Frequently Asked Questions

Professional & Ethical

These FAQs should assist you to adopt and implement the proposed revised long association provisions to be included within PES 1 (Revised).  

They highlight, illustrate or explain aspects of the proposed revised partner rotation regime, and may assist you to properly apply the changes.  They do not create new requirements, amend or override the Code.

Acknowledgement
Information in these FAQs has been drawn from the FAQs prepared by the staff of the International Ethics Standards Board for Accountants (IESBA).

PES 1 (Revised) defines a public interest entity as:

Any entity that is required or elects to prepare financial statements to comply with Tier 1 for-profit accounting requirements or Tier 1 PBE Accounting requirements in accordance with XRB A1.

The following table provides a snapshot of how the NZAuASB has analysed the types of entities that are PIEs in New Zealand:

Tier 1 For Profit Accounting Requirements

Tier 1 PBE Accounting Requirements

Listed issuers

Other FMC reporting entities1 considered to have a higher level of public accountability

Large
for-profit
public sector
entity

May opt down, but voluntarily applies Tier 1

Large
public sector
entity

Large
not-for profit entity

Other FMC reporting entities considered to have a higher level of public accountability

Both listed debt and equity

For example:

  • Registered banks
  • Insurers
  • Credit unions
  • Building societies
  • Licensed derivative issuers
  • Licensed MIS managers
  • Recipients of money from a conduit issuer

For example:

  • Port companies
  • Energy companies
  • Airports
  • State owned enterprise and Mixed ownership companies

 

For example:

  • Large DHBs
  • Large government departments
  • Large crown agents
  • Large city /district/ regional councils
  • Crown tertiary education institutions

 

For example large registered charities

For example:

  • Debt and equity issuers
  • Credit unions 

 

The proposals include amendments to the general auditor rotation provisions that apply to all assurance engagements.  The general provisions however do not establish a maximum time on period nor a minimum cooling off period 


1 An FMC reporting entity considered to have a higher level of public accountability is defined as an FMC reporting entity or a class of FMC reporting entity that is considered to have a higher level of public accountability than other FMC reporting entities:

  • Under section 461K of the Financial Markets Conduct Act 2013; or
  • By notice issued by the Financial Markets Authority 9FMA) under section 461L(1)(1) of the Financial Markets Conduct Act 2013. 

Information on FMC designations is available on the FMA website.

Questions 2-5 illustrate how the requirements set out below could apply. They are not intended to address all possible circumstances. You need to apply the principles to different facts and circumstances.

The same maximum time-on period applies to all key audit partners. However, there are different cooling-off periods depending on the role of the key audit partner, as summarised below:

Role

Time-on and cooling-off periods

Engagement partner

Maximum 7 year time-on period

5 year cooling-off period

Individual responsible for the engagement quality control review

Maximum 7 year time-on period

3 year cooling-off period

Other key audit partners

 

Maximum 7 year time-on period

2 year cooling-off period

 

The maximum 7-year time-on period is calculated on a cumulative basis and need not be consecutive (also look at Question 1 in the 'Breaks in Service' section below).

In some jurisdictions, the new provisions will permit for a limited time the application of a cooling-off period shorter than five consecutive years (but no shorter than three consecutive years) with respect to an engagement partner (look at Question 1 in the section 'Shorter Cooling-off Period Established by Law or Regulation' below).

In New Zealand, neither the Financial Markets Authority, nor the NZX, have established a shorter cooling off period. Therefore entities regulated by these regulators cannot apply a shorter cooling off period prior to 2023.

Combination of Roles are addressed in that section below.

Pursuant to proposed paragraph 290.168, firms may have the opportunity for relief from the partner rotation requirements in the Code based on an exemption provided by the relevant regulator in their jurisdiction.

Where such relief is available, the individual could remain as a key audit partner (for example, as the engagement partner) on the audit engagement in accordance with any conditions specified under such relief.

