Parties demanding auditing services SMSEOLR
Need for auditing: Principal-Agent-Relationship
Principal: Provides capital and hires agent to manage resources; excessive information risk prevents principal from taking investment decisions
Agent/Management: Agents hires auditor to reduce principals information risk
=>Auditor adds credibility to the financial reports and reduces principal information risk (Provides reasonable assurance that financial statements are free from material misstatement)
=> Audit requires trust in auditor and the company
Ethical behavior of an auditor ILHFP CR
- Integrity; loyalty; honesty; fairness; promise-keeping
- Caring and respect for others; responsible citizenship
Independence -> What is needed to be perceived as independent and trustworthy?
Independence of Mind:
State of mind that ensures unbiased professional judgment.
Enables acting with integrity, objectivity, and professional skepticism.
Allows expressing conclusions without compromised judgment.
Independence in Appearance:
Avoidance of significant facts or circumstances.
Third-party perspective with all relevant information.
Ensures no compromise to integrity, objectivity, or professional skepticism.
Potential threats to an auditors independence AFSIS
Advocacy threat: (where you take the role as advocate in addition to audit services)
Advocacy threat occurs when a member of the assurance team promotes, or seems to promote, an assurance client’s position or opinion.
Familiarity threat (Closeness to client is too strong)
A familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company. - therefore we rotate
Self-interest threat -> if you have investment/financial interest
A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or depends on the client for a major fee that is outstanding.
Intimidation threat -> Client is threatening you in an inappropriate way
Self-review threat -> Have to audit your own work -> Not independent in mind
4 Pillars of EU regulation and PIE definition
Pillar 1 (External Rotation of the auditor): Every 10 years at least the audit firm has to change
Pillar 2 (Blacklist for Non-Audit Services): e.g. Tax and Tax Compliance Services (Preparation of tax forms)
Pillar 3 (Cap for Non-Audit Services): A cap on permissible NAS of maximum 70% of the average of the fees paid in the last three consecutive financial years for the statutory audit(s) of the audited entity
Pillar 4 (Non-Audit Services to be confirmed by Audit Committee) -> Pre-Approval
Reasons for the decision for EU regulation
External rotation: Long professional relationship undermines auditor independence and skepticism.
Rotation of key audit partner is insufficient; firm prioritizes client retention.
Mandatory audit firm rotation reduces familiarity, limits repeated inaccuracies, and encourages fresh thinking for stronger professional skepticism and better audit quality.
Responsibilities of Audit Committee (Aufsichtsrat)
Overseeing auditor rotations
Rotation period, including transition period
Tender or joint audit
Selection of auditor and recommendation to the board and shareholder vote
Monitoring the provision of non-audit services
Pre-approval for permissible non-audit services
Monitoring that NAS do not exceed 70% of the average group audit fees
Monitoring auditors assessment of the threats to its independence regarding provision of permissible services
Issuing guidelines for the provision of tax and valuation services