Ethical Standard: Section 2 (Relationships)

Question 1

What are the rules regarding FINANCIAL INTERESTS for firms, covered persons, and their immediate family members under Section 2?

Answer 1

Financial Interests: There should be no direct or material indirect financial interests in the audit client.

Loans: Loans are prohibited unless they occur in the Ordinary Course of Business (OCB) and on an Arms Length Basis (ALB).

Safeguards: No safeguards are considered adequate for financial conflicts of interest. The only options are to dispose of the interest or not accept the audit appointment.

Question 2

How are BUSINESS RELATIONSHIPS regulated under Section 2 for firms, covered persons, and their immediate family members?

Answer 2

Business relationships with an audit client are only permissible when:
1. OCB & ALB: The goods or services exchanged are in the Ordinary Course of Business (OCB) and on an Arms Length Basis (ALB).
2. Immaterial: The transactions are not material to either party.
3. Inconsequential: The transactions are clearly inconsequential to both parties.

Question 3

What are the guidelines regarding EMPLOYMENT RELATIONSHIPS under Section 2?

Answer 3

1. Dual Employment: An employee of the client is prohibited from working on the audit to prevent conflicts of interest.
2. Loan Staff Assignments in RoI: Secondments are allowed only for short periods (no longer than a few months), and those involved cannot hold a management or decision-taking position.
3. Loan Staff Assignments in NI: Secondments are now prohibited in Northern Ireland to maintain audit independence.

Question 4

What are the rules for audit staff joining an audit client and vice versa under Section 2?

Answer 4

1. Former Partners Joining Clients: Ensure former partners sever all significant connections before joining a client. They are prohibited from taking key management positions or directorships within 1 year (2 years for Public Interest Entities - PIEs) after leaving the audit firm.
2. Acceptance of Former Partners: An audit cannot be accepted or continued if a former partner joins the audit client within 2 years of leaving the firm.
3. Audit Client Employees Joining Audit Firm: Employees leaving an audit client to join the audit firm cannot work on the audit for at least 2 years after their departure.

Question 5

How should PERSONAL RELATIONSHIPS be managed according to Section 2 to ensure audit independence?

Answer 5

1. Reporting Relationships: Team members must report any immediate, close, or other personal relationships with the audit client.
2. Action on Close Relationships: If an immediate or close family member of an audit team member works at the client, that team member should be removed from the audit.
3. Engagement Partner Responsibilities: The engagement partner is tasked with assessing any threats to independence these relationships might pose and implementing safeguards as necessary.
4. External Consultants: External consultants employed as experts in the audit must maintain objectivity and cannot have conflicting personal relationships with the audit client.