Revised ethical standards for auditors

APB Ethical Standards 1 to 5 and the PASE have been revised and apply for the audit of periods commencing on or after 6 April 2008. This requires firms to amend procedures by 30 September 2008.

The revisions are not extensive and mainly introduce the Companies Act 2006 and IFAC ethical amendments. The main changes are outlined below.


Firms’ procedures should be updated to reflect the terminology changes within the Standards. These include replacing 'audit client' with 'audited entity' and 'independent partner' with 'engagement quality review partner'.


There are a number of changes to the Provisions Available for Smaller Entities (PASE). The definition of a smaller entity has been updated for the Companies Act 2006. The increases under section 382 for a stand alone non listed company with 50 employees, turnover under £6.5m and balance sheet total under £3.26m (read about this and section 383 group revisions.)

The revised definition applies to any non listed company, any charity or any other entity such as a club.

The pension fund member limit has been reduced from 1000 to 100. Where paragraph 12 and 14 management threat – non audit services apply, firms should ensure procedures include confirmation 'that management accept responsibility for any decision taken'. Check and ensure your management representation letters are updated to reflect the requirement.

ES1 – integrity, objectivity and independence

The footnote to paragraph 17 highlights the requirement placed on firms to have 'arrangements to prevent any person from being able to exert any influence over the way in which a statutory audit is conducted in circumstances in which that influence would be likely to affect the independence or integrity of the audit'.

Paragraph 20 includes in (c) a requirement to identity 'audited entities which the partners in the chain of command and their immediate family need to be independent from'.

Paragraphs 30 and 31 reinforce the requirement that partners and staff in audit firms must not take management decisions. Firms' policies should be reviewed to ensure they are clear on this requirement.

Paragraph 41 applies to listed companies, while 42 and 43 require firms to consider other entities for which paragraph 41 should apply. Paragraph 43 cites regulated financial institutions (non listed banks and insurance companies) as a typical example.

Paragraphs 54 and 55 apply to network firms and require firms to ensure policies and procedures are updated for the current IFAC code.

Paragraph 59 applies to listed companies and the information required by audit committees. 

ES2 – financial, business, employment and personal relationships

Paragraph 9 provides relief where the immediate family of a partner who is not in a position to influence the conduct of an audit has a financial interest in that company.

Paragraph 11 extends relief to auditors who because of membership of a club are required to hold shares.

Paragraph 20 extends financial interest to potential beneficiaries of trusts. Fit and proper forms should be updated.

Paragraphs 28, 30 and 33 confirm business relationships 'inconsequential to either party' are permitted where 'a reasonably informed third party' would reach the same conclusion.

Paragraph 37 allows short staff assignments as long as the work undertaken is not precluded by ES5. Paragraph 70 has guidance on existing relationships and a change of auditor.

Paragraph 48 potentially extends the commencement of the two year prohibition where audit firms are prohibited from accepting appointment or reappointment where a partner leaves the firm and joins an audit client. The period is extended to 'when the former partner ceases to have ability to influence the conduct of the outcome of the audit'.

ES3 – long association with the audit engagement

The changes relate to listed companies and partner rotation and are detailed in paragraphs 12, 13, 14, 18, 23 and 24.

ES4 – fees, remuneration and evaluation policies, litigation, gifts and hospitality

Paragraphs 7 to 9 require that audit fees are 'not influenced or determined by the provision of non-audit services to the audited entity'.

The footnote to paragraph 25 applies to sole practitioners and allows all earned income to be taken into account when assessing 'annual fee income of the audit firm'.

ES5 – non-audit services provided to audited entities

Paragraphs 25 and 26 provide additional clarification of management threats, judgements and informed management.

Paragraph 31 is a useful note highlighting that where audit firms provide non audit services to entities not audited by the firm but connected to the firm and 'the outcome of that service has a material impact on the financial statements of the audited entity' that the threat needs to be assessed. This cites the useful illustration of actuarial services provided to a company pension scheme where the scheme is in deficit.

The valuation section (paragraphs 55 to 62) and actuarial valuation sections (paragraphs 63 to 67) have been revised. The revisions include guidance on valuations and prohibitions for auditors of listed entities.

Restrictions on tax services to listed entity are detailed in paragraphs 78 to 81.

The revised Standards can be viewed online within ACCA's Knowledge Library or on the FRC's website