Auditor Independence APES 110

Why Auditor Independence Matters – APES 110 Update Explained

Maintaining auditor independence is not just good practice, it’s essential to maintaining public trust in financial reporting. The updated APES 110 Code Prohibitions for Auditors (effective December 2024) strengthens this principle, clearly outlining what audit and review firms must not do to avoid conflicts of interest.

Understanding the Framework

At the heart of APES 110 is a conceptual framework that guides auditors in identifying and evaluating threats to independence. A central feature is the “reasonable and informed third party” test, would a knowledgeable outsider believe the auditor’s objectivity is compromised?

If the answer is yes, and appropriate safeguards can’t reduce the threat to an acceptable level, the firm must decline or withdraw from the engagement.

Key Prohibitions for PIE vs Non-Pie Clients

Some threats to independence are too significant to manage, which is why APES 110 enforces strict prohibitions. The table below summarises key restrictions:

Prohibited Service PIE Clients Non-PIE Clients
Management Responsibility (R400.20) Prohibited Prohibited
Internal Audit Services (R605.6) Prohibited Allowed with safeguards
IT System Implementation (R606.6) Prohibited Prohibited
Valuation Services (R603.5) Prohibited if material Prohibited if material
Tax Advocacy (R604.26) Prohibited Prohibited if material
Cooling-off Periods (R524.6) Mandatory Not required

These prohibitions ensure that auditors don’t assume roles or provide services that could lead to a self-review threat, particularly where past work influences financial reporting outcomes.

Beyond Services: Interests and Relationships

Threats to independence aren’t limited to services alone. Financial and personal relationships can also compromise objectivity. For instance:

  • Firms must not hold direct or material financial interests in their audit clients.

  • Serving as a director or officer of a client is strictly prohibited.

  • Substantial loans, close business ties, or employment relationships must be avoided.

  • Gifts and inducements that may influence judgement are also disallowed.

For Public Interest Entities (PIEs), the rules are even tighter. Mandatory cooling-off periods apply, key audit partners must wait at least two years before accepting governance roles with an audit client (R524.6).

Communicate and Document Everything

Transparency is especially important when dealing with PIEs. Before offering any non-assurance service, firms must:

  • Engage with Those Charged With Governance (TCWG)

  • Disclose the scope of the service and any potential threats

  • Explain safeguards in place

  • Obtain TCWG’s agreement before proceeding

This documentation and consultation process reinforces trust and ensures all stakeholders remain informed.

Case Study: Internal Audit Assistance Gone Too Far

Scenario:
A firm was engaged to conduct both external and internal audits for a manufacturing client. The internal audit covered procurement, inventory, and payroll, all material to the financial statements. Over time, management adopted internal audit recommendations that influenced reporting outcomes.

Complication:
APES 110 (R605.6) allows internal audit services for non-PIEs only if they don’t create a self-review threat. However, the external audit relied on areas directly impacted by the firm’s internal audit findings.

Outcome:
An internal independence review confirmed the threat was too significant. The firm ended the internal audit engagement and recommended a separate provider. It also tightened its internal review process for combined engagements.

Lesson:
Even if technically allowed internal audit services for non-PIEs must be assessed for independence risks. When in doubt, step back.

Case Study: The Friendly Director Appointment

Scenario:
A former engagement partner retired and was appointed as a non-executive director of a PIE client within 12 months of retirement.

Complication:
This breached the required two-year cooling-off period (Section 540.5). The appointment posed a significant independence risk given the partner’s prior involvement.

Outcome:
The firm notified TCWG and considered withdrawing unless the appointment was delayed. TCWG complied, and the firm documented its process.

Lesson:
Post-employment relationships must be monitored closely. Firms should track partner transitions and communicate with clients to avoid breaches.

Case Study: The IT System Implementation Dilema

Scenario:
A mid-tier firm’s long-standing client requested help implementing a new ERP system, which included financial reporting modules critical to their statements.

Complication:
Although the work would be delivered by a different team, Section 606 of APES 110 prohibits designing or implementing IT systems that generate information used in financial statements.

Outcome:
The firm declined the service and referred the client to an external consultancy. While the client was initially disappointed, they appreciated the transparency.

Lesson:
Auditors must not participate in system implementation that affects financial data — even through a separate internal team.

What It Means for Firms

For firms offering both audit and advisory services, independence must be embedded into the firm’s operations:

  • Separate audit and non-audit teams for PIEs

  • Conduct regular training on APES 110

  • Document all risk assessments and safeguards

  • Engage early and transparently with TCWG

Maintaining a clear audit trail of decisions protects both firms and their clients.

How National Audits Group Can Help

At National Audits Group, independence isn’t just a requirement, it’s the foundation of everything we do.

As a specialist audit-only firm, we work alongside accounting practices, financial controllers, and boards to help them stay ahead of evolving regulatory expectations like those outlined in APES 110.

We support our clients and partners by:

  • Providing independent audit services that meet the highest professional and ethical standards

  • Identifying and managing threats to independence, including self-review and advocacy risks

  • Advising on the separation of audit and non-assurance functions to avoid conflicts of interest

  • Delivering in-house training and practical guidance tailored to your team and clients

  • Conducting internal independence reviews to ensure compliance and transparency

  • Strengthening documentation and governance processes for TCWG reporting and stakeholder confidence

Whether you’re an accounting firm navigating client service boundaries or a compliance team seeking clarity, our team brings deep technical expertise and a practical, collaborative approach.