Independence Letters

Many CPA firms still issue independence letters for all assurance engagements but in many cases this is actually not required.  The adoption of the Canadian Auditing Standards (CASs) in 2010 created a discrepancy between the CASs and the rules of professional conduct regarding the requirement for independence letters.  Previously the rules of professional conduct required an annual communication on independence matters with audit committees (or similar oversight bodies) for all audit engagements.  However, in 2011 this was amended to coincide with the CASs to only require this communication for audits of listed entities.

Paragraph 39 of the guidance to rules 204.1 to 204.3 in the CPABC Code of Conduct states that:

CPA Code of Professional Conduct Summary - Independence

Where an audit committee does not exist, as is set out in the definition of “audit committee”, references in this Code to an audit committee should be interpreted to refer to another governance body which has the duties and responsibilities normally granted to an audit committee or to those charged with governance for the entity. In some cases, this role may be filled by client management personnel. The CPA Canada Handbook – Assurance requires members and firms to determine the appropriate person or persons within the entity’s governance structure with whom to communicate and establishes requirements for communication on matters relating to independence with such a person or persons.

The requirements for independence letters within the CASs are located within CAS 260:

CPA Handbook Summary - CAS 260 Communications with Those Charged with Governance

17.   In the case of listed entities, the auditor shall communicate with those charged with governance:

1. A statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements regarding independence; and
2.  
   1. All relationships and other matters between the firm, network firms, and the entity that, in the auditor's professional judgment, may reasonably be thought to bear on independence. This shall include total fees charged during the period covered by the financial statements for audit and non-audit services provided by the firm and network firms to the entity and components controlled by the entity. These fees shall be allocated to categories that are appropriate to assist those charged with governance in assessing the effect of services on the independence of the auditor; and
   2. The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level. (Ref: Para. A21-A23)

Definition of a listed entity “An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.”

The above notwithstanding the CASs do not prohibit auditors from issuing independence letters to non-listed entity clients. In fact, the application material to CAS 260 suggests that it might be relevant to send such a communication to other clients due to their business, size or corporate status, or range of stakeholders. Examples of where communication of auditor independence could be appropriate include public sector entities, credit institutions, insurance companies, and retirement benefit funds.  The relevant application material can be found at CAS 260 A23:

CPA Handbook Summary - CAS 260 Communications with Those Charged with Governance

A23.  The communication requirements relating to auditor independence that apply in the case of listed entities may also be relevant in the case of some other entities, particularly those that may be of significant public interest because, as a result of their business, their size or their corporate status, they have a wide range of stakeholders. Examples of entities that are not listed entities, but where communication of auditor independence may be appropriate, include public sector entities, credit institutions, insurance companies, and retirement benefit funds. On the other hand, there may be situations where communications regarding independence may not be relevant, for example, where all of those charged with governance have been informed of relevant facts through their management activities. This is particularly likely where the entity is owner-managed, and the auditor's firm and network firms have little involvement with the entity beyond a financial statement audit.