In this example, individual A has served as the engagement partner for the audit of a public interest entity (P) for seven years. Individual B has served as the engagement partner on the audit of a subsidiary (S) of P for seven years.

How long is the cooling-off period for individuals A and B?

A cooling-off period of five years applies to individual A, the engagement partner responsible for the report that is issued on behalf of the firm for the audit of P. This engagement partner is sometimes referred to as the “lead audit engagement partner” in a group audit and would be required to serve a five-year cooling-off period from the audit of P. The determination of the cooling-off period applicable to individual B should be approached from two different perspectives: the audit of S and the group audit of P.

From the perspective of the audit of S, if S is a public interest entity, individual B would be the engagement partner responsible for the report issued on public interest entity S and therefore would be required to serve a five-year cooling-off period from the audit of S (subject to proposed paragraph 290.163).

If S is not a public interest entity, there is no cooling-off requirement for individual B in relation to the audit of S. However, individual B will be subject to the general provisions set out in proposed paragraphs 290.148 – 290.152.

From the perspective of the group audit of P, it is necessary to determine if individual B is a key audit partner for the audit of P.

This determination would depend on, for example, the significance of the subsidiary and whether individual B makes key decisions or judgements with respect to the audit of the group.

If individual B was considered to be a key audit partner with respect to the group audit of P, he or she is required to serve a two-year cooling-off period from the group audit of P. (Also look at Question 4)

If individual B was not considered to be a key audit partner in relation to the group audit of P, there is no cooling-off requirement for individual B in relation to the group audit of P.  However, individual B will be subject to the general provisions set out in proposed paragraphs 290.148 – 290.152.

In this example, individual A has completed a cumulative period of seven years as engagement partner on the audit of a public interest entity (P).

Could individual A participate in the audit of a subsidiary (S) of P for purposes of the group audit of P without completing the required cooling-off period of five years?

No.

Paragraph 290.27 as it applies in New Zealand in the extant Code PES 1 (Revised) states that:

  1. Where an audit client is a FMC reporting entity considered to have a higher level of public accountability, references to an audit client include its related entities (which include subsidiaries); and
  2. For all other audit clients, references to an audit client include related entities over which the client has direct or indirect control (which also would include subsidiaries).

Accordingly, individual A is subject to a five-year cooling-off period with respect to both P and S, as the reference to the audit client (P) also includes S. Individual A would therefore not be permitted under the Code to participate in the audit of S for purposes of the group audit of P without completing the required cooling-off period of five years (subject to proposed paragraph 290.163).

However, if the audit of S is undertaken for purposes other than the group audit of P (for example, a statutory audit of S where the audit evidence is not used in the group audit of P), A could participate in that audit of S without serving any cooling-off period, subject to consideration of threats and safeguards pursuant the general provisions in proposed paragraphs 290.148 – 290.152.

Individual C has completed a cumulative period of seven years as engagement partner on the audit of a subsidiary (S) of a public interest entity (P).

Could individual C participate in the group audit of P after completing the seven years on the audit of S?

It depends on whether:

  1. individual C was a KAP with respect to the group audit of P; and
  2. whether S is a FMC reporting entity considered to have a higher level of public accountability and, if so, whether it is material to P.

If individual C was considered to be a key audit partner with respect to the group audit of P, he or she would not be able to participate in the group audit of P until the completion of a two-year cooling-off period. If S is a public interest entity, individual C would be required to serve a five-year cooling-off period (subject to proposed paragraph 290.163) in relation to the audit of S.

If individual C was not considered to be a key audit partner with respect to the group audit of P, but S is a FMC reporting entity considered to have a higher level of public accountability and it is material to P, individual C would also not be able to participate in the group audit of P.[1] Under the related entity provision in paragraph 290.27, the reference to audit client (in this case, S) will also include P.[2] Individual C would therefore not be permitted to participate in the group audit of P without completing the required cooling-off period of five years (subject to proposed paragraph 290.163).

