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TECHNICAL ADVISORY SERVICES HELPSHEET

Rotation of audit partners and staff

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Published: 01 Feb 2017 Updated: 02 Dec 2020 Update History

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Technical helpsheet issued to help ICAEW members to identify the requirements for rotation of audit partners and staff involved in audits within scope of the FRC Ethical Standard.

Introduction

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to identify the requirements for rotation of audit partners and staff involved in audits within scope of the FRC Ethical Standard.

Members may also wish to refer to the following related guidance:

Subject to the transitional provisions set out in paragraphs 1.69 to 1.72, the FRC Ethical Standard 2019 becomes effective on 15 March 2020. This helpsheet addresses the requirements of both the FRC Ethical Standard 2016 and the FRC Ethical Standard 2019. Paragraph references are labelled 2016 or 2019 accordingly.

Relevant terminology

In order to understand the relevant rotation requirements, consideration of the following definitions is required.

Engagement partner (EP)

The FRC Glossary of Terms – Ethics and auditing defines ‘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. For an audit, the engagement partner is a key audit partner.

The engagement partner is therefore the partner responsible for the engagement including signing the audit report.

Key partner involved in the engagement (KPIE)

The FRC Glossary of Terms – Ethics and auditing defines ‘key partner involved in the engagement’ as:

A partner, or other person in the engagement team (other than the engagement partner or engagement quality control reviewer) who either: Is involved at the group level and is responsible for key aspects of the engagement, including decisions or judgements on significant matters or risk factors that relate to the engagement for that entity, or Is primarily responsible for the engagement work in respect of a significant affiliate, division or function of the entity.

A key partner involved in the engagement is any other partner involved who is responsible for key judgments, or significant functions of the audit. For a group audit, a partner in charge of a significant subsidiary or division would also be considered to be a group KPIE.

Engagement quality control reviewer (EQCR)

The FRC Glossary of Terms – Ethics and auditing defines ‘engagement quality control reviewer’ as:

A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team with sufficient and appropriate experience and authority to objectively evaluate the significant judgements the engagement team made and the conclusions it reached in formulating the report

The engagement quality control reviewer is generally the person who undertakes the quality review in accordance with ISA 220 (UK) Quality Control for an Audit of Financial Statements.

Key audit partner (KAP)

The FRC Glossary of Terms – Ethics and auditing defines ‘key audit partner’ as:

(i) The statutory auditor designated by an audit firm for a particular audit engagement as being primarily responsible for carrying out the statutory audit on behalf of the audit firm; or (ii) In the case of a group audit, the statutory auditor designated by an audit firm as being primarily responsible for carrying out the statutory audit at the level of the group and the statutory auditor designated at the level of material subsidiaries; or (iii) The statutory auditor who signs the audit report.

Whilst not strictly meeting the definition of ‘the statutory auditor designated at the level of material subsidiaries’, partners who are responsible for the audit of material subsidiaries incorporated outside the EU, or for significant components that are not subsidiaries (e.g. a major joint venture) should be considered to be a key audit partner (FRC Rolling Record (December 2016 meeting)).

Note that an engagement partner is a key audit partner.

For the purpose of considering rotation, the concept of a key audit partner is only relevant to audits of public interest entities (PIEs).

General requirements

The FRC Ethical Standard requires all firms to establish policies and procedures to monitor the length of time and extent of involvement that partners and staff in senior positions serve as members of engagement teams for particular engagements (paragraph 3.1 (2016) or paragraph 3.2 (2019)).

Long association and/or extensive involvement with an audited entity creates self-interest, self-review and familiarity threats to integrity or objectivity and may impair, and could compromise independence. The significance of such threats will depend on factors including an individual’s role in the engagement team, the proportion of their annual hours spent working on the audited entity and the length of time they have been associated with it.

Where partners and staff in senior positions have long association or extensive involvement with an audited entity, the FRC Ethical Standard (paragraph 3.2 (2016) or paragraph 3.1 (2019)) requires the firm to assess threats to integrity, objectivity and independence of the firm and covered persons and apply safeguards to reduce the threats to a level where independence would not be compromised. Where appropriate safeguards cannot be applied, the firm must not accept or must resign from the engagement as appropriate.

Appropriate safeguards may include

  • Appointing an engagement partner who has no previous involvement with the entity;
  • Rotating the partners and other senior members of the engagement team after a pre-determined number of years;
  • Arranging an additional independent partner review; and/or
  • Arranging an engagement quality control review.

Specific requirements

In addition to the general requirements outlined above, specific requirements also apply depending on an individual’s role, the type of audited entity and the period they have served on the engagement team.

The basic rotation requirements are summarised in the following table (based on the FRC Rolling Record (Appendix 1)) and the sections which follow.

The full requirements are detailed in Section 3 of the FRC Ethical Standard.

Maximum period of rotation / applicable to
Engagement partner
Key audit partner
Key partner involved in the engagement Engagement quality control reviewer
Other partners and staff in senior positions
Public interest entity (PIE)

5 on / 5 off
(See Note 1)

5 on / 5 off
(See Note 1)
7 on / 2 off
(See Note 2)
7 on / 5 off

Apply threats and safeguards approach, specifically in respect of personnel who have been involved in the engagement for more than 7 years.
(See Note 3)

Other listed

5 on / 5 off
(See Note 1)
N/A
7 on / 2 off
(See Note 2)
7 on / 5 off
Non-PIE/Listed
Apply threats and safeguards approach, specific steps to be taken at ten years.
(See Note 4)
N/A
Apply threats and safeguards approach, specific steps to be taken at ten years.
(See Note 4)
Apply threats and safeguards approach, specific steps to be taken at ten years.
(See Note 4)
Apply threats and safeguards approach.

Note 1 – Possible extension of rotation period

In circumstances where the audit committee (or equivalent) decide that a degree of flexibility over the timing of rotation is necessary to safeguard the quality of the engagement, and the firm agrees, the engagement partner may continue for an additional period of up to two years, so that no longer than seven years in total is spent in the position (FRC Ethical Standard paragraph 3.15 (2016) or paragraph 3.15 (2019)).

An audit committee may determine this appropriate where, for example, substantial change has recently been made or will soon be made to the nature or structure of the entity’s business or there are unexpected changes in the senior management of the entity.

Where an extension is considered appropriate and agreed by the firm in the interests of audit quality, this fact and the reasons for it must be disclosed to the audited entity’s shareholders as early as practicable and in each of the additional years (paragraph 3.16 (2016) or paragraph 3.16 (2019)).

The FRC has confirmed that the provision can be used to allow extension of any other KAP beyond five years (FRC Rolling Record (Appendix 1), footnote 8).

Note 2 – Combination of roles

Where the individual has acted as key partner involved in the engagement and also as the engagement quality control reviewer or engagement partner the rotation period changes to 7 on / 5 off (FRC Ethical Standard paragraph 3.20(c)(iii) (2016) or paragraph 3.20(c)(iii) (2019)).

Note 3 – Other partners and staff in senior positions

Where other partners and staff in senior positions have been involved in the engagement for a continuous period of longer than seven years, the engagement partner must review the safeguards put in place to address the threats to objectivity and independence of those persons and discuss those situations with the engagement quality control reviewer (FRC Ethical Standard paragraph 3.21 (2016) or paragraph 3.21 (2019)). In the FRC Ethical Standard 2019, this also applies to where partners and staff have been responsible for the relationship between the audit firm and the entity, including periods prior to the firm’s appointment as auditor.

The significance of the threats arising will depend on the total period of time the individual has been involved in the engagement, changes in the nature of the work and role performed by the individual during that period and the portion of time the individual has spent on any engagements with the entity during that period.

Potential safeguards may include:

  • Changes in roles within the engagement team;
  • An additional review of the work done by that individual; and/or
  • Additional procedures carried out as part of the engagement quality control review.

If safeguards do not reduce threats to a level where independence is not compromised, the individual must be removed from the engagement team.

Note 4 – Continuous period of ten years

The FRC Ethical Standard (paragraph 3.6 (2016) or paragraph 3.6 (2019)) requires careful consideration to be given, where applicable, once an engagement partner has held this role for a continuous period of ten years as to whether it is probable that an objective, reasonable and informed third party would conclude the integrity, objectivity or independence of the firm or covered persons are compromised.

Where the individual concerned is not rotated after 10 years either:

  • Safeguards other than rotation (see General requirements section) are applied; and
  • The reasoning as to why the individual continues to participate in the engagement without any safeguards is documented and the facts are communicated to those charged with governance.

Although these requirements strictly apply only to engagement partners, it is best practice to apply them to any other key partner involved in the engagement and any engagement quality control reviewer too.

Transitional provisions

When an entity becomes a PIE or other listed entity, the length of time the engagement partner has served the entity in that capacity is taken into account in calculating the rotation period.

However, paragraph 3.14 (2016) or paragraph 3.14 (2019) of the FRC Ethical Standard allows that where the engagement partner has already served for four or more years, they may continue to serve for not more than two years after the entity becomes a PIE of other listed entity.

If in doubt seek advice

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250, via webchat or e-mail ethics@icaew.com.

Terms and conditions

© ICAEW 2020  All rights reserved.

ICAEW cannot accept responