Part 4A: Independence for audit and review engagements

This Part shall be applied in relation to all work carried out on behalf of the Auditor-General. PES 1 is scoped to apply to “assurance engagements”. The glossary to PES 1 describes an assurance engagement as “An engagement in which an assurance practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users … about the subject matter information (that is, the outcome of the measurement or evaluation of an underlying subject matter against criteria).”

In short, an “assurance agreement” is a process that involves the provision of a reasonable assurance conclusion (an audit) or a limited assurance conclusion (a review). However, a significant proportion on the work carried out on behalf of the Auditor-General is not designed to reach a conclusion that gives reasonable or limited assurance. For the purposes of the Auditor-General’s Code and this Guide, any references to an assurance engagement in PES 1 are to be applied to all work carried out on behalf of the Auditor-General under sections 15 to 19 of the Public Audit Act 2001. This is despite the fact that the work might not meet the definition of an assurance engagement in PES 1.

The more stringent test is based on the following criteria:

1. The assessment of independence in appearance must take into account any facts and circumstances. The proper application of the reasonable and informed third party test requires an assessment of any facts and circumstances that might influence the application of the test. To limit the reasonable and informed third party test to facts and circumstances that are “so significant” is not appropriate. This is because the highly subjective term “so significant” does not establish a sufficiently high or rigorous threshold to ensure that independence in appearance is maintained. Those applying the “so significant” test are required to discount all facts or circumstances unless they meet a level of significance that exceeds “normal” significance. This interpretation can be taken from the term “so significant”. The Auditor-General and those who carry out work on their behalf are required to take account of all facts and circumstances in assessing independence in appearance – irrespective of whether the facts or circumstances meet the “so significant” criterion.
2. The assessment of independence in appearance is based on whether the reasonable and informed third party might conclude that integrity, objectivity, or professional scepticism has been compromised. Any element of doubt as to independence will mean that the reasonable and informed third party test fails. The independence in appearance test in paragraph 400.5(b) requires that the reasonable and informed third party “would be likely to conclude” that integrity, objectivity, or professional scepticism has been compromised. The “would be likely to conclude” test is a relatively low standard in that the facts and circumstances must be persuasive before those applying the test would conclude that integrity, objectivity, or professional scepticism has been compromised. When applying the reasonable and informed third party test, the “would be likely to” acceptable level shall be replaced with the “might” acceptable level.
3. The facts and circumstances to which the reasonable and informed third party test is applied must be publicly available. The reason for this requirement is that the reports of the Auditor-General, in most instances, are made available to the public. If information that is influential in applying the reasonable and informed third party test is not publicly available, then the appearance that the Auditor-General is not independent will remain. In this situation, the reasonable and informed third party test fails.

As a matter of principle, the Auditor-General’s independence requirements apply equally to all public entities and to all work carried out by, or on behalf of, the Auditor-General. In practice, this means that the requirements in PES 1 that apply to “public interest entities” shall be applied to all public entities. The two main exceptions to this principle are:

1. Under section 540 Long association of personnel (including partner rotation) with an audit client, the Auditor-General recognises the distinction between public entities that are “public interest entities” and other public entities. The Auditor-General’s rotation requirements are specified in section 540.
2. Under subsection 601 Accounting and bookkeeping services, the Auditor-General recognises that the provision of temporary accounting assistance or conducting compilation engagements is appropriate, in the interests of accountability, for small public entities within the parameters specified by the Auditor-General in subsection 601.

Reports issued by, or on behalf of, the Auditor-General that are intended for a wide audience shall not include a restriction on use and distribution.

A restriction on use and distribution in a report issued by, or on behalf of, the Auditor-General shall only be included with the express permission of the OAG (using the Independence@oag.parliament.nz email address).

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The examples of actions in paragraph 400.31 A3 (below) that might be safeguards to address the threat to independence caused by the circumstances in paragraphs R400.31, 400.31 A1 and 400.31 A2 do not normally provide a satisfactory safeguard to independence in appearance. Accordingly, these safeguards are not available to those who carry out work for the Auditor-General, except in unusual circumstances.

Other than in the capacity of an engagement quality reviewer, an “appropriate reviewer” shall not be used as a safeguard if that individual is a member or an employee of the firm that is carrying out the work on behalf of the Auditor-General. Having a member or an employee of the firm that is carrying out the work on behalf of the Auditor-General review the audit or review and non-assurance work is not a satisfactory safeguard because it does not satisfy independence in appearance under the reasonable and informed third party test.

Examples of actions that might be safeguards to address such threats include:

• Not assigning professionals who performed the non-assurance service to be members of the engagement team.
• Having an appropriate reviewer review the audit and non-assurance work as appropriate.
• Engaging another firm outside of the network to evaluate the results of the non- assurance service or having another firm outside of the network re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

If the merged entity is no longer a public entity, then the Auditor-General’s requirement to audit that entity will normally be determined by the prevailing laws and regulations. In most instances, the merged entity will no longer be required to be audited by the Auditor-General.

If the merged entity is a public entity, the Auditor-General will continue to be the auditor. The Auditor-General’s choice of Auditor Service Provider will be governed by the requirements and application material in paragraphs 400.70 A1 to R400.76. Where a threat to independence might arise because of the merger or acquisition, the reasonable and informed third party test shall be applied – as set out in paragraphs AG R400.5.1 to AG R400.5.3 and the application material in paragraph AG 400.5.4.

The Auditor-General is the auditor of all public entities. Unlike auditors in the private sector, the Auditor-General cannot always refuse to accept or refuse to continue an assurance engagement to eliminate threats to independence. This situation is recognized in paragraph NZ1.3 of PES 1, which states: “The Code is not intended to detract from responsibilities that may be imposed by law or regulation.”

Where a threat to independence arises because of a merger or acquisition, the following steps shall be taken:

1. The threat to independence will, as a minimum, be disclosed to those responsible for governance of the public entity and publicly disclosed in the auditor’s report.
2. Safeguards will be introduced, which will, as a minimum, be disclosed to those responsible for governance of the public entity and publicly disclosed in the auditor’s report. Safeguards might include the selection of an individual and/or firm with suitable credentials, the imposition of specific terms and conditions of appointment, the assignment of audit staff with particular skills and experience, and additional quality management processes to mitigate the threat to independence.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The Public Audit Act 2001 places expectations on the Auditor-General that exceed the minimum requirements of PES 1, particularly in the areas of independence.

As a matter of principle, the Auditor-General’s independence requirements apply equally to all public entities and to all work carried out by, or on behalf of, the Auditor-General. The two main exceptions to this principle are:

3. Under section 540 Long association of personnel (including partner rotation) with an audit client, the Auditor-General recognises the distinction between public entities that are “public interest entities” and other public entities. The Auditor-General’s rotation requirements are specified in section 540.
4. Under subsection 601 Accounting and bookkeeping services, the Auditor-General recognises that the provision of temporary accounting assistance or conducting compilation engagements is appropriate, in the interests of accountability, for small public entities within the parameters specified by the Auditor-General in subsection 601.

The Appointed Auditor shall advise the OAG (using the Independence@oag.parliament.nz email address) if fees determined to be reasonable by the Auditor-General under section 42 of the Public Audit Act 2001 are not paid in accordance with the fee-paying arrangements agreed between the Appointed Auditor and the public entity.

The OAG will take the steps deemed to be appropriate to have the fees paid, while taking into account any valid concerns of the public entity.

For any public entity audited on behalf of the Auditor-General, the Appointed Auditor shall report the total fees (from all sources) received from a public entity and its related entities to the OAG (using the Independence@oag.parliament.nz email address when the total fees generated from a public entity by the firm expressing the audit opinion, on behalf of the Auditor-General, represent a large proportion of the total fees of that firm.

The OAG will make an assessment of whether the extent of the fees presents an unacceptable threat to audit independence. In making its assessment, the OAG will apply the reasonable and informed third party test – as set out in paragraphs AG R400.5.1 to AG R400.5.3 and the application material in paragraph AG 400.5.4.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The provision or receipt of gifts and hospitality by an auditor might be a necessary step to carrying out an effective audit.

Auditors are required to establish and maintain effective two-way communication with those charged with governance under ISA (NZ) 260 and to obtain an understanding of the entity and its environment under ISA (NZ) 315 (Revised 2019). Measures taken to establish and maintain communication with those charged with governance and to obtain an understanding of the entity and its environment may include the provision or receipt of gifts and hospitality by an auditor. The provision or receipt of gifts and hospitality that are limited to those that are “trivial and inconsequential in value, quantity, nature, and frequency, and are not illegal” (see paragraphs AG R420.3.1 and AG 420.3.2), might be necessary to an effective audit.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The requirements and application material on financial interests:

1. do not apply to public securities, as defined in the Public Finance Act 1989; and
2. cease to apply when the Auditor-General is no longer the auditor of an entity and when all risks of insider trading have disappeared (for example, following listing of shares on a stock exchange).

The following employees of the Auditor-General shall not have a financial interest in any public entity:

1. members of the OAG Leadership team and their immediate family members;
2. members of the Audit New Zealand Leadership team and their immediate family members;
3. members of the OAG Audit Quality group;
4. members of the OAG Legal, Policy, and Inquiries group;
5. sector managers in the OAG Local Government and Parliamentary groups; and
6. employees of the OAG and Audit New Zealand who are involved in the audit of the financial statements of the government.

Audit New Zealand Directors and members of Audit New Zealand’s Professional Practices Group shall not have a financial interest in:

1. any public entity audited by Audit New Zealand; or
2. any public entities that are part of a public entity group where Audit New Zealand audits a significant entity in the group.

All other employees of the Auditor-General:

1. may have a financial interest in a public entity;
2. shall disclose their interest as part of the employee independence system, so that any independence threats can be managed; and
3. shall not work on any matter involving a public entity or group where they have a financial interest.

On disclosure of a financial interest held by an immediate family member, the threat to independence shall be managed by:

1. disposing of the financial interest; or
2. removing the individual referred to in paragraphs AG R510.2.2(c) to AG R510.2.2(f), AG R510.2.3, and AG R510.2.4 from the audit team, or from doing any other work involving the public entity in which the immediate family member has a financial interest.

A financial interest might threaten both independence of mind and independence in appearance. When assessing whether a financial interest threatens independence in appearance, those who carry out work on behalf of the Auditor-General shall apply the reasonable and informed third party test as set out in paragraphs AG R400.5.1 to AG R400.5.3 and take account of the application material in paragraph AG 400.5.4.

The application of the reasonable and informed third party test will, in all but exceptional circumstances, lead to the conclusion that any financial interest should not be held – including financial interests that are determined to be immaterial under paragraph 510.3 A2.

In circumstances where those who carry out work on behalf of the Auditor-General consider that an immaterial financial interest will not threaten independence in appearance and conclude that retention of the financial interest is acceptable, then they shall advise the OAG (using the Independence@oag.parliament.nz email address). The OAG, in consultation with the affected party and their firm, will determine whether retention of the financial interest threatens independence in appearance.

If financial interests are acquired involuntarily (for example, in a share give-away by an energy company):

1. the financial interest shall be disclosed, in accordance with the Auditor-General’s, Audit New Zealand’s, or other Audit Service Provider’s independence policies and procedures that are required by PES 3: Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements; and
2. the threat to independence shall be managed by:
   1. disposing of the financial interest at the earliest opportunity at which there can be no suggestion of insider trading; or
   2. removing the individual from the audit team, or from doing any other work involving the public entity in which they have a financial interest.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

This section does not apply to student loans unless the loan is in arrears or is otherwise in dispute.

A loan or guarantee might threaten both independence of mind and independence in appearance. When assessing whether a loan or guarantee threatens independence in appearance, those who carry out work on behalf of the Auditor-General shall apply the reasonable and informed third party test as set out in paragraphs AG R400.5.1 to AG R400.5.3 and take account of the application material in paragraph AG 400.5.4.

Except as permitted under the provisions of this section, the application of the reasonable and informed third party test will, in all but exceptional cases, lead to the conclusion that:

1. no loan, or a guarantee of a loan, should be made to a public entity; or
2. no loan, or guarantee of a loan, should be accepted from a public entity.

Such a conclusion is likely to be formed even if the loans or guarantees are determined to be immaterial under paragraph 511.3 A1.

In circumstances where those who carry out work on behalf of the Auditor-General consider that an immaterial loan or guarantee will not threaten independence in appearance and conclude that retention of the loan or guarantee is acceptable, then they shall advise the OAG (using the Independence@oag.parliament.nz email address). The OAG, in consultation with the affected party and their firm, will determine whether retention of the loan or guarantee threatens independence in appearance.

No loan shall be accepted from, or given to, a public entity that is not a bank or similar institution by:

1. the Auditor-General and their immediate family;
2. the Deputy Auditor-General and their immediate family;
3. any employee of the Auditor-General and their immediate family; or
4. any person (and their immediate family), firm or network firm where that person, firm or network firm is carrying out work on behalf of the Auditor-General.

This requirement does not apply to student loans.

No guarantee shall be accepted from, or given to, a public entity that is not a bank or similar institution by:

1. the Auditor-General or their immediate family;
2. the Deputy Auditor-General or their immediate family;
3. any employee of the Auditor-General or their immediate family; or
4. any person (or their immediate family), firm, or network firm where that person, firm, or network firm is carrying out work on behalf of the Auditor-General.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

A business relationship might threaten both independence of mind and independence in appearance. When assessing whether a business relationship threatens independence in appearance, those who carry out work on behalf of the Auditor-General shall apply the reasonable and informed third party test as set out in paragraphs AG R400.5.1 to AG R400.5.3 and take account of the application material in paragraph AG 400.5.4.

The application of the reasonable and informed third party test will, in all but exceptional circumstances, lead to the conclusion that any business relationship should not be held – including business relationships that are determined to be immaterial under paragraph 520.3 A1.

In circumstances where those who carry out work on behalf of the Auditor-General consider that an immaterial business relationship will not threaten independence in appearance and conclude that retention of the business relationship is acceptable, then they shall advise the OAG (using the [Independence@oag.parliament.nz] email address). The OAG, in consultation with the affected party and their firm, will determine whether retention of the business relationship threatens independence in appearance.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

In addition to the requirement in NZ R523.3.1, those working on behalf of the Auditor-General shall not assume a management responsibility for a public entity.

For example, no member of an Audit Service Provider shall be a member of the governing body, or in any other way participate in the direction and control, of the public entity. Specifically, the Audit Service Provider shall not take responsibility for the financial statements of the public entity or accept a role of internal auditor. However, Audit Service Providers may provide accounting and bookkeeping services assistance in accordance with the Auditor-General’s Code and the requirements of this Guide.

Further guidance in determining whether an activity is a management responsibility is provided in paragraphs R400.13 to R400.14.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The Auditor-General is the auditor of all public entities and cannot always refuse to accept or continue an engagement to eliminate threats to independence. If there is a conflict between PES 1 and legislation relating to the statutory appointment of the Auditor-General, the Auditor-General will:

1. introduce safeguards to reduce the threat to independence to the extent that is reasonably possible in the circumstances; and
2. disclose the threat to independence to those responsible for governance of the public entity and publicly disclose the matter in the auditor’s report.

Where a significant threat to independence arises in respect of a person employed by, or placed with, a public entity, the Auditor-General will ensure that the threat to independence is reduced to the extent that is reasonably possible by considering one or more of the following options:

1. the selection of the Audit Service Provider and/or the Appointed Auditor;
2. the terms and conditions of their appointment;
3. the assignment of audit staff; and
4. additional quality management processes.

A particular independence threat exists when “individuals of influence” (as specified in AG 524.3 A1.2) who were previously associated with the audit of a public entity join a public entity as:

• a director or officer; or
• an employee in a position to exert significant influence over the preparation of the public entity’s accounting records or the financial statements on which the Appointed Auditor will express an opinion or a conclusion, on behalf of the Auditor-General.

The particular independence threat arises because of the capability and stature of an “individual of influence” and their potential to influence the fair presentation of the financial statements through their relationship with the auditor, by means of familiarity or intimidation.

When an “individual of influence” joins a public entity, the OAG wishes to assess if the Appointed Auditor has given due consideration to the independence threat and, where considered necessary, has introduced safeguards to reduce the independence threat to an acceptable level.

AG R524.3 A1.1 sets out the process to inform the OAG. The process is based on the following understandings:

• The Auditor-General’s requirements are not intended to replace more rigorous requirements that may be placed on former directors, partners, contractors or employees by the Audit Service Provider.
• The Appointed Auditor is required to inform the OAG when they become aware of an “individual of influence” during the normal course of the audit process. Accordingly, the Appointed Auditor is under no obligation to carry out specific enquiries to determine if an individual who joins a public entity as:
  • a director or officer; or
  • an employee in a position to exert significant influence over the preparation of the public entity’s accounting records or the financial statements on which the Audit Service Provider will express an opinion or a conclusion, on behalf of the Auditor-General; is an “individual of influence”. The existing knowledge of the Appointed Auditor and the audit team is sufficient to identify an “individual of influence”.
• AG 524.3 A1.3 describes a “period of conflict” which is the period when a threat to independence in respect of an “individual of influence” exists. The “period of conflict” will exist for a period of no more than 24 months from the date an “individual of influence” ceases their association with:
  • the audit of a public entity; or
  • the Audit Service Provider. In many instances the “period of conflict” will be less than 24 months. The description of a “period of conflict” is supplemented by several examples to illustrate how the “period of conflict is calculated.

As a matter of principle, the Auditor-General’s independence requirements apply equally to all public entities and to all work carried out by, or on behalf of, the Auditor-General. In practice, this means that the requirements in PES 1 that apply to “public interest entities” shall be applied to all public entities. The two main exceptions to this principle are the following:

1. Under section 540 Long association of personnel (including partner rotation) with an audit client, the Auditor-General recognises the distinction between public entities that are “public interest entities” and other public entities. The Auditor-General’s rotation requirements are specified in section 540.
2. Under subsection 601 Accounting and bookkeeping services, the Auditor-General recognises that the provision of temporary accounting assistance or conducting compilation engagements is appropriate, in the interests of accountability, for small public entities within the parameters specified by the Auditor-General in subsection 601.

The Appointed Auditor shall advise the OAG (using the Independence@oag.parliament.nz email address) the names of any individuals in paragraph AG 524.3 A1.2 (referred to as “individuals of influence”) who have joined the public entity as:

• a director or officer; or
• an employee in a position to exert significant influence over the preparation of the public entity’s accounting records or the financial statements on which the Audit Service Provider will express an opinion or a conclusion, on behalf of the Auditor-General.

When advising the OAG, the Appointed Auditor shall provide a description of the safeguards considered necessary to reduce the threat to independence to an acceptable level during the “period of conflict”. The description of the safeguards should be accompanied by relevant contextual information such as the role of the “individual of influence” at the firm (assurance v non-assurance partner or Audit New Zealand director), whether they were in the same office as the Appointed Auditor, how long they had been a partner or Audit New Zealand director, and the role they have taken on at the public entity. Contextual information of this nature is relevant when evaluating the effectiveness of the safeguards in responding to the threats.

An important factor to be considered is the length of time between when the “individual of influence” joined the public entity and when the threat to independence has expired. Further guidance about this length of time (referred to as the “period of conflict”) is provided in paragraph AG 524.3 A1.3 below.

The individuals to be advised to the OAG by the Appointed Auditor (in respect of a public entity audited by the Audit Service Provider) under AG R524.3 A1.1 are:

• A former Auditor-General or Deputy Auditor-General;
• A former member of the OAG leadership team;
• A former member of the Audit New Zealand leadership team;
• A former Audit New Zealand director; or
• A former partner of the Audit Service Provider firm or network firm.

These individuals are referred to elsewhere in this section as “individuals of influence”.

A familiarity or intimidation threat to independence will, in normal circumstances, no longer be present on the expiration of the “period of conflict”. The “period of conflict” is the period of time that commences when an individual identified in AG524.3 A1.2 joins a public entity, and ceases when the amounts or disclosures in the public entity’s financial statements (that the individual or their former organisation took responsibility for in their capacity as the auditor of the public entity) are no longer disclosed in the public entity’s financial statements. The period of conflict will mainly apply to comparative amounts and the associated disclosures in the public entity’s financial statements.

To illustrate the application of the “period of conflict” consider the following scenarios:

Scenario 1: A former Appointed Auditor resigns from their firm on 30 June 20X1. They were the Appointed Auditor of a public entity and completed their contractual obligations to the Auditor-General by signing the audit report on the 30 June 20X0 financial statements on 30 September 20X0. The former Appointed Auditor is appointed as a director of the public entity on 1 July 20X1. The appointment means that a “period of conflict” arises – starting on 1 July 20X1 and expiring when the audit report on the 30 June 20X1 financial statements is signed by the replacement Appointed Auditor. If the audit report on the 30 June 20X1 financial statements is signed on 30 September 20X1 the “period of conflict” will be 3 months.

Alternatively, if the former Appointed Auditor became a director of the public entity on 1 April 20X1 and the audit report on the 30 June 20X1 financial statements was signed by the replacement Appointed Auditor on 30 September 20X1 the “period of conflict” would be from 1 April 20X1 to 1 October 20X1 – a period of 6 months for which any safeguards would need to apply.

The ”period of conflict” exists because the former Appointed Auditor has a current responsibility for the 30 June 20X1 financial statements, as a director of the public entity. This role may conflict with their previous role as the Appointed Auditor of the public entity’s comparative figures that are reported in the 30 June 20X1 financial statements.

The new Appointed Auditor is required to advise the OAG as soon as they become aware of the appointment of the former Appointed Auditor as a director of the public entity, in accordance with paragraph AG R524.3 A1.1.

Scenario 2: An Audit New Zealand director who is not part of the audit team responsible for the audit of a public entity audited by Audit New Zealand resigns on 30 June 20X0 and is employed as the Chief Financial Officer of the public entity on 1 July 20X0. The Appointed Auditor is required to advise the OAG as soon as they become aware of the appointment of the former Audit New Zealand director as the public entity’s Chief Financial Officer, in accordance with paragraph AG R524.3 A1.1. If the public entity has a 30 June balance date the “period of conflict” will expire on the signing of the audit report on the financial statements for the year ended 30 June 20X1. In this instance, if the audit report on the 30 June 20X1 financial statements was signed on 30 September 20X1, the “period of conflict” commences on 1 July 20X0 and expires on 1 October 20X1; a period of 15 months.

Scenario 3: A former member of the OAG leadership team resigns with effect from 1 July 20X0. They join the audit committee of a public entity on 1 October 20X1. The audit report on the 30 June 20X1 financial statements of the public entity was signed on 30 September 20X1. The expiration of the “period of conflict” ended with the signing of the audit report on the 30 June 20X1 financial statements. The Appointed Auditor is not equired to advise the OAG of the appointment in accordance with paragraph AG R524.3 A1.1.

Scenario 4: The Appointed Auditor is responsible for the audit of an entity with a 30 June 20X0 balance date. They resign from their firm on 31 March 20X0 and join the entity as a director on 1 October 20X0. The “period of conflict” would expire upon the issue of the audit report on the entity’s 30 June 20X1 financial statements. Although the Appointed Auditor did not sign the audit report on the entity’s 30 June 20X0 financial statements, they were extensively involved in critical aspects of that audit, such as audit planning and the interim audit. This involvement is sufficient to associate them with the audit of the 30 June 20X0 financial statements in an audit capacity.

If the audit report on the 30 June 20X1 financial statements was signed on 30 September 20X1 the “period of conflict” would commence on 1 October 20X0 and end on 1 October 20X1; a period of 12 months.

Scenario 5: A former Senior or Managing Partner steps down from their role on 31 December 20X0 and retires from the Audit Service Provider firm on 30 June 20X1. On 1 July 20X1 the former Senior or Managing Partner is appointed as a director of a public entity audited by their previous firm. If the public entity has a 30 June balance date the “period of conflict” will expire on the signing of the audit report on the financial statements for the year ended 30 June 20X2. In this instance, if the audit report on the 30 June 20X2 financial statements was signed on 30 September 20X2, the “period of conflict” commences on 1 July 20X1 and expires on 1 October 20X2; a period of 15 months. The Appointed Auditor is required to advise the OAG as soon as they become aware of the appointment of the former Senior or Managing Partner as a director of the public entity, in accordance with paragraph AG R524.3 A1.1.

