April 9, 2021

INTRODUCTION   1.1 APB Ethical Standards for Auditors require an auditor to be independent from the entity that it is appointed to audit.  There is a substantial degree of similarity between an audit opinion and the nature of assurance provided by accountants reporting for the purposes of an investment circular prepared in accordance with the statutory or regulatory requirements of a recognised stock exchange.  Accordingly, the Auditing Practices Board (APB) believes that users of investment circulars will expect an equivalent standard of independence of reporting accountants to that required of auditors.   1.2 This standard is based on the APB Ethical Standards for Auditors and applies to all engagements: that are subject to the requirements of the Standards for Investment Reporting (SIRs) issued by the APB, and which are in connection with an investment circular in which a report from the reporting accountant is to be published. This standard applies to all public reporting engagements undertaken in accordance with the SIRs.  It also applies to all private reporting engagements that are directly linked to such public reporting engagements.   Where a private reporting engagement is undertaken, but it is not intended that the reporting accountant will issue a public report, the reporting accountant follows the ethical guidance issued by the professional accountancy body of which the reporting accountant is a member. The APB is not aware of any significant instances where the relevant parts of the ethical guidance issued by professional accountancy bodies in the UK and Ireland are more restrictive than this standard.   An investment circular is a document issued by an entity pursuant to statutory or regulatory requirements relating to securities on which it is intended that a third party should make an investment decision, including a prospectus, listing particulars, a circular to shareholders or similar document.   Public confidence in the operation of the capital markets and in the conduct of public interest entities depends, in part, upon the credibility of the opinions and reports issued by reporting accountants in connection with investment circulars. Such credibility depends on beliefs concerning the integrity, objectivity and independence of reporting accountants and the quality of work they perform. The APB establishes quality control, investment reporting1 and ethical standards to provide a framework for the practice of reporting accountants.   Reporting Accountants should conduct an investment circular reporting engagement with integrity, objectivity and independence.   Integrity   1.7 Integrity is a prerequisite for all those who act in the public interest.  It is essential that reporting accountants act, and are seen to act, with integrity, which requires not only honesty but a broad range of related qualities such as fairness, candour, courage, intellectual honesty and confidentiality.   1.8 It is important that the directors and management of an engagement client can rely on the reporting accountant to treat the information obtained during an engagement as confidential, unless they have authorised its disclosure, it is already known to third parties or the reporting accountant has a legal right or duty to disclose it. Without this, there is a danger that the directors and management will fail to disclose such information to the reporting accountant and that the outcome of the engagement will thereby be impaired.   Objectivity   1.9 Objectivity is a state of mind that excludes bias, prejudice and compromise and that gives fair and impartial consideration to all matters that are relevant to the task in hand, disregarding those that are not. Objectivity requires that the reporting accountant’s judgment is not affected by conflicts of interests. Like integrity, objectivity is a fundamental ethical principle.   1.10 The need for reporting accountants to be objective arises from the fact that the important issues involved in an engagement are likely to relate to questions of judgment rather than to questions of fact. For example, in relation to historical financial information included in an investment circular directors have to form a view as to whether it is necessary to make adjustments to previously published financial statements. If the directors, whether deliberately or inadvertently, make a biased judgment or an otherwise inappropriate decision, the financial information may be misstated or misleading.   1.11 It is against this background that reporting accountants are engaged to undertake an investment circular reporting engagement. The reporting accountant’s objectivity requires that it expresses an impartial opinion in the light of all the available information and its professional judgment. Objectivity also requires that the reporting accountant adopts a rigorous                                                                                                                                             1 SIR 1000 paragraph 18 states ‘In the conduct of an engagement involving an investment circular, the reporting accountant should comply with the applicable ethical standards issued by the Auditing Practices Board’.  and robust approach and is prepared to disagree, where necessary, with the directors’ judgments.   Independence   1.12 Independence is freedom from situations and relationships which make it probable that a reasonable and informed third party would conclude that objectivity either is impaired or could be impaired. Independence is related to and underpins objectivity. However, whereas objectivity is a personal behavioural characteristic concerning the reporting accountant’s state of mind, independence relates to the circumstances surrounding the engagement, including the financial, employment, business and personal relationships between the reporting accountant and its engagement client and other parties who are connected with the investment circular.   1.13 The need for independence arises because, in most cases, users of the financial information and other third parties do not have all the information necessary to assess whether reporting accountants are, in fact, objective. Although reporting accountants themselves may be satisfied that their objectivity is not impaired by a particular situation, a third party may reach a different conclusion. For example, if a third party were aware that the reporting accountant had certain financial, employment, business or personal relationships with the engagement client, that individual might reasonably conclude that the reporting accountant could be subject to undue influence from the engagement client or would not be impartial or unbiased. Public confidence in the reporting accountant’s objectivity could therefore suffer as

INTRODUCTION   The APB issues Ethical Standards which set out the standards that auditors are required to comply with in order to discharge their responsibilities in respect of their integrity, objectivity and independence. The Ethical Standards 1 to 5 address such matters as: How audit firms set policies and procedures to ensure that, in relation to each audit, the audit firm and all those who are in a position to influence the conduct and outcome of an audit act with integrity, objectivity and independence; Financial, business, employment and personal relationships; Long association with the audit engagement; Fees, remuneration and evaluation policies, litigation, gifts and hospitality; Non-audit services provided to audited entities.   These Ethical Standards apply to all audit firms and to all audits and must be read in order to understand the alternative provisions and exemptions contained in this Standard.   The APB is aware that a limited number of the requirements in Ethical Standards 1 to 5 are difficult for certain audit firms to comply with, particularly when auditing a small entity. Whilst the APB is clear that those standards are appropriate in the interests of establishing the integrity, objectivity and independence of auditors, it accepts that certain dispensations, as set out in this Standard, are appropriate to facilitate the cost effective audit of the financial statements of Small Entities (as defined below).   This Standard provides alternative provisions for auditors of Small Entities to apply in respect of the threats arising from economic dependence and where tax or accounting services are provided and allows the option of taking advantage of exemptions from certain of the requirements in APB Ethical Standards 1 to 5 for a Small Entity audit engagement. Where an audit firm takes advantage of the exemptions within this Standard, it is required to: take the steps described in this Standard; and disclose in the audit report the fact that the firm has applied APB Ethical Standard – Provisions Available for Small Entities.   4      (i) In this Standard, for the UK a ‘Small Entity’ is: any company, which is not a UK listed company or an affiliate thereof, that qualifies as a small company under Section 382 of the Companies Act 2006; where group accounts are produced, any group that qualifies as small under Section 383 of the Companies Act 2006; any charity with an income of less than the turnover threshold applicable to small companies as identified in Section 382 of the Companies Act 2006; any pension fund with less than 100 members (including active, deferred and pensioner members)[1]; any firm regulated by the FSA, which is not required to appoint an auditor in accordance with chapter 3 of the FSA Supervision Manual which forms a part of the FSA Handbook[2]; any credit union which is a mutually owned financial cooperative 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; any entity registered under the Industrial and Provident Societies Act 1965, incorporated under the Friendly Societies Act 1992 or [1] In cases where a scheme with more than 100 members has been in wind-up over a number of years, such a scheme does not qualify as a Small Entity, even where the remaining number of members falls below 100. [2] This relates to those firms that are not required to appoint an auditor under rule SUP 3.3.2R of the FSA Supervision Manual. registered under the Friendly Societies Act 1974 (or equivalent legislation), which meets the criteria set out in (a) above; any registered social landlord with less than 250 units; and any other entity, such as a club, which would be a Small Entity if it were a company. (ii) In this Standard, for the Republic of Ireland a ‘Small Entity’ is:  (a) any company, which is not an Irish listed company or an affiliate thereof, that meets two or more of the following requirements in both the current financial year and the preceding financial year: not more than €7.3 million turnover; not more than €3.65 million balance sheet total; not more than 50 employees. any charity with an income of less than €7.3 million; any pension fund with less than 1,000 members (including active, deferred and pensioner members)[1]; and any other entity, such as a club or credit union, which would be a Small Entity if it were a company. Where an entity falls into more than one of the above categories, it is only regarded as a ‘Small Entity’ if it meets the criteria of all relevant categories.     