In all other circumstances, P would not be considered to be part of the audit client (S) and individual C could participate in the group audit of P after serving seven years as engagement partner on the audit of S, subject to consideration of threats and safeguards pursuant the general provisions in proposed paragraphs 290.148 – 290.152.


  1. If S is material to P, it is likely that the engagement partner on S would be a key audit partner with respect to the group audit of P. However, this is not necessarily the case is all circumstances. This is because under the definition of a key audit partner in the Code, whether the individual is a key audit partner depends on whether he or she makes key decisions or judgements on significant matters with respect to the audit of the group, and not on whether S is material to P.  
  2. The definition of a related entity under the Code includes an entity that has direct or indirect control over the client if the client is material to such entity.

The Code defines the engagement partner as the partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body to sign the audit report.

In the situation where the partner who signs the audit report (the signing partner) is not the same individual as the engagement partner, which cooling-off provisions apply to the former?

The signing partner, if different, would normally also be treated as an engagement partner and be subject to the same requirement as the engagement partner.

Where more than one audit partner is required to sign the audit report, it may not be reasonable or appropriate to treat all the signing partners as engagement partners. In this case, determining which cooling-off provisions apply would depend on circumstances and the reasons why there are additional signing partner(s).

At a minimum, however, the signing partner(s) would be considered to be key audit partners and therefore subject to a minimum two-year cooling-off period as applicable to the audit of a public interest entity.

In calculating the time-on period, the count of years may be restarted if the break in service is equal to at least the cooling-off period determined in accordance with proposed paragraphs 290.155 to 290.157 as applicable to the role in which the individual served in the year immediately prior to the break in service.

Breaks in service that are shorter than the required cooling-off period do not contribute to the consecutive cooling-off period.

For example, if a key audit partner (KAP) for the audit of a public interest entity has completed five years in the role and is off the engagement for one year due to medical leave, the one year off does not count towards cooling off and the year the individual was not on the engagement team also does not count towards the cumulative time-on period. He or she could therefore return to the engagement as a key audit partner for a further two years (completing a total of seven cumulative years of service) before being required to serve the cooling-off period associated with his or her role on the engagement.

In contrast, if the key audit partner had acted as the individual responsible for the engagement quality control review (EQCR) for those five years, followed by three years off the engagement, then he or she will have cooled off and could return to the engagement for a further seven years.

The table illustrates some examples showing how the cooling-off period would apply in the case of an audit of a public interest entity where “X“ represents a year in which the individual was not a key audit partner on the audit.

For the purposes of this table, “KAP” refers to an individual who was neither the engagement partner (EP) nor the individual responsible for the engagement quality control review (EQCR).

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

Yr 6

Yr 7

Yr 8

Yr 9

Cooling-off period

EP

EP

EP

EP

EP

EP

X

EP

 

5 consecutive years off at end of year 8 (Note 1)

EQCR

EQCR

EQCR

EQCR

X

X

EQCR

EQCR

EQCR

3 consecutive years off at the end of year 9 (Note 2)

KAP

KAP

KAP

X

KAP

KAP

X

KAP

KAP

2 consecutive years off at the end of year 9 (Note 3)

KAP

KAP

KAP

X

X

 

 

 

 

The KAP could return in year 6 for a further 7-year period (Note 4)


Notes

  1. The one year off the engagement in year 7 does not constitute cooling-off as it is less than the five consecutive years off required to achieve cooling off for an EP. So, the individual reaches seven cumulative years on the engagement at the end of year 8 after which he or she must serve a cooling-off period of five consecutive years.
  2. The two years off the engagement in years 5 and 6 do not constitute cooling-off as they are less than the three consecutive years off required to achieve cooling off for an EQCR. So, the individual reaches seven cumulative years on the engagement at the end of year 9, after which he or she must serve a cooling-off period of three consecutive years.
  3. The two years off the engagement in years 4 and 7 do not constitute cooling-off as they do not add up to two consecutive years off required to achieve cooling for a KAP. So, the individual reaches seven cumulative years on the engagement at the end of year 9, after which he or she must serve a cooling-off period of two consecutive years.
  4. The individual has effectively served a cooling-off period of two consecutive years in years 4 and 5 (even though not required by the Code as he or she had not completed 7 years on the audit) and therefore could return in year 6 for a further 7-year period. 

How should the required cooling-off period be determined in those circumstances?

The number of required years off will be determined by the roles undertaken and the periods during which they were performed. This is illustrated in the table below. For the purposes of the table, “KAP” refers to an individual who was neither the engagement partner (EP) nor the individual responsible for the engagement quality control review (EQCR). For simplicity, breaks in service (covered in the question above) are ignored. 

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

Yr 6

Yr 7

Cooling-off period

KAP

KAP

KAP

EP

EP

EP

EP

5 consecutive years (Note 1)

KAP

KAP

KAP

EQCR

EQCR

EQCR

EQCR

3 consecutive years (Note 2)

EP

EP

EP

KAP

KAP

KAP

KAP

2 consecutive years (Note 3)

EQCR

EQCR

EQCR

EQCR

EP

EP

EP

5 consecutive years (Note 4)

EQCR

EQCR

EQCR

EQCR

EQCR

EP

EP

3 consecutive years (Note 5)

EP

EP

KAP

KAP

KAP

EP

EP

5 consecutive years (Note 1) 


Notes

  1. As the individual has served on the audit engagement for a total of seven cumulative years in a combination of roles during which he or she was the EP for four or more years, the individual must serve a cooling-off period of five consecutive years before he or she can return to the audit engagement (see proposed paragraph 290.158).
  2. As the individual has served on the audit engagement for a total of seven cumulative years in a combination of roles during which he or she was the EQCR for four or more years, the individual must serve a cooling-off period of three consecutive years before he or she can return to the audit engagement (see proposed paragraph 290.159).
  3. The individual has served on the audit engagement for a total of seven cumulative years but has not served as the EP or the EQCR for at least four of those seven years. Accordingly, the individual must serve a cooling-off period of two consecutive years before he or she can return to the engagement (see proposed paragraph 290.161).
  4. The individual has served on the audit engagement for a total of seven cumulative years in a combination of EP and EQCR roles during which he or she was the EP for three years, the individual must serve a cooling-off period of five consecutive years before he or she can return to the audit engagement (see proposed paragraph 290.160(a)).
  5. As the individual has served on the audit engagement for a total of seven cumulative years in a combination of EP and EQCR roles but was the EP for less than three years, the individual must serve a cooling-off period of three consecutive years before he or she can return to the audit engagement (see proposed paragraph 290.160(b)). 

Look at the table below for a full analysis of the possible combinations and the determination of the required cooling-off period. 

Number of Years During Time-on Period

Cooling-off

(Years)

Proposed section 290 Para Ref.

Engagement Partner

Engagement Quality Control Reviewer

Other Key Audit Partner

7

-

-

5

155

6

1

-

5

158

6

-

1

5

158

5

2

-

5

158

5

1

1

5

158

5

-

2

5

158

4

3

-

5

158

4

2

1

5

158

4

1

2

5

158

4

-

3

5

158

3

4

-

5

160(a)

3

3

1

5

160(a)

3

2

2

5

160(a)

3

1

3

5

160(a)

3

-

4

2

161

2

5

-

3

160(b)

2

4

1

3

160(b)

2

3

2

3

160(b)

2

2

3

3

160(b)

2

1

4

2

161

2

-

5

2

161

1

6

-

3

159

1

5

1

3

159

1

4

2

3

159

1

3

3

3

160(b)

1

2

4

2

161

1

1

5

2

161

1

-

6

2

161

-

7

-

3

156

-

6

1

3

159

-

5

2

3

159

-

4

3

3

159

-

3

4

2

161

-

2

5

2

161

-

1

6

2

161

-

-

7

2

157

Does this mean that for audits of financial statements for periods beginning on or after December 15, 2023, the cooling-off requirement for engagement partners on the audit of a public interest entity will be five consecutive years in jurisdictions where a legislative body or regulator (or organisation authorised or recognised by such legislative body or regulator) has established a cooling-off period shorter than five consecutive years?

Yes.

Proposed paragraph 290.163 is intended to facilitate the transition to the new cooling-off period of five consecutive years for engagement partners on audits of public interest entities in those jurisdictions where a shorter cooling-off period is currently specified by a legislative body or regulator (or organisation authorised or recognised by such legislative body or regulator) in their jurisdictions, provided that the cooling-off period is no shorter than three consecutive years.

The IESBA has committed to review during this transitional period the revised long association provisions to take account of, among other things, relevant legislative and regulatory developments as well as experience of the application of the provisions in practice.

In New Zealand, neither the Financial Markets Authority nor the NZX have established a shorter cooling off period and therefore entities regulated by these regulators cannot apply a shorter cooling off period prior to 2023.

A key audit partner signs a half-year review opinion in relation to a client that is a public interest entity, then another partner signs the opinion for the audit.

Does the partner’s service as engagement partner for the half-year review engagement constitute a year for the purposes of applying the rotation requirements?

Yes.

The partner for the review engagement is also considered to have served one year for the purposes of applying the rotation provisions even if he or she was not the engagement partner for the audit of the financial statements.

A firm accepts a new public interest entity audit client that had previously been audited by another firm.  In the course of auditing the current period’s financial statements, it was determined that the newly engaged firm should re-audit the prior two periods.

For the purposes of the partner rotation provisions of the Code, does this engagement constitute one year or three years of service by the key audit partners?

This constitutes one year for the purposes of determining when the individuals would need to rotate.

A manager served on the audit engagement team for a public interest entity audit client for five years before being promoted to partner.

How many years may he or she serve on the engagement as a key audit partner for that audit client?

The rotation requirements in the Code apply to time spent as a key audit partner.

In principle, the individual may serve seven years as a key audit partner. However, the general provisions in the Code indicate that in evaluating the threat created by long association, the overall length of an individual’s association with the client, how long the individual has been on the engagement team and the roles that he or she has played should be taken into account (see proposed paragraph 290.149).

A firm may decide that it is appropriate to rotate an individual off the audit team before the end of the seven-year period (or to serve a period off the engagement before re-joining the audit engagement team as a key audit partner).

Note: The following situations illustrate different transition scenarios with respect to an engagement partner. The same circumstances could arise with respect to an engagement quality control reviewer.

The engagement partner for the audit of a public interest entity served for seven cumulative years in that role with the completion of the calendar year 2016 audit. The individual subsequently did not participate in the 2017 and 2018 audits.

Would that individual be able to come back as engagement partner for the 2019 audit for a new seven-year term?

Yes.

As the proposed new provisions become effective only for audits of financial statements for periods beginning on or after December 15, 2018 (i.e., effectively beginning with calendar 2019 audits) and the individual has served the time-on limit of seven cumulative years with the 2016 audit, the current cooling-off requirement of two consecutive years applies.

The individual would therefore have to cool off for the 2017 and 2018 audits and could begin a new seven-year term beginning with the calendar 2019 audit under the new provisions.

The new provisions become effective for audits of financial statements for periods beginning on or after December 15, 2018, i.e., effectively audits for calendar year 2019 and thereafter.

In New Zealand, the five-year cooling-off requirement will need to be applied starting with the calendar year 2019 audit, i.e., the individual could only come back to the engagement in any key audit partner role for a new seven-year term with the 2024 audit.

The table illustrates the latter situation, where “X” represents a year in which the individual was not a key audit partner on the audit:

2018

(Yr 7)

2019

2020

2021

2022

2023

2024

(Yr 1)

2025

(Yr 2)

EP

X

X

X

X

X

KAP

KAP

The new provisions, as explained in the question above, would be equally applicable had the individual completed his or her seven cumulative years as engagement partner with the 2017 audit and commenced cooling off as required by the old provisions from the 2018 audit.

The new provisions apply as the engagement partner had not completed a two year cooling-off period under the old provisions when the new provisions come into effect.

Would that individual be able to come back as engagement partner for the 2020 audit for a new seven-year term (having cooled off for the 2018 and 2019 audits)?

No.

The new provisions are effective for audits of financial statements for periods beginning on or after December 15, 2018. This means that from calendar 2019 audits, the new cooling-off provisions in the Code apply.

Accordingly, if the engagement partner comes off the engagement before the full permitted seven-year time-on period is served, under the new provisions the full five-year cooling-off period applies in accordance with proposed paragraph 290.154 before the individual may come back to the engagement in any key audit partner role for a new seven-year time-on period.

In this case, the individual would therefore be able to serve as engagement partner for only an additional two years (i.e., for the 2020 and 2021 audits) before reaching the cumulative seven-year time-on period. He or she would then need to cool off for five consecutive years from the 2022 audit.

Alternatively, the individual could remain off the engagement for the 2020, 2021 and 2022 audits, reaching the five consecutive years cooling-off period applicable to engagement partners under the new provisions, and then come back to the 2023 audit in any key audit partner role for a new seven-year time-on period.

(In accordance with proposed paragraph 290.163, where a legislative body or regulator (or organisation authorised or recognised by such legislative body or regulator) has specified a cooling-off period shorter than five years for engagement partners, that alternative cooling-off period may be substituted for the five years described in the above situation provided that this period is no shorter than three years. See Q9 for further explanation.)

The tables below illustrates the two options, where “X” represents a year in which the individual was not a key audit partner on the audit. (For simplicity, proposed paragraph 290.163 is ignored.)

 

2017

(Yr 5)

2018

 

2019

2020

(Yr 6)

2021

(Yr 7)

2022

2023

2024

2025

2026

2027

(Yr 1)

EP

X

X

EP

EP

X

X

X

X

X

KAP

 

2017

(Yr 5)

2018

 

2019

2020

2021

2022

2023

(Yr 1)

2024

(Yr 2)

2025

(Yr 3)

2026

(Yr 4)

2027

(Yr 5)

EP

X

X

X

X

X

KAP

KAP

KAP

KAP

KAP

 

How should the provision regarding additional restrictions on activities during the cooling-off period be applied?

The new provisions on scope of activities apply to all key audit partners from the effective date, i.e., effectively beginning with calendar year 2019 audits.

Accordingly, if a key audit partner has completed his or her seventh cumulative year of service with the 2017 audit and commenced a cooling-off period with the 2018 audit, he or she would be required to comply with paragraph 290.149 of the extant Code for the 2018 audit and proposed paragraph 290.164 of the new provisions for the 2019 audit and thereafter.

Additional restrictions would apply in 2019. For example, during 2019 the individual would not be permitted to lead or coordinate the firm’s professional services to the audit client – this change would need managing in terms of a firm’s resource planning.

The proposed new provisions become effective for audits of financial statements for periods beginning on or after 15 December 2018. 

The engagement partner must have completed the two-year cooling-off period under the old provisions before the new provisions come into effect, otherwise the new rules apply.  This means that the last time that the engagement partner can rotate off, and have the old rules apply, will be for years ending before 15 December 2017.  When the year end is after 15 December 2017, the individual cannot complete the cooling off period using the old rules before the new rules come into effect.  Thereafter the new rules will apply (refer to question 3 above). 

For example, if the individual served as engagement partner for the seventh consecutive year for the June 30, 2017 year end, the individual must rotate off the engagement. The new provisions do not become effective for audits of financial statements until periods beginning on or after December 15, 2018.

This individual will have completed the two-year cooling off period (off for the audits for June 30, 2018 and June 30, 2019 year ends) before the effective date of the revised requirements. The June 2019 year end is for a period beginning before the effective date of the revised standard, and therefore the individual has completed cooling off before the new rules come into effect. The individual could then come back as EP on the engagement for a new seven-year term with the June 30, 2020 audit.