Although R524.7 explains that independence is compromised unless 12 months have passed since the individual was the Senior or Managing Partner, the requirements of AG R524.3 A1.1 and AG 524.3 A1.3 prevail in this instance; resulting in a 15 month “period of conflict”.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

If the entity is not a public interest entity, then for annual audits of 150 budgeted hours or more, and subject to the requirements of paragraph AG R540.4.2, Appointed Auditors and senior personnel involved in annual audits shall not undertake the same audit tasks for more than six cumulative years.

For public interest entities AG R540.5.1 and, where applicable, AG R540.5.2 apply.

The purpose of this requirement is to mitigate the familiarity threat to independence by maintaining the objectivity of Appointed Auditors and other members of audit teams.

In implementing the requirement of paragraph AG R540.4.1, the following principles and practices apply:

1. The individual who is appointed as the Appointed Auditor shall not carry out the same audit for more than six cumulative years. Having completed such a period, a former Appointed Auditor will not become eligible to act again in the capacity of Appointed Auditor, or in any other capacity in relation to the audit (for example, as an engagement quality reviewer), until the expiry of two consecutive annual audits (the cooling-off period). In addition, eligibility for further appointment after the cooling-off period will require that the former Appointed Auditor shall not be involved with the entity in any professional capacity.
2. Other individuals associated with the audit (who are classified as a “key audit partner”) shall not continue their association with the audit for more than six cumulative years. Having completed such a period, the individual shall not be associated with the engagement team or be a “key audit partner” for the entity for two years (the cooling-off period). During the cooling-off period, the individual shall not be involved with the entity in any professional capacity.
3. Audit staff below Appointed Auditor level shall not continue their involvement with the same audit for more than six cumulative years if they retain substantially the same responsibility in relation to the conduct of the audit, without a two-consecutive-year break. Audit staff below Appointed Auditor level may therefore be involved for more than six cumulative years with a public entity, provided their roles and responsibilities have substantially changed as a result of legitimate career development.
4. The Appointed Auditor shall check annually that the staffing of annual audits complies with the requirements in paragraphs AG R540.4.2(a) to AG R540.4.2(c).
5. Where law or regulation specifies more stringent rotation requirements, those requirements shall apply.

The following rotation requirements apply to the annual audits of public entities that are also public interest entities (regardless of the size of the audit):

1. engagement partner or director (the Appointed Auditor) – six cumulative years on, five consecutive years off;
2. engagement quality reviewer – six cumulative years on, three consecutive years off; and
3. other key audit partners – six cumulative years on, two consecutive years off.

Where law or regulation specifies more stringent rotation requirements, those requirements shall apply.²

The Auditor-General reserves the right to extend the rotation period, within the parameters permitted by PES 1, subject to prevailing law or regulation.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

An aspect where the expectations placed on the Auditor-General by the Act depart significantly from the requirements of PES 1 is in the ability of those working on behalf of the Auditor-General to carry out additional work over and above the work that is required, or permitted, to be carried out on behalf of the Auditor-General under legislation.³ A critical factor in determining whether the additional work does not threaten independence is the appearance of this work from the perspective of a reasonable and informed third party. The reasonable and informed third party test is applied in a particular manner when determining whether additional work is able to be carried out by staff of the Auditor-General or an Audit Service Provider.

The application and the consequences of the reasonable and informed third party test in the context of additional work is described in paragraphs AG 600.3.4 to AG 600.3.5 and in paragraphs AG R600.8.1 to AG 600.8.26.

An overseas subsidiary of a public entity is not a public entity. Although the Auditor-General is not able to directly regulate the activities of an auditor of an overseas subsidiary of a public entity, there is an expectation that the important aspects of the Auditor-General’s auditing standards will be met by the auditor of the overseas subsidiary. This will be achieved by means of the instructions issued by the group auditor.

Where the auditor of the overseas subsidiary is part of the group auditor’s network firm the subsidiary auditor shall comply with the Auditor-General’s auditing standards (including the requirements of the Auditor-General’s Code and this Guide) because the group auditor must be able to assert compliance with the Auditor-General’s auditing standards in forming their opinion on the group financial statements.

Section 600 of PES 1 is concerned with the provision of non-assurance services. When applying section 600 in the context of public sector auditing, it is essential to understand several important considerations:

1. The relationships that exist between different public entities, or between a public entity and a non-public entity, could mean that an Audit Service Provider’s (and the Auditor-General’s) independence might be threatened if the Audit Service Provider provides services to an entity that the Audit Service Provider does not audit on behalf of the Auditor-General. This situation is further discussed in paragraphs AG R600.8.1 to AG 600.8.3.
2. Additional work, over and above the work that is required (or permitted) to be carried out on behalf of the Auditor-General under legislation, shall be limited to “work of an assurance nature”, subject to some exceptions provided for in this Guide. Work of an assurance nature is a subset of the category of work classified in PES 1 as “non-assurance services”. An explanation of the components that define “work of an assurance nature” is provided in paragraphs AG R600.8.4 to AG 600.8.8.
3. Responsibility for additional work engagements rests solely with the Audit Service Provider, subject to the exceptions in paragraph AG R600.8.9.
4. A pre-requisite to accepting an additional work engagement with a public entity is to obtain the acknowledgement of the contracting party that:
   1. the results of the work will be made available to the OAG; and
   2. any matters identified will be brought to the attention of the Auditor-General, who is free to report in accordance with section 30 of the Public Audit Act 2001. This requirement is specified in paragraph AG R600.8.11.
5. Additional work carried out in accordance with this Guide, prima facie, does not threaten audit independence. However, where the value of the additional work becomes significant when compared to the amount of the audit fee, the application of the reasonable and informed third party test will lead to a conclusion that the amount of the additional work might need to be limited. Further guidance is provided in paragraph AG R600.8.12.
6. Where the subject matter of the additional work is of possible media or political interest or is sensitive in nature, the Appointed Auditor shall consult with the OAG. Further guidance is provided in paragraphs AG R600.8.13 to AG R600.8.15.
7. Public disclosure of the nature of the additional work and the fees associated with the category of the engagement is required. Public disclosure is a consequence of the proper application of the reasonable and informed third party test as set out in paragraph AG R120.5 A6.1 to AG R120.5 A6.2. Requirements on the public disclosure of the nature of the additional work and the associated fees are in paragraphs AG R600.8.16 to AG R600.8.20.
8. Details of all additional work are required to be reported to the OAG in accordance with paragraphs AG R600.8.21 to AG R600.8.24.
9. If doubt exists whether an other engagement is permitted under this Guide, those working on behalf of the Auditor-General should consult with the OAG in accordance with paragraphs AG R600.8.25 to AG 600.8.26.