ALTERNATIVE PROVISIONS   ECONOMIC DEPENDENCE   When auditing the financial statements of a Small Entity an audit firm is not required to comply with the requirement in APB Ethical Standard 4, paragraph 39 that an external independent quality control review is performed.   [1] In cases where a scheme with more than 1,000 members has been in wind-up over a number of years, such a scheme does not qualify as a Small Entity, even where the remaining number of members falls below 1,000. APB Ethical Standard 4, paragraph 39 provides that, where it is expected that the total fees for both audit and non-audit services receivable from a non-listed audited entity and its subsidiaries audited by the audit firm will regularly exceed 10% of the annual fee income of the audit firm or the part of the firm by reference to which the audit engagement partner’s profit share is calculated, but will not regularly exceed 15% the firm shall arrange an external independent quality control review of the audit engagement to be undertaken before the auditors’ report is finalised. Although an external independent quality control review is not required, nevertheless the audit engagement partner discloses the expectation that fees will amount to between 10% and 15% of the firm’s annual fee income to the Ethics Partner and to those charged with governance of the audited entity.   SELF-REVIEW THREAT – NON-AUDIT SERVICES

INTRODUCTION   APB Ethical Standard 1 requires the audit engagement partner to identify and assess the circumstances which could adversely affect the auditor’s objectivity (‘threats’), including any perceived loss of independence, and to apply procedures (‘safeguards’) which will either: eliminate the threat; or reduce the threat to an acceptable level (that is, a level at which it is not probable that a reasonable and informed third party would conclude that the auditor’s objectivity and independence either is impaired or is likely to be impaired). When considering safeguards, where the audit engagement partner chooses to reduce rather than to eliminate a threat to objectivity and independence, he or she recognises that this judgment may not be shared by users of the financial statements and that he or she may be required to justify the decision.   This Standard provides requirements and guidance on specific circumstances arising from the provision of non-audit services by audit firms to entities audited by them which may create threats to the auditor’s objectivity or perceived loss of independence. It gives examples of safeguards that can, in some circumstances, eliminate the threat or reduce it to an acceptable level. In circumstances where this is not possible, either the non-audit service engagement in question is not undertaken or the auditor either does not accept or withdraws from the audit engagement, as appropriate.   Whenever a possible or actual breach of an APB Ethical Standard is identified, the audit engagement partner, in the first instance, and the Ethics Partner, where appropriate, assess the implications of the breach, determine whether there are safeguards that can be put in place or other actions that can be taken to address any potential adverse consequences and consider whether there is a need to resign from the audit engagement.   An inadvertent violation of this Standard does not necessarily call into question the audit firm’s ability to give an audit opinion provided that: the audit firm has established policies and procedures that require all partners and staff to report any breach promptly to the audit engagement partner or to the Ethics Partner, as appropriate; the audit engagement partner promptly notifies the partner or member of staff that any matter which has given rise to a breach is to be addressed as soon as possible and ensures that such action is taken; safeguards, if appropriate, are applied (for example, by having another partner review the work done by the relevant partner or member of staff or by removing him or her from the engagement team); and the actions taken and the rationale for them are documented.   GENERAL APPROACH TO NON-AUDIT SERVICES   Paragraphs 6 to 53 of this Standard set out the general approach to be adopted by audit firms and auditors in relation to the provision of nonaudit services to entities audited by them. This approach is applicable irrespective of the nature of the non-audit services, which may be in question in a given case. (Paragraphs 54 to 168 of this Standard illustrate the application of the general approach to a number of common non-audit services.)   An audit is the term used to describe the work that is undertaken by the auditor to enable him or her to express an independent audit opinion on an entity’s financial statements and, where the entity is a parent company, on the group financial statements and/or the separate financial statements of its components[1].   [2] International Standards on Auditing (UK and Ireland) require that the auditor exercise professional judgment and maintain professional scepticism throughout the planning and performance of the audit and, among other things: Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control. Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks. Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained2.   [1] In the public sector the statutory scope of an audit can extend beyond expressing an independent opinion on an entity’s financial statements to include reporting on an entity’s arrangements to ensure the proper conduct of its financial affairs, manage its performance or use of its resources. 2  ISA (UK and Ireland) 200 ‘Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing (UK and Ireland)’ paragraph [2] . Judgments regarding the nature and extent of evidence necessary to support the audit opinion are a matter for the auditor but will include: Identifying, evaluating and testing, where appropriate, those internal control systems the effectiveness of which is necessary for the audit of the financial statements and where, if any control weaknesses are identified, extended testing will be required; and additional work undertaken to respond to risks identified by management or the audit committee that the auditor considers could impact the auditor’s opinion on the financial statements.   Other work undertaken by the engagement team at the request of management or those charged with governance will not be categorised as part of the audit irrespective of whether it forms part of the audit proposal or engagement, unless it is clear that the predominant rationale for the performance of the work in question is to enable a soundly based audit opinion on the financial statements to be expressed. Therefore, an audit of financial statements does not include work where: The objective of that work is not to gather evidence to support the auditor’s opinion on the financial statements; or The nature and extent of testing is not determined by the external auditor, or in the case of a group, the component auditors, in the context of expressing an opinion on the financial statements; or         The principal terms and conditions differ from that of the audit.   If additional work on financial information[1] and/or financial controls is authorised by those charged with governance, but the objective of

 INTRODUCTION   APB Ethical Standard 1 requires the audit engagement partner to identify and assess the circumstances which could adversely affect the auditor’s objectivity (‘threats’), including any perceived loss of independence, and to apply procedures (‘safeguards’) which will either: eliminate the threat; or reduce the threat to an acceptable level (that is, a level at which it is not probable that a reasonable and informed third party would conclude that the auditor’s objectivity and independence either is impaired or is likely to be impaired). When considering safeguards, where the audit engagement partner chooses to reduce rather than to eliminate a threat to objectivity and independence, he or she recognises that this judgment may not be shared by users of the financial statements and that he or she may be required to justify the decision.   This Standard provides requirements and guidance on specific circumstances arising out of fees, economic dependence, litigation, remuneration and evaluation of partners and staff, and gifts and hospitality, which may create threats to the auditor’s objectivity or perceived loss of independence. It gives examples of safeguards that can, in some situations, eliminate the threat or reduce it to an acceptable level. In circumstances where this is not possible, either the situation is avoided or the auditor either does not accept or withdraws from the audit engagement, as appropriate.   Whenever a possible or actual breach of an APB Ethical Standard is identified, the audit engagement partner, in the first instance, and the Ethics Partner, where appropriate, assesses the implications of the breach, determines whether there are safeguards that can be put in place or other actions that can be taken to address any potential adverse consequences and considers whether there is a need to resign from the audit engagement.   An inadvertent violation of this Standard does not necessarily call into question the audit firm’s ability to give an audit opinion provided that: the audit firm has established policies and procedures that require all partners and staff to report any breach promptly to the audit engagement partner or to the Ethics Partner, as appropriate; the audit engagement partner or Ethics Partner ensures that any matter which has given rise to a breach is addressed as soon as possible; safeguards, if appropriate, are applied (for example, having another partner review the work done by the relevant partner or member of staff or by removing him or her from the engagement team); and the actions taken and the rationale for them are documented.     FEES   The audit engagement partner shall be satisfied and able to demonstrate that the audit engagement has assigned to it sufficient partners and staff with appropriate time and skill to perform the audit in accordance with all applicable Auditing and Ethical Standards, irrespective of the audit fee to be charged.   Paragraph 5 is not intended to prescribe the approach to be taken by audit firms to the setting of audit fees, but rather to emphasise that there are no circumstances where the amount of the audit fee can justify any lack of appropriate resource or time taken to perform a proper audit in accordance with applicable Auditing and Ethical Standards.   The audit engagement partner shall ensure that audit fees are not influenced or determined by the provision of non-audit services to the audited entity.   The audit fee ordinarily reflects the time spent, the skills and experience of the personnel performing the audit in accordance with all the relevant requirements, and the competitive situation in the audit market. Paragraph 7 is intended to prevent any relationship between the appropriate cost of the audit and the actual or potential provision of nonaudit services.   Paragraph 7 is not intended to prohibit proper cost savings that can be achieved as a result of providing non-audit services in accordance with APB Ethical Standard 5 to the audited entity, for example, where information gained through undertaking a non-audit service is referred to by audit staff when carrying out the audit of the financial statements.   An audit shall not be undertaken on a contingent fee basis.   A contingent fee basis is any arrangement made under which a fee is calculated on a pre-determined basis relating to the outcome or result of a transaction, or other event, or the result of the work performed. A fee that is established by a court or other public authority is not a contingent fee.   Contingent fee arrangements in respect of audit engagements create self-interest threats to the auditor’s objectivity and independence that are so significant that they cannot be eliminated or reduced to an acceptable level by the application of any safeguards.   The audit fee does not depend on whether the auditor’s report on the financial statements is qualified or unqualified. The basis for the calculation of the audit fee is agreed with the audited entity each year before significant audit work is undertaken. Arrangements under which estimated audit fees are agreed with the audited entity on terms where the fees may be varied based on the level of audit work required do not constitute contingent fee arrangements.   Contingent fee arrangements in respect of non-audit services provided by the auditor in respect of an audited entity can create significant selfinterest threats to the auditor’s objectivity and independence as the auditor may have, or may appear to have, an interest in the outcome of the non-audit service.     The audit firm shall not undertake an engagement to provide nonaudit services in respect of an audited entity on a contingent fee basis where: the contingent fee is material to the audit firm, or that part of the firm by reference to which the audit engagement partner’s profit share is calculated; or the outcome of those non-audit services (and, therefore, the amount of the fee) is dependent on a future or contemporary audit judgment relating to a material matter in the financial statements of an audited entity.   Where non-audit services are provided on a

INTRODUCTION   APB Ethical Standard 1 requires the audit engagement partner to identify and assess the circumstances which could adversely affect the auditor’s objectivity (‘threats’), including any perceived loss of independence, and to apply procedures (‘safeguards’) which will either: eliminate the threat; or reduce the threat to an acceptable level (that is, a level at which it is not probable that a reasonable and informed third party would conclude that the auditor’s objectivity and independence either is impaired or is likely to be impaired). When considering safeguards, where the audit engagement partner chooses to reduce rather than to eliminate a threat to objectivity and independence, he or she recognises that this judgment may not be shared by users of the financial statements and that he or she may be required to justify the decision.   This Standard provides requirements and guidance on specific circumstances arising out of long association with the audit engagement, which may create threats to the auditor’s objectivity or perceived loss of independence. It gives examples of safeguards that can, in some circumstances, eliminate the threat or reduce it to an acceptable level. In circumstances where this is not possible, the auditor either does not accept or withdraws from the audit engagement, as appropriate.   Whenever a possible or actual breach of an APB Ethical Standard is identified, the audit engagement partner, in the first instance, and the Ethics Partner, where appropriate, assesses the implications of the breach, determines whether there are safeguards that can be put in place or other actions that can be taken to address any potential adverse consequences and considers whether there is a need to resign from the audit engagement.   An inadvertent violation of this Standard does not necessarily call into question the audit firm’s ability to give an audit opinion provided that: the audit firm has established policies and procedures that require all partners and staff to report any breach promptly to the audit engagement partner or to the Ethics Partner, as appropriate; the audit engagement partner or Ethics Partner ensures that any matter which has given rise to a breach is addressed as soon as possible; safeguards, if appropriate, are applied (for example, by having another partner review the work done by the relevant partner or member of staff or by removing him or her from the engagement team): and the actions taken and the rationale for them are documented.   GENERAL PROVISIONS   The audit firm shall establish policies and procedures to monitor the length of time that audit engagement partners, key partners involved in the audit and partners and staff in senior positions, including those from other disciplines, serve as members of the engagement team for each audit.   Where audit engagement partners, key partners involved in the audit, and partners and staff in senior positions have a long association with the audit, the audit firm shall assess the threats to the auditor’s objectivity and independence and shall apply safeguards to reduce the threats to an acceptable level. Where appropriate safeguards cannot be applied, the audit firm shall either resign as auditor or not stand for reappointment, as appropriate.[1]   Where audit engagement partners, key partners involved in the audit, other partners and staff in senior positions have a long association with the audited entity, self-interest, self-review and familiarity threats to the auditor’s objectivity may arise.  Similarly, such circumstances may result [1] In the case of those public sector bodies where the responsibility for the audit is assigned by legislation, the auditor cannot resign from the audit engagement and considers alternative safeguards that can be put in place. in an actual or perceived loss of independence. The significance of such threats depends upon factors such as: the role of the individual in the engagement team; the proportion of time that the audited entity contributes to the individual’s annual billable hours; the length of time that the individual has been associated with that audit engagement.   In order to address such threats, audit firms apply safeguards. Appropriate safeguards may include: removing (‘rotating’) the partners and the other senior members of the engagement team after a pre-determined number of years; involving an additional partner, who is not and has not recently been a member of the engagement team, to review the work done by the partners and the other senior members of the engagement team and to advise as necessary; applying independent internal quality reviews to the engagement in question.   Once an audit engagement partner has held this role for a continuous period of ten years, careful consideration is given as to whether a reasonable and informed third party would consider the audit firm’s objectivity and independence to be impaired. Where the individual concerned is not rotated after ten years, it is important that: safeguards other than rotation, such as those noted in paragraph 8, are applied; or (i) the reasoning as to why the individual continues to participate in the audit engagement without any safeguards is documented; and (ii) the facts are communicated to those charged with governance of the audited entity in accordance with paragraphs 63 – 71 of APB Ethical Standard 1.   The audit firm’s policies and procedures set out whether there are circumstances in which the audit engagement partners, engagement quality control reviewers and key partners involved in the audit of nonlisted entities are subject to accelerated rotation requirements, such as those set out in paragraph 12, as described in paragraph 47 of APB Ethical Standard 1.   Any scheme of rotation of partners and other senior members of the engagement team needs to take into account the factors which affect the quality of the audit work, including the experience and continuity of members of the engagement team and the need to ensure appropriate succession planning.     ADDITIONAL PROVISIONS RELATED TO AUDITS OF LISTED COMPANIES    The audit engagement partner In the case of listed companies, save where the circumstances contemplated in paragraph 15 and 16 apply, the audit firm shall

APB Ethical Standard 1 requires the audit engagement partner to identify and assess the circumstances which could adversely affect the auditor’s objectivity (‘threats’), including any perceived loss of independence, and to apply procedures (‘safeguards’) which will either: eliminate the threat; or reduce the threat to an acceptable level (that is, a level at which it is not probable that a reasonable and informed third party would conclude that the auditor’s objectivity and independence is impaired or is likely to be impaired). When considering safeguards, where the audit engagement partner chooses to reduce rather than to eliminate a threat to objectivity and independence, he or she recognises that this judgment may not be shared by users of the financial statements and that he or she may be required to justify the decision.   This Standard provides requirements and guidance on specific circumstances arising out of financial, business, employment and personal relationships with the audited entity, which may create threats to the auditor’s objectivity or perceived loss of independence. It gives examples of safeguards that can, in some circumstances, eliminate the threat or reduce it to an acceptable level. In circumstances where this is not possible, either the relationship in question is not entered into or the auditor either does not accept or withdraws from the audit engagement, as appropriate.   