Frequently Asked Questions
APB Ethical Standards - Provisions available for small entities
The APB guidance is not issued by the ICAEW and there is currently no "case precedent" to
endorse the positions outlined below. Whilst we make every effort to ensure that this content
reflects the most up-to-date position members should always refer to the current on-line version of
the APB guidance found on the website of the Financial Reporting Council before acting.
Please select the question to view the response.
1) Paragraph 7 of PASE (Revised) exempts me from the need to apply safeguards to
address self review threats resulting from providing non-audit services for a small entity
audit client. In addition paragraph 12 provides an exemption from the requirement for
‘informed management’. Can I apply both together?
2) Can we take advantage of more than one provision from PASE at a time?
3) I have heard a lot about audit exemptions for small entities. What is a “small entity” and
who can take advantage of these provisions?
1) Paragraph 7 of PASE (Revised) exempts me from the need to apply safeguards to
address self review threats resulting from providing non-audit services for a small entity
audit client. In addition paragraph 12 provides an exemption from the requirement for
‘informed management’. Can I apply both together?
Although in some circumstances you can ‘double up’ provisions and exemption it is not
possible to combine the provisions in Para 7 (self review alternative provision) and Para 12
(management threat exemption).
One of the requirements of the alternative provision under para 7 is that the audit client has
‘informed management’1 (i.e. it does not undertake part of the role of management).
If the firm is already providing a non-audit service with an associated self-review threat and is
applying the exemption under para 12, then it cannot also apply the alternative provision under
para 7.
So if, for example an audit firm provides accounting services to a small entity audit client with
no informed management, the firm can apply ES PASE (Revised) which allows them to
undertake work which would give rise to a management threat, but the firm needs to introduce
safeguards to counter the self review threat.
References:
1 ‘Informed Management’ A member of the management (or senior employee) of the audited
entity who has the authority and capability to make independent management judgements and
decisions in relation to non-audit services on the basis of information provided by the audit firm.
(See APB Ethical Standards (Revised) – glossary of terms)
Last updated: 03/05/2011
Links:
The full APB guidance can be found at http://www.frc.org.uk/Our-Work/Codes-Standards/Auditand-assurance/Standards-and-guidance/Standards-and-guidance-for-auditors/Ethicalstandards-for-auditors.aspx
Ref 4PASE
2) Can we take advantage of more than one provision from PASE at a time?
Yes. ES PASE (Revised) applies in any of the circumstances indicated by the underlying
guidance. ES – PASE (Revised) contains the following provisions:
1. Alternative provisions can be applied in circumstances where:
a. The firm has between 10 and 15% of their fee income received from an audit client and
its subsidiaries but no external independent quality control review of the audit
engagement is undertaken (para 5).
b. Non audit services are provided without the safeguards of ES 5 (2010) (para 13).
2. Exemptions can be applied in circumstances where:
a. Non-audit services are provided and the audit firm undertakes part of the role of
management (para 12).
b. Tax services are provided and the audit firm acts as an advocate for the audit client
before an appeals tribunal or court in the resolution of an issue that is material to the
financial statements or where the outcome of the issue is dependent on a future or
contemporary audit judgment (para 15).
c. A former partner is appointed as a director, or to a key management position with an
audit client, having acted in certain roles in the two years prior to this appointment (para
20).
It is possible to ‘double up’ provisions and exemptions, provided that the disclosure
requirements of ES – PASE (Revised) are complied with.
For example, it is possible for a firm to provide non-audit services (including undertaking part of
the role of management) and receive between 10 and 15 per cent of their fee income from an
audit client and its subsidiaries and not have an external independent quality control review of
the audit engagement.
However, it is not possible to combine the provisions in Para 7 (self review alternative
provision) and Para 12 (management threat exemption). One of the requirements of the
alternative provision under para 7 is that the audit client has ‘informed management’1.
If the firm is already providing a non-audit service with an associated self-review threat and is
applying the exemption under para 12, then it cannot also apply the alternative provision under
para 7.
So if, for example an audit firm provides accounting services to a small entity audit client with
no informed management, the firm can apply ES PASE (Revised) which allows them to
undertake work which would give rise to a management threat, but the firm needs to introduce
safeguards to counter the self review threat.
References:
1 ‘Informed Management’ A member of the management (or senior employee) of the audited
entity who has the authority and capability to make independent management judgements and
Last updated: 03/05/2011
decisions in relation to non-audit services on the basis of information provided by the audit firm.
(See APB Ethical Standards (Revised) – glossary of terms)
Links:
The full APB guidance can be found at http://www.frc.org.uk/Our-Work/Codes-Standards/Auditand-assurance/Standards-and-guidance/Standards-and-guidance-for-auditors/Ethicalstandards-for-auditors.aspx
FAQ: ‘I have read the term “informed management” in the APB Standards. What does this
mean?’
Ref: 3PASE
3) I have heard a lot about audit exemptions for small entities. What is a “small entity” and
who can take advantage of these provisions?
There is a separate APB Ethical Standard entitled ‘Provisions Available for Small Entities’
(Revised). This (para 4) defines a small entity as:
a. an unlisted company (or group) that is not an affiliate of a listed company and qualifies as a
small company under the Companies Act 2006
b. a charity with an income of less than the turnover threshold applicable to small companies
c. a pension fund with fewer than 100 members
d. a firm regulated by the Financial Services Authority (FSA) which is not required to appoint
an auditor under chapter 3 of the FSA Supervision manual
e. a credit union which is a mutually owned financial co-operative established under the Credit
Unions Act 1979 and the Industrial and Provident Societies Act 1965 (or equivalent
legislation), which meets the criteria set out in (a) above;
f. an entity registered under the Industrial and Provident Societies Act 1965, incorporated
under the Friendly Societies Act 1992 or registered under the Friendly Societies Act 1974
(or equivalent legislation) which meets the criteria set out in (a) above;
g. a registered social landlord with less than 250 units; and
h. any other entity, such as a club, which would be a Small Entity if it were a company.
There is no restriction on the size of the firm providing the services to the small entity but where
an exemption has been taken advantage of (these cover informed management, tax tribunal
representation and partners joining clients), the firm must briefly state in the audit report that its
compliance with the Ethical Standards includes the ES-PASE (Revised). There also needs to
be a general reference to the nature of the exemption in the accounts.
In addition to the exemptions, alternative provisions are permitted to certain requirements
relating to economic dependence and the nature of the necessary safeguards. Application of
these alternatives does not need to be referred to in the audit report or accounts.
References:
APB Ethical Standard PASE (Revised)
Links:
The full APB guidance can be found at http://www.frc.org.uk/Our-Work/Codes-Standards/Auditand-assurance/Standards-and-guidance/Standards-and-guidance-for-auditors/Ethicalstandards-for-auditors.aspx
Ref: 2PASE
Last updated: 03/05/2011
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Last updated: 03/05/2011