The Auditor-General generally applies a consistent standard of independence. This means that no allowance is made for:

1. the nature of the additional work, which means that the same standard applies to any additional work carried out in respect of a public entity; or
2. the size and nature of the public entity, or the subject of the engagement, if the subject matter does not directly relate to a public entity (for example, the subject of an engagement might be the actions of a public entity member, officer, employee, or contractor). This means that the more rigorous independence requirements in PES 1 that apply to “public interest entities” generally apply to all additional engagements carried out in respect of a public entity under the Auditor-General’s Code and this Guide.

An example of an engagement referred to under paragraph AG R600.8.1 is when an entity requests the Audit Service Provider to assist it in conducting due diligence for the possible purchase of assets from a public entity that is audited by an Audit Service Provider on behalf of the Auditor-General. In this example, it makes no difference whether:

1. the entity requesting the work is a public or non-public entity;
2. the entity requesting the work is audited by the Audit Service Provider or has an existing client relationship with the Audit Service Provider or not;
3. the work is carried out by personnel other than those involved in the audit or not; or
4. the work is carried out by another member of “the network firm” – including local or overseas entities that belong to the “network firm” – or not.

Acceptance of such a due diligence engagement would compromise the Auditor-General’s independence because the Audit Service Provider (and, by implication, the Auditor-General) would have been perceived to have conflicting responsibilities – first, as the auditor of the public entity and, secondly, as an advisor to a third party transacting with the public entity. Such a conflict is damaging to the independence of the Audit Service Provider and the Auditor-General, and would have compromised the objectivity of the Auditor-General had they been requested to investigate any issues surrounding the transaction at a later date. No safeguards applied by the Audit Service Provider would have reduced the threat to independence to an acceptable level.

There are numerous variations to this example that would not be permitted because the threat to independence is unacceptable.

The meaning of “assurance” in paragraph AG 600.8.5 implies the presence of several components when applied to “work of an assurance nature”. The components are:

1. the independence of the party providing the assurance (the assurer) from the subject matter over which assurance is provided – in other words, the assurer cannot have a role in creating, developing, or otherwise taking responsibility for the subject matter;
2. subject matter over which assurance is provided;
3. the presence of generally accepted or agreed criteria against which to benchmark the subject matter;
4. the competence of the assurer to carry out the work; and
5. a report arising from that work.

Engagements of an assurance nature include:

1. engagements that involve the formal expression on an opinion;
2. agreed-upon-procedures;
3. real-time independent quality assurance;
4. probity engagements; and
5. activities involving the examination, investigation, or inquiry into matters of concern.

The Audit Service Provider shall take sole responsibility for any additional work engagements, subject to two exceptions:

1. where the engagement relies, in part or in total, on evidence gained from the work that is required (or permitted) to be carried out on behalf of the Auditor-General under legislation; or
2. where the Auditor-General requires the engagement to be carried out on their behalf.

The Audit Service Provider shall obtain the acknowledgement of the contracting party, that is a public entity, that:

1. the results of the additional work will be made available to the OAG; and
2. any matters identified will be brought to the attention of the Auditor-General, who is free to report in accordance with section 30 of the Public Audit Act 2001.

The Appointed Auditor shall inform the OAG (using the Independence@oag.parliament.nz email address) if it is expected that the total amount of additional work carried out in accordance with this Guide is likely to exceed 100% of the annual audit fee in any one reporting period, for an entity audited on behalf of the Auditor-General.

The OAG will consider whether any action needs to be taken to eliminate or mitigate any threat to independence arising from the amount of additional work engagements. Matters to be considered by the OAG include:

1. the extent to which the total amount of the additional work is likely to exceed the annual audit fee;
2. whether the additional work is largely confined to one reporting period; and
3. the extent to which the additional work will enhance public sector accountability. For example, will the public entity be publicly communicating about the project or activity, including the findings of the additional work carried out by the Audit Service Provider.

Those working on behalf of the Auditor-General shall consult with the OAG (using the Independence@oag.parliament.nz email address) before accepting or finalising any terms of reference for any additional engagement where there is possible media or political interest in the subject matter of the engagement, or where the matter is generally of a sensitive nature. Consultation might include discussing whether:

1. the engagement should be accepted in the first instance and, if so, the most appropriate party to conduct the engagement;
2. the terms of reference are complete and all key matters or areas have been included within the scope of the engagement; and/or
3. the engagement letter (which specifies the terms of the engagement) includes any unreasonable restrictions on distribution of the report arising from the engagement.

It is important that, before accepting such an engagement, proper consideration is given to any political risks, the wider interests of the Auditor-General, and any implications for the wider public sector. This might include consideration of the following matters:

1. Has the entity been involved in any political or public controversy, or does it operate in a politically sensitive environment?
2. Are there other agencies or institutions already involved (for example, a central agency, a select committee, or a regulator)?
3. Could the work have implications for other entities in the public sector (for example, if a probity matter concerns a board member who is also a director of other entities in the public sector)?
4. Is the entity subject to organisational, legislative, or other change?
5. Has the Auditor-General carried out any previous work in relation to this entity (for example, an inquiry into probity issues), or on the subject matter of the engagement (for example, a special study of consultation procedures)?
6. Has any performance audit or inquiry been signalled by the Auditor-General?
7. How does the entity intend making use of any report arising from the engagement?
8. Is the report likely to be used in the context of any legal or other dispute the entity has with other parties?

The Auditor-General and those who carry out work on their behalf can have numerous and separate interactions with a public entity. Those interactions include:

1. the annual audit carried out by the Appointed Auditor;
2. other work carried out by the Appointed Auditor or their firm;
3. performance audits or inquiries carried out by, or on behalf of, the Auditor-General;
4. other auditing services carried out by Audit New Zealand for a public entity that is audited by another Audit Service Provider; and
5. the audit of a subsidiary of a public entity group by a private sector auditor when the subsidiary is not required to be separately audited by the Auditor-General.

Public disclosure of the additional work in the context of the audit of an entity’s (or entity group’s) financial statements is generally limited to other work carried out by the Appointed Auditor or their firm for the public entity or the public entity group.