Whenever a possible or actual breach of an APB Ethical Standard is identified, the audit engagement partner, in the first instance, and the Ethics Partner, where appropriate, assesses the implications of the breach, determines whether there are safeguards that can be put in place or other actions that can be taken to address any potential adverse consequences and considers whether there is a need to resign from the audit engagement.   An inadvertent violation of this Standard does not necessarily call into question the audit firm’s ability to give an audit opinion provided that: the audit firm has established policies and procedures that require all partners and staff to report any breach promptly to the audit engagement partner or to the Ethics Partner as appropriate; the audit engagement partner or Ethics Partner promptly notifies the partner or member of staff that any matter which has given rise to a breach is to be addressed as soon as possible and ensures that such action is taken; safeguards, if appropriate, are applied (for example, having another partner review the work done by the relevant partner or member of staff or by removing him or her from the engagement team); and the actions taken and the rationale for them are documented.     FINANCIAL RELATIONSHIPS   General considerations A financial interest is an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such an interest.   Financial interests may be: owned directly, rather than through intermediaries (a ‘direct financial interest’); or owned through intermediaries, for example, an open ended investment company or a pension scheme (an ‘indirect financial interest’).   Save where the circumstances contemplated in paragraphs 9, 10, 12, 19 or 21 apply, the audit firm, any partner in the audit firm, a person in a position to influence the conduct and outcome of the audit or an immediate family member of such a person shall not hold: any direct financial interest in an audited entity or an affiliate of an audited entity; or any indirect financial interest in an audited entity or an affiliate of an audited entity, where the investment is material to the audit firm or the individual, or to the intermediary; or any indirect financial interest in an audited entity or an affiliate of an audited entity, where the person holding it has both: the ability to influence the investment decisions of the intermediary; and actual knowledge of the existence of the underlying investment in the audited entity.   The threats to the auditor’s objectivity and independence, where a direct financial interest or a material indirect financial interest in the audited entity is held by the audit firm or by one of the individuals specified in paragraph 7, are such that no safeguards can eliminate them or reduce them to an acceptable level.   Where a person joins the audit firm as a partner, he or she or an immediate family member is not required to dispose of financial interests held where: the financial interests were acquired before the new partner joined the audit firm; and the individual is not able to influence the affairs of the audited entity; and either there is no market for such interests, or the individual does not have the power to sell or direct the sale of the interest; and (d) the new partner: is not in a position to influence the conduct and outcome of the audit; does not work in the same part of the firm as the audit engagement partner; and is not involved in the provision of a non-audit service to the audit client. Such a financial interest is disposed of as soon as possible after the individual becomes able to make a disposal.  The audit firm ensures that: such financial interests are approved by the Ethics Partner; a record is maintained of such individuals, including a description of the circumstances; and this information is communicated to the relevant audit engagement partner.   Where an immediate family member of a partner who is not in a position to influence the conduct and outcome of the audit holds a financial interest in an audited entity or an affiliate of an audited entity as a consequence of: their compensation arrangements (for example, a share option scheme, where the shares have not vested); or a decision made, or a transaction undertaken, by an entity with whom that immediate family member has a contractual business or employment arrangement (for example, a partnership agreement); such financial interests are not generally considered to threaten the auditor’s objectivity and independence.  However, where such interests are significant or

INTRODUCTION   The financial statements of an entity may have a number of different users. For example, they may be used by suppliers and customers, joint venture partners, bankers and other suppliers of finance, taxation and regulatory authorities, employees, trades unions and environmental groups. In the case of a listed company, the financial statements are an important source of information to the capital markets. But the primary purpose of the financial statements of an entity is to provide its owners – the shareholders (or those in an equivalent position) – with information on the state of affairs of the entity and its performance and to assist them in assessing the stewardship exercised by the directors (or those in an equivalent position) over the business that has been entrusted to them.   The financial statements of an entity are the responsibility of its board of directors and are prepared by them, or by others on their behalf, for the shareholders or, in some circumstances, for other third parties.   