FRC - revised ethical standard - part 2
In this lesson, you'll learn how the FRC's revised ethical standard addresses key audit independence risks, including fee dependence, non-audit services, and prohibited activities.
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In this lesson
- 0:00 Understanding undue fee dependence
- 1:39 Non-audit services and fee limits
- 2:31 Gifts, hospitality and staff incentives
- 3:19 Prohibited services for public interest entities
- 5:13 Non-audit services for non-PIE clients
- 7:03 Relaxed rules for small entities
- 8:58 Audit partner rotation scenario
About this lesson
Understanding these requirements is essential for Advanced Audit and Assurance, particularly when advising on compliance for listed companies and public interest entities. The lesson covers the critical thresholds and safeguards that govern your firm's relationship with audit clients. For listed companies, if audit fees exceed 10% of total fee income, you must reduce reliance on that client or cease the engagement; between 5% and 10%, enhanced safeguards apply including hot file reviews and disclosure to those charged with governance. For unlisted clients, the threshold is 15%, with safeguards kicking in at 10%. Non-audit services are capped at 70% of the audit fee on a rolling three-year basis. You'll also explore the strict prohibitions on gifts and hospitality, and the rules preventing staff performance assessments from being linked to cross-selling. The standard introduces even stricter controls for public interest entities, where internal audit, valuation, IT system work, and certain tax services are completely prohibited. For non-public interest entities, the audit partner can assess and manage threats to independence through informed management and ethics partner consultation. The lesson concludes by examining relaxations for small entities, where fee dependence thresholds are higher and non-audit service restrictions are waived, though informed management and code reviews remain mandatory. A practical scenario walks you through identifying ethical breaches in a real audit situation, helping you recognise when engagement partners must be rotated and how to recommend appropriate safeguards to maintain audit quality and independence.
Duration: 12m
Transcript
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