An exception to this general expectation is where a subsidiary of an entity group is audited by another auditor and where that subsidiary does not separately report its financial statements publicly, and the accompanying disclosure of the additional work.

A public sector peculiarity is where Audit New Zealand also carries out other auditing services for a public entity that is audited by another Audit Service Provider. Public disclosure of the work carried out by Audit New Zealand is appropriate in the interests of transparency.

In the context of an annual audit, public disclosure is concerned with the additional work carried out by the Appointed Auditor or their firm, and any work carried out by Audit New Zealand, rather than the total of the work carried out by the Auditor-General and those who carry out work on their behalf.

Public disclosure of work carried out by an Audit Service Provider in accordance with this Guide is not required if:

1. the Audit Service Provider audits a component of a group; and
2. provides work to the parent or to another component of the group that is not audited by the Audit Service Provider.

Public disclosure of fees paid to the auditor is required where legislation or a financial reporting standard requires the reporting entity to include disclosure in the financial statements. It is highly desirable that this disclosure is disaggregated to separate the various engagements the reporting entity has with the Audit Service Provider and any work carried out by Audit New Zealand. The disclosure should, wherever possible, separate out the following engagements:

1. the annual audit;
2. description of the separate other work engagements and their fees – for example, half-yearly reviews, investigating accountant reviews as part of an initial public offering, assurance engagements required by other parties (such as the Commerce Commission), work of an assurance nature with the public entity (such as an independent quality assurance review of an information technology project), etc; and
3. any “work of an assurance nature” carried out by Audit New Zealand.

For each other engagement referred to in paragraph AG R600.8.21, Appointed Auditors shall send the following information to the OAG:

1. a copy of the report issued for the engagement, or a statement advising that the report has yet to be issued;
2. if applicable, a copy of the information on which the report has been issued; and
3. the total fee for the engagement and the actual fees billed to the public entity during the period covered by the annual audit.

In making decisions about the additional work that can be carried out for a public entity, the Auditor-General has taken the following measures:

1. requiring those working on behalf of the Auditor-General to understand the relationships that exist between different public entities, or between a public entity and a non-public entity – these relationships could mean that an Audit Service Provider’s (and the Auditor-General’s) independence might be threatened if the Audit Service Provider provides services to an entity that the Audit Service Provider does not audit on behalf of the Auditor-General;
2. primarily limiting the additional work to work of an assurance nature;
3. requiring auditors to inform the OAG if the value of additional work might exceed 100% of the annual audit fee in any one reporting period;
4. requiring public disclosure of the nature and amount of additional work – in the audit report and in the notes to the financial statements; and
5. reserving the power of the Auditor-General to publicly report the findings of the other work under section 30 of the Public Audit Act 2001.

The Auditor-General generally applies a consistent standard of independence. This means that no allowance is made for:

1. the nature of the additional work, which means that the same standard applies to any additional work carried out in respect of a public entity; and
2. the size and nature of the public entity, or the subject of the engagement, if the subject matter does not directly relate to a public entity (for example, the subject of an engagement might be the actions of a public entity member, officer, employee, or contractor). This means that the more rigorous independence requirements in PES 1 that apply to “public interest entities” generally apply to all additional engagements carried out in respect of a public entity under the Auditor-General’s Code and this Guide.

The Auditor-General generally applies a consistent standard of independence. This means that no allowance is made for:

1. the nature of the additional work, which means that the same standard applies to any additional work carried out in respect of a public entity; and
2. the size and nature of the public entity, or the subject of the engagement, if the subject matter does not directly relate to a public entity (for example, the subject of an engagement might be the actions of a public entity member, officer, employee, or contractor). This means that the more rigorous independence requirements in PES 1 that apply to “public interest entities” generally apply to all additional engagements carried out in respect of a public entity under the Auditor-General’s Code and this Guide.

The Auditor-General generally applies a consistent standard of independence. This means that no allowance is made for:

• the nature of the additional work, which means that the same standard applies to any additional work carried out in respect of a public entity; and
• the size and nature of the public entity, or the subject of the engagement, if the subject matter does not directly relate to a public entity (for example, the subject of an engagement might be the actions of a public entity member, officer, employee, or contractor). This means that the more rigorous independence requirements in PES 1 that apply to “public interest entities” generally apply to all additional engagements carried out in respect of a public entity under the Auditor-General’s Code and this Guide.

Those who carry out work on behalf of the Auditor-General shall not use the internal separation of activities within a firm as a safeguard to reduce the threat to compliance with the fundamental principles to an acceptable level.

Internal separation is sometimes used by firms as a safeguard to permit different (and sometimes incompatible) activities to be carried out for an entity. An example of internal separation is where different partners and engagement teams within the same firm provide non-assurance services for an entity that is also audited by the firm.

The internal separation safeguard can never mitigate the perceived compliance requirement. The perceived compliance requirement is met through the application of the reasonable and informed third party test in paragraphs AG R120.5 A6.1 and AG R120.5 A6.2.

If the acceptance of a non-assurance service is being considered, and a safeguard is likely to be needed to enable the non-assurance service to be accepted, then it is very unlikely that the service can be accepted under the Auditor-General’s Code and this Guide. The main reason for this situation is that the non-assurance service is unlikely to be “work of an assurance nature”.

Refer to paragraph AG 600.3.4 that describes the framework over the provision of additional work when working for the Auditor-General.

The Auditor-General generally applies a consistent standard of independence. This means that no allowance is made for:

1. the nature of the additional work, which means that the same standard applies to any additional work carried out in respect of a public entity; and
2. the size and nature of the public entity, or the subject of the engagement, if the subject matter does not directly relate to a public entity (for example, the subject of an engagement might be the actions of a public entity member, officer, employee, or contractor). This means that the more rigorous independence requirements in PES 1 that apply to “public interest entities” generally apply to all additional engagements carried out in respect of a public entity under the Auditor-General’s Code and this Guide.

In addressing the provisions in paragraphs 600.19 A1 to 600.25 A1 Appointed Auditors shall communicate to those charged with governance of every public entity (irrespective of whether the public entity is also a public interest entity) the following details of each additional work engagement proposed to be carried out (over and above the work that is required (or permitted) to be carried out on behalf of the Auditor-General under legislation). The details to be communicated, that will normally be included in an engagement letter for the additional work, include:

• the nature and scope of the service to be provided;
• the basis and amount of the proposed fee;
• a statement that the engagement complies with the Auditor-General’s Code of Ethics;
• a statement that the results of the work:
  • will be made available to the OAG; and
  • any that any significant matters identified will be brought to the attention of the Auditor-General, who is free to report in accordance with section 30 of the Public Audit Act 2001; and
• public disclosure of the nature of the additional work and the associated fees will be made (either in the entity’s published financial statements or in the auditor’s report).

The provision of limited accounting and bookkeeping services is permitted to be carried out by those working on behalf of the Auditor-General. The provision of these limited services departs from the general principles in the Auditor-General’s Code and in this Guide by:

1. permitting other engagements that are not of an assurance nature; and
2. making a distinction between small entities that are not public interest entities and public interest entities.

The departure from the general principles in the Auditor-General’s Code and in this Guide is justified because the Auditor-General is the auditor of many “micro” public entities, and the only way those public entities can reasonably comply with their statutory reporting requirements is to have those working on behalf of the Auditor-General to assist in compiling the financial statements.

When conducting temporary accounting assistance and compilation engagements, those working on behalf of the Auditor-General shall ensure that:

1. the public entity accepts the responsibility for the financial statements (including the accounting policies) as its own;
2. those working on behalf of the Auditor-General who carry out the temporary accounting assistance and/or compilation engagement do not function as employees or part of management in conducting the operations of the organisation;
3. the nature of the temporary accounting assistance and/or compilation engagement is straightforward and does not require those working on behalf of the Auditor-General to exercise their professional judgement (an example where professional judgement is not required would be the preparation of cash-based financial statements for very small entities);
4. processes and procedures are put in place to mitigate the risk of those working on behalf of the Auditor-General auditing their own work (for instance, their work is reviewed by a more senior audit staff member); and
5. the annual audit shall be carried out in keeping with the Auditor-General’s auditing standards, which includes obtaining sufficient and appropriate audit evidence to enable the Appointed Auditor to form an objective opinion on the financial statements.

Unacceptable self-review and advocacy threats to audit independence arise from the provision of tax services by those working on behalf of the Auditor-General. Apart from the different independence expectations placed on the Auditor-General by the Public Audit Act 2001, the two assumptions set out in paragraph 604.6 A1 do not generally hold true in the New Zealand context. Those assumptions are:

1. Tax returns are based on historical information and principally involve analysis and presentation of such historical information under existing tax law, including precedents and established practice. This assumption implies that existing tax law is readily able to be interpreted so that tax outcomes will not be materially different, irrespective of who calculates the tax outcome. In New Zealand, tax law is subject to interpretation and, as a consequence, tax outcomes can vary significantly.
2. Tax returns are subject to whatever review or approval process the tax authority considers appropriate. This assumption suggests that tax authorities check and approve tax returns when they are received. In New Zealand, the Inland Revenue Department may check a tax return. That check is no guarantee that the tax return is correct, as the Inland Revenue Department has the power to amend a tax assessment it has previously issued, or it can go back through returns for a number of years to investigate an entity’s tax situation.

• Reviews of a public entity’s tax returns to the Inland Revenue or the public entity’s underlying tax computations, subject to paragraph AG R604.1.3.
• Referral to generic tax requirements in accordance with published Inland Revenue policy

• Preparation of a public entity’s tax returns or the underlying tax computations.
• Assisting a public entity to obtain binding or non-binding rulings from the Inland Revenue.
• Preparation of calculations of current and deferred tax liabilities (or assets) for a public entity.
• Provision of tax planning and other tax advisory services to a public entity.
• Provision of tax valuation services to a public entity.
• Acting as the tax agent for a public entity.
• Providing assistance to a public entity with a tax investigation.
• Subject to paragraphs AG 604.20 A1.1, AG R604.20 A1.2 and AG R604.20 A1.3 providing assistance to a public entity in the resolution of tax disputes.

In some instances, an Audit Service Provider might have advised a public entity on tax matters prior to the Audit Service Provider becoming the auditor of the public entity. Where those tax matters are questioned by the Inland Revenue Department, it might be pragmatic for the Audit Service Provider to assist the public entity in resolving the matter, if:

1. the public entity does not have its own resources to address the demands of the Inland Revenue Department; and
2. it is impractical to use any firm other than the Audit Service Provider because of the Audit Service Provider’s specialised understanding of the public entity’s taxation issues.

Internal audit services shall not be provided to a public entity by:

1. the Auditor-General;
2. the Deputy Auditor-General;
3. any employee of the Auditor-General; or
4. any person, firm, or network firm where that person, firm, or network firm is carrying out work on behalf of the Auditor-General.

Those working on behalf of the Auditor-General shall not provide corporate finance services to public entities, unless those services:

1. meet the description of “work of an assurance nature” in paragraphs AG R600.8.4 to AG 600.8.8; and
2. do not result in those working on behalf of the Auditor-General assuming a management responsibility under paragraph R400.13.

The provision of corporate finance services to public entities will normally present an unacceptable threat to audit independence because:

1. Those working on behalf of the Auditor-General are likely to assume a management responsibility. This is because public entity management will be persuaded by the expert advice provided to them.
2. Such engagements can encroach on the applicable government or local authority policy to which the public entity is required to adhere. Commenting on policy is expressly prohibited under section 16(4) of the Public Audit Act 2001.
3. Corporate finance activities by their nature are of possible media or political interest, or are generally sensitive. Involvement in such areas needs to be carefully assessed and managed.

The Auditor-General and those who carry out work on their behalf shall comply with:

1. the fundamental principles set out in section 110 and apply the conceptual framework set out in section 120; and
2. the Auditor-General’s additional requirements that are specified in relation to the fundamental principles in section 110 and that apply to the conceptual framework in section 120.

Reports issued by, or on behalf of, the Auditor-General that are intended for a wide audience shall not include a restriction on use and distribution.

A restriction on use and distribution in a report issued by, or on behalf of, the Auditor-General shall only be included with the express permission of the OAG. In some instances, prior OAG permission might have been provided. In other instances, OAG permission might need to be sought (using the Independence@oag.parliament.nz email address).