The primary objective of an audit of the financial statements is for the auditor to provide independent assurance to the shareholders that the directors have prepared the financial statements properly. The auditor issues a report that includes an opinion as to whether or not the financial statements give a true and fair view[1]. Thus the auditor assists the shareholders to exercise their proprietary powers as shareholders in the Annual General Meeting.   Public confidence in the operation of the capital markets and in the conduct of public interest entities depends, in part, upon the credibility of the opinions and reports issued by the auditor in connection with the audit of the financial statements. Such credibility depends on beliefs concerning the integrity, objectivity and independence of the auditor and the quality of audit work performed. APB establishes quality control, auditing and ethical standards to provide a framework for audit practice. The Auditors’ Code underlies APB’s standards and sets out the fundamental principles, which APB expects to guide the conduct of auditors.   APB Ethical Standards are concerned with the integrity, objectivity and independence of auditors. Ethical guidance on other matters, together with statements of fundamental ethical principles governing the work of all professional accountants, are issued by professional accountancy bodies.   Auditors shall conduct the audit of the financial statements of an entity with integrity, objectivity and independence.   Integrity Integrity is a prerequisite for all those who act in the public interest. It is essential that auditors act, and are seen to act, with integrity, which requires not only honesty but a broad range of related qualities such as fairness, candour, courage, intellectual honesty and confidentiality.   [1] In the case of certain bodies in the public sector, the auditor expresses an opinion as to whether the financial statements ‘present fairly’ the financial position. Integrity requires that the auditor is not affected, and is not seen to be affected, by conflicts of interest. Conflicts of interest may arise from personal, financial, business, employment, and other relationships which the audit engagement team, the audit firm or its partners or staff have with the audited entity and its connected parties.2   It is important that the directors and management of an audited entity can rely on the auditor to treat the information obtained during an audit as                                                 2 For this purpose an audited entity’s connected parties are: its affiliates; key members of management (including but not limited to directors and those charged with governance) of the audited entity and its significant affiliates; and any person or entity with an ability to influence (other than in their capacity as professional advisor), whether directly or indirectly, key members of management and those charged with governance of the audited entity and its significant affiliates in relation to their responsibility for, or approach to, any matter or judgment that is material to the entity’s financial statements. confidential[1], unless they have authorised its disclosure, unless it is already known to third parties or unless the auditor has a legal right or duty to disclose it. Without this, there is a danger that the directors and management will fail to disclose such information to the auditor and that the effectiveness of the audit will thereby be impaired.   Objectivity Objectivity is a state of mind that excludes bias, prejudice and compromise and that gives fair and impartial consideration to all matters that are relevant to the task in hand, disregarding those that are not. Like integrity, objectivity is a fundamental ethical principle and requires that the auditor’s judgment is not affected by conflicts of interest.   [1] The fundamental principle of confidentiality is addressed in the ethical guidance issued by the auditor’s professional accountancy body.  This principle does not constrain the proper communication between the auditor and shareholders (or equivalent) of the audited entity. The need for auditors to be objective arises from the fact that many of the important issues involved in the preparation of financial statements do not relate to questions of fact but rather to questions of judgment. For example, there are choices to be made by the board of directors in deciding on the accounting policies to be adopted by the entity: the directors have to select the ones that they consider most appropriate and this decision can have a material impact on the financial statements. Furthermore, many items included in the financial statements cannot be measured with absolute precision and certainty. In many cases, estimates have to be made and the directors may have to choose one value from a range of possible outcomes. When exercising discretion in these areas, the directors have regard to the applicable financial reporting framework. If the directors, whether deliberately or inadvertently, make a biased judgment or an otherwise inappropriate decision, the financial statements may be misstated or misleading.   It is against this background that the auditor is required to express an opinion on the financial statements. The audit involves considering the process followed and the choices