a period of work experience. This should be the normal pattern of development for a professional accountant. (b) Maintenance of professional competence (i)The maintenance of professional competence requires acontinuing awareness of developments in the accountancyprofession including relevant national and internationalpronouncements on accounting, auditing and other relevantregulations and statutory requirements. (ii) A professional accountant should adopt a program designed toensure quality control in the performance of professionalservices consistent with appropriate national and internationalpronouncements.ETHICS 28 31. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 4Confidentiality 4.1 Professional accountants have an obligation to respect the confidentiality of information about a clients or employers affairs acquired in the course of professional services. The duty of confidentiality continues even after the end of the relationship between the professional accountant and the client or employer. 4.2 Confidentiality should always be observed by a professional accountant unless specific authority has been given to disclose information or there is a legal or professional duty to disclose. 4.3 Professional accountants have an obligation to ensure that staff under their control and persons from whom advice and assistance is obtained respect the principle of confidentiality. 4.4 Confidentiality is not only a matter of disclosure of information. It also requires that a professional accountant acquiring information in the course of performing professional services does neither use nor appear to use that information for personal advantage or for the advantage of a third party.ETHICS 4.5 A professional accountant has access to much confidential information about a clients or employers affairs not otherwise disclosed to the public. Therefore, the professional accountant should be relied upon not to make unauthorized disclosures to other persons. This does not apply to disclosure of such information in order properly to discharge the professional accountants responsibility according to the professions standards. 4.6 It is in the interest of the public and the profession that the professions standards relating to confidentiality be defined and guidance given on the nature and extent of the duty of confidentiality and the circumstances in which disclosure of information acquired during the course of providing professional services shall be permitted or required. 4.7 It should be recognized, however, that confidentiality of information is part of statute or common law and therefore detailed ethical requirements in respect thereof will depend on the law of the country of each member body. 4.8 The following are examples of the points which should be considered in determining whether confidential information may be disclosed: (a) When disclosure is authorized. When authorization to disclose is given by the client or the employer the interests of all the parties including those third parties whose interests might be affected should be considered.29 ETHICS 32. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (b) When disclosure is required by law. Examples of when a professional accountant is required by law to disclose confidential information are: (i) To produce documents or to give evidence in the course of legal proceedings; and (ii)To disclose to the appropriate public authorities infringements of the law which come to light. (c) When there is a professional duty or right to disclose: (i) To comply with technical standards and ethics requirements; such disclosure is not contrary to this section; (ii)To protect the professional interests of a professional accountant in legal proceedings; (iii) To comply with the quality (or peer) review of a member body or professional body; and (iv)To respond to an inquiry or investigation by a member body or regulatory body. 4.9 When the professional accountant has determined that confidential information can be disclosed, the following points should be considered: (a) Whether or not all the relevant facts are known and substantiated, to the extent it is practicable to do so; when the situation involves unsubstantiated fact or opinion, professional judgment should be used in determining the type of disclosure to be made, if any; (b) What type of communication is expected and the addressee; in particular, the professional accountant should be satisfied that the parties to whom the communication is addressed are appropriate recipients and have the responsibility to act on it; and (c) Whether or not the professional accountant would incur any legal liability having made a communication and the consequences thereof. In all such situations, the professional accountants should consider the need to consult legal counsel and/or the professional organization(s) concerned.ETHICS30 33. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 5Tax Practice 5.1 A professional accountant rendering professional tax services is entitled to put forward the best position in favor of a client, or an employer, provided the service is rendered with professional competence, does not in any way impair integrity and objectivity, and is in the opinion of the professional accountant consistent with the law. Doubt may be resolved in favor of the client or the employer if there is reasonable support for the position. 5.2 A professional accountant should not hold out to a client or an employer the assurance that the tax return prepared and the tax advice offered are beyond challenge. Instead, the professional accountant should ensure that the client or the employer are aware of the limitations attaching to tax advice and services so that they do not misinterpret an expression of opinion as an assertion of fact. 5.3 A professional accountant who undertakes or assists in the preparation of a tax return should advise the client or the employer that the responsibility for the content of the return rests primarily with the client or employer. The professional accountant should take the necessary steps to ensure that the ETHICS tax return is properly prepared on the basis of the information received. 5.4 Tax advice or opinions of material consequence given to a client or an employer should be recorded, either in the form of a letter or in a memorandum for the files. 5.5 A professional accountant should not be associated with any return or communication in which there is reason to believe that it: (a) Contains a false or misleading statement; (b) Contains statements or information furnished recklessly or without any real knowledge of whether they are true or false; or (c) Omits or obscures information required to be submitted and such omission or obscurity would mislead the revenue authorities. 5.6 A professional accountant may prepare tax returns involving the use of estimates if such use is generally acceptable or if it is impractical under the circumstances to obtain exact data. When estimates are used, they should be presented as such in a manner so as to avoid the implication of greater accuracy than exists. The professional accountant should be satisfied that estimated amounts are reasonable under the circumstances. 5.7 In preparing a tax return, a professional accountant ordinarily may rely on information furnished by the client or employer provided that the information appears reasonable. Although the examination or review of31ETHICS 34. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS documents or other evidence in support of the information is not required, the professional accountant should encourage, when appropriate, such supporting data to be provided. In addition, the professional accountant: (a) Should make use of the clients returns for prior years whenever feasible; (b) Is required to make reasonable inquiries when the information presented appears to be incorrect or incomplete; and (c) Is encouraged to make reference to the books and records of the business operations. 5.8 When a professional accountant learns of a material error or omission in a tax return of a prior year (with which the professional accountant may or may not have been associated), or of the failure to file a required tax return, the professional accountant has a responsibility to: (a) Promptly advise the client or employer of the error or omission and recommend that disclosure be made to the revenue authorities. Normally, the professional accountant is not obligated to inform the revenue authorities, nor may this be done without permission. (b) If the client or the employer does not correct the error the professional accountant: (i)Should inform the client or the employer that it is not possibleto act for them in connection with that return or other relatedinformation submitted to the authorities; and (ii) Should consider whether continued association with the clientor employer in any capacity is consistent with professionalresponsibilities. (c) If the professional accountant concludes that a professional relationship with the client or employer can be continued, all reasonable steps should be taken to ensure that the error is not repeated in subsequent tax returns. (d) Professional or statutory requirements in some countries may also make it necessary for the professional accountant to inform the revenue authorities that there is no longer any association with the return or other information involved and that acting for the client or employer has ceased. In these circumstances, the professional accountant should advise the client or employer of the position before informing the authorities and should give no further information to the authorities without the consent of the client or employer unless required to do so by law.ETHICS32 35. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 6Cross Border Activities 6.1 When considering the application of ethical requirements in cross border activities a number of situations may arise. Whether a professional accountant is a member of the profession in one country only or is also a member of the profession in the country where the services are performed should not affect the manner of dealing with each situation. 6.2 A professional accountant qualifying in one country may reside in another country or may be temporarily visiting that country to perform professional services. In all circumstances, the professional accountant should carry out professional services in accordance with the relevant technical standards and ethical requirements. The particular technical standards which should be followed are not dealt within this section. In all other respects, however, the professional accountant should be guided by the ethical requirements set out below. 6.3 When a professional accountant performs services in a country other than the home country and differences on specific matters exist between ethical requirements of the two countries the following provisions should beETHICS applied: (a) When the ethical requirements of the country in which the services are being performed are less strict than the IFAC Code of Ethics, then the IFAC Code of Ethics should be applied. (b) When the ethical requirements of the country in which services are being performed are stricter than the IFAC Code of Ethics, then the ethical requirements in the country where services are being performed should be applied. (c) When the ethical requirements of the home country are mandatory for services performed outside that country and are stricter than set out in (a) and (b) above, then the ethical requirements of the home country should be applied. (In the case of cross border advertising and solicitation see also Section 14 paragraph 14.4 and 14.5 below.)33 ETHICS 36. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSSECTION 7Publicity*7.1In the marketing and promotion of themselves and their work, professional accountants should: (a) Not use means which brings the profession into disrepute; (b) Not make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; and (c) Not denigrate the work of other accountants.* See Definitions.ETHICS34 37. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSPART BAPPLICABLE TO PROFESSIONALACCOUNTANTS IN PUBLIC PRACTICESECTION 8Independence8.1 It is in the public interest and, therefore, required by this Code of Ethics,that members of assurance teams,* firms and, when applicable, networkfirms* be independent of assurance clients.*8.2 Assurance engagements are intended to enhance the credibility ofinformation about a subject matter by evaluating whether the subject matterconforms in all material respects with suitable criteria. The InternationalStandard on Assurance Engagements issued by the International Auditingand Assurance Standards Board describes the objectives and elements ofassurance engagements to provide either a high or a moderate level ofassurance. The International Auditing and Assurance Standards Board hasalso issued specific standards for certain assurance engagements. Forexample, International Standards on Auditing provide specific standards foraudit (high level assurance) and review (moderate level assurance) ofETHICSfinancial statements.Paragraphs 8.3 through 8.6 are taken from the International Standard onAssurance Engagements and describe the nature of an assuranceengagement. These paragraphs are presented here only to describe thenature of an assurance engagement. To obtain a full understanding of theobjectives and elements of an assurance engagement it is necessary to referto the full text contained in the International Standard on AssuranceEngagements.8.3 Whether a particular engagement is an assurance engagement will dependupon whether it exhibits all the following elements:(a)A three party relationship involving: (i) A professional accountant; (ii)A responsible party; and (iii) An intended user;(b)A subject matter;(c)Suitable criteria;(d)An engagement process; and(e)A conclusion.* See Definitions. 35ETHICS 38. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS The responsible party and the intended user will often be from separate organizations but need not be. A responsible party and an intended user may both be within the same organization. For example, a governing body may seek assurance about information provided by a component of that organization. The relationship between the responsible party and the intended user needs to be viewed within the context of a specific engagement. 8.4 There is a broad range of engagements to provide a high or moderate level of assurance. Such engagements may include: Engagements to report on a broad range of subject matters covering financial and non-financial information; Attest and direct reporting engagements; Engagements to report internally and externally; and Engagements in the private and public sector. 8.5 The subject matter of an assurance engagement may take many forms, such as the following: Data (for example, historical or prospective financial information, statistical information, performance indicators). Systems and processes (for example, internal controls). Behavior (for example, corporate governance, compliance with regulation, human resource practices). 8.6 Not all engagements performed by professional accountants are assurance engagements. Other engagements frequently performed by professional accountants that are not assurance engagements include: Agreed-upon procedures; Compilation of financial or other information; Preparation of tax returns when no conclusion is expressed, and tax consulting; Management consulting; and Other advisory services. 8.7 This section of the Code of Ethics (this section) provides a framework, built on principles, for identifying, evaluating and responding to threats to independence. The framework establishes principles that members of assurance teams, firms and network firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level. Judgment isETHICS 36 39. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS needed to determine which safeguards are to be applied. Some safeguards may eliminate the threat while others may reduce the threat to an acceptable level. This section requires members of assurance teams, firms and network firms to apply the principles to the particular circumstances under consideration. The examples presented are intended to illustrate the application of the principles in this section and are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances that may create threats to independence. Consequently, it is not sufficient for a member of an assurance team, a firm or a network firm merely to comply with the examples presented, rather they should apply the principles in this section to the particular circumstances they face.A Conceptual Approach to Independence 8.8 Independence requires: (a)Independence of MindThe state of mind that permits the provision of an opinion withoutbeing affected by influences that compromise professional judgment,allowing an individual to act with integrity, and exercise objectivityand professional skepticism. ETHICS (b)Independence in AppearanceThe avoidance of facts and circumstances that are so significant thata reasonable and informed third party, having knowledge of allrelevant information, including safeguards applied, would reasonablyconclude a firms, or a member of the assurance teams, integrity,objectivity or professional skepticism had been compromised. 8.9 The use of the word independence on its own may create misunderstandings. Standing alone, the word may lead observers to suppose that a person exercising professional judgment ought to be free from all economic, financial and other relationships. This is impossible, as every member of society has relationships with others. Therefore, the significance of economic, financial and other relationships should also be evaluated in the light of what a reasonable and informed third party having knowledge of all relevant information would reasonably conclude to be unacceptable. 8.10 Many different circumstances, or combination of circumstances, may berelevant and accordingly it is impossible to define every situation thatcreates threats to independence and specify the appropriate mitigatingaction that should be taken. In addition, the nature of assuranceengagements may differ and consequently different threats may exist,requiring the application of different safeguards. A conceptual frameworkthat requires firms and members of assurance teams to identify, evaluate andaddress threats to independence, rather than merely comply with a set ofspecific rules which may be arbitrary, is, therefore, in the public interest.37ETHICS 40. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS8.11 This section is based on such a conceptual approach, one that takes into account threats to independence, accepted safeguards and the public interest. Under this approach, firms and members of assurance teams have an obligation to identify and evaluate circumstances and relationships that create threats to independence and to take appropriate action to eliminate these threats or to reduce them to an acceptable level by the application of safeguards. In addition to identifying and evaluating relationships between the firm, network firms, members of the assurance team and the assurance client, consideration should be given to whether relationships between individuals outside of the assurance team and the assurance client create threats to independence.8.12 This section provides a framework of principles that members of assurance teams, firms and network firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level, such that independence of mind and independence in appearance are not compromised.8.13 The principles in this section apply to all assurance engagements. The nature of the threats to independence and the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level differ depending on the characteristics of the individual engagement: whether the assurance engagement is an audit engagement* or another type of engagement; and in the case of an assurance engagement that is not an audit engagement, the purpose, subject matter and intended users of the report. A firm should, therefore, evaluate the relevant circumstances, the nature of the assurance engagement and the threats to independence in deciding whether it is appropriate to accept or continue an engagement, as well as the nature of the safeguards required and whether a particular individual should be a member of the assurance team.8.14 Audit engagements provide assurance to a wide range of potential users; consequently, in addition to independence of mind, independence in appearance is of particular significance. Accordingly, for audit clients,* the members of the assurance team, the firm and network firms are required to be independent of the audit client. Similar considerations in the case of assurance engagements provided to non-audit assurance clients require the members of the assurance team and the firm to be independent of the non- audit assurance client. In the case of these engagements, consideration should be given to any threats that the firm has reason to believe may be created by network firm interests and relationships.* See Definitions.ETHICS 38 41. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS8.15 In the case of an assurance report to a non-audit assurance client expressly restricted for use by identified users, the users of the report are considered to be knowledgeable as to the purpose, subject matter and limitations of the report through their participation in establishing the nature and scope of the firms instructions to deliver the services, including the criteria by which the subject matter are to be evaluated. This knowledge and enhanced ability of the firm to communicate about safeguards with all users of the report increase the effectiveness of safeguards to independence in appearance. These circumstances may be taken into account by the firm in evaluating the threats to independence and considering the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level. At a minimum, it will be necessary to apply the provisions of this section in evaluating the independence of members of the assurance team and their immediate and close family. * Further, if the firm had a material financial interest,* whether direct or indirect, in the assurance client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Limited consideration of any threats created by network firm interests and relationships may be sufficient.8.16 Accordingly: ETHICS (a) For assurance engagements provided to an audit client, the members of the assurance team, the firm and network firms are required to be independent of the client; (b) For assurance engagements provided to clients that are not audit clients, when the report is not expressly restricted for use by identified users, the members of the assurance team and the firm are required to be independent of the client; and (c) For assurance engagements provided to clients that are not audit clients, when the assurance report is expressly restricted for use by identified users, the members of the assurance team are required to be independent of the client. In addition, the firm should not have a material direct or indirect financial interest* in the client.* See Definitions.39 ETHICS 42. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSThese independence requirements for assurance engagements are illustrated asfollows:Type of Assurance EngagementClient Non-audit Non-audit Audit not restricted userestricted use Audit client Assurance team, firm and network firmsNon-auditAssurance team and firm Assurance team andassurancehas no material financialfirmclient interest8.17 The threats and safeguards identified in this section are generally discussed in the context of interests or relationships between the firm, network firms, a member of the assurance team and the assurance client. In the case of a listed audit client, the firm and any network firms are required to consider the interests and relationships that involve that clients related entities. Ideally those entities and the interests and relationships should be identified in advance. For all other assurance clients, when the assurance team has reason to believe that a related entity* of such an assurance client is relevant to the evaluation of the firms independence of the client, the assurance team should consider that related entity when evaluating independence and applying appropriate safeguards.8.18 The evaluation of threats to independence and subsequent action should be supported by evidence obtained before accepting the engagement and while it is being performed. The obligation to make such an evaluation and take action arises when a firm, a network firm or a member of the assurance team knows, or could reasonably be expected to know, of circumstances or relationships that might compromise independence. There may be occasions when the firm, a network firm or an individual inadvertently violates this section. If such an inadvertent violation occurs, it would generally not compromise independence with respect to an assurance client provided the firm has appropriate quality control policies and procedures in place to promote independence and, once discovered, the violation is corrected promptly and any necessary safeguards are applied.8.19 Throughout this section, reference is made to significant and clearly insignificant threats in the evaluation of independence. In considering the significance of any particular matter, qualitative as well as quantitative* See Definitions.ETHICS40 43. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTSfactors should be taken into account. A matter should be considered clearlyinsignificant only if it is deemed to be both trivial and inconsequential.Objective and Structure of this Section8.20 The objective of this section is to assist firms and members of assurance teams in:(a) Identifying threats to independence;(b) Evaluating whether these threats are clearly insignificant; and(c)In cases when the threats are not clearly insignificant, identifying and applying appropriate safeguards to eliminate or reduce the threats to an acceptable level.In situations when no safeguards are available to reduce the threat to anacceptable level, the only possible actions are to eliminate the activities orinterest creating the threat, or to refuse to accept or continue the assuranceengagement.8.21 This section outlines the threats to independence (paragraphs 8.28 through 8.33). It then analyzes safeguards capable of eliminating these threats or reducing them to an acceptable level (paragraphs 8.34 through 8.47). It ETHICS concludes with some examples of how this conceptual approach to independence is to be applied to specific circumstances and relationships. The examples discuss threats to independence that may be created by specific circumstances and relationships (paragraphs 8.100 onwards). Professional judgment is used to determine the appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level. In certain examples, the threats to independence are so significant the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement. In other examples, the threat can be eliminated or reduced to an acceptable level by the application of safeguards. The examples are not intended to be all- inclusive.8.22 When threats to independence that are not clearly insignificant are identified, and the firm decides to accept or continue the assurance engagement, the decision should be documented. The documentation should include a description of the threats identified and the safeguards applied to eliminate or reduce the threats to an acceptable level.8.23 The evaluation of the significance of any threats to independence and the safeguards necessary to reduce any threats to an acceptable level, takes into account the public interest. Certain entities may be of significant public interest because, as a result of their business, their size or their corporate status they have a wide range of stakeholders. Examples of such entities might include listed companies, credit institutions, insurance companies,41ETHICS 44. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS and pension funds. Because of the strong public interest in the financial statements of listed entities, certain paragraphs in this section deal with additional matters that are relevant to the audit of listed entities. Consideration should be given to the application of the principles set out in this section in relation to the audit of listed entities to other audit clients that may be of significant public interest.National Perspectives8.24 This section establishes a conceptual framework for independence requirements for assurance engagements that is the international standard on which national standards should be based. Accordingly, no member body or firm is allowed to apply less stringent standards than those stated in this section. When, however, member bodies or firms are prohibited from complying with certain parts of this section by law or regulation they should comply with all other parts of this section.8.25 Certain examples in this section indicate how the principles are to be applied to listed entity* audit engagements. When a member body chooses not to differentiate between listed entity audit engagements and other audit engagements, the examples that relate to listed entity audit engagements should be considered to apply to all audit engagements.8.26 When a firm conducts an assurance engagement in accordance with the International Standard on Assurance Engagements or with specific standards for assurance engagements issued by the International Auditing and Assurance Standards Board such as an audit or review of financial statements in accordance with International Standards on Auditing, the members of the assurance team and the firm should comply with this section unless they are prohibited from complying with certain parts of this section by law or regulation. In such cases, the members of the assurance team and the firm should comply with all other parts of this section.8.27 Some countries and cultures may have set out, either by legislation or common practice, different definitions of relationships from those used in this section. For example, some national legislators or regulators may have prescribed lists of individuals who should be regarded as close family that differ from the definition contained in this section. Firms, network firms and members of assurance teams should be aware of those differences and comply with the more stringent requirements.Threats to Independence8.28 Independence is potentially affected by self-interest, self-review, advocacy, familiarity and intimidation threats.* See Definitions.ETHICS42 45. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS8.29 Self-Interest Threat occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance client. Examples of circumstances that may create this threat include, but are not limited to: A direct financial interest or material indirect financial interest in an assurance client; A loan or guarantee to or from an assurance client or any of its directors or officers;* Undue dependence on total fees from an assurance client; Concern about the possibility of losing the engagement; Having a close business relationship with an assurance client; Potential employment with an assurance client; and Contingent fees relating to assurance engagements.8.30 Self-Review Threat occurs when (1) any product or judgment of a previous assurance engagement or non-assurance engagement needs to be ETHICS re-evaluated in reaching conclusions on the assurance engagement or (2) when a member of the assurance team was previously a director or officer of the assurance client, or was an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement. Examples of circumstances that may create this threat include, but are not limited to: A member of the assurance team being, or having recently been, a director or officer of the assurance client; A member of the assurance team being, or having recently been, an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement; Performing services for an assurance client that directly affect the subject matter of the assurance engagement; and Preparation of original data used to generate financial statements or preparation of other records that are the subject matter of the assurance engagement.* See Definitions. 43 ETHICS 46. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS8.31 Advocacy Threat occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an assurance clients position or opinion to the point that objectivity may, or may be perceived to be, compromised. Such may be the case if a firm or a member of the assurance team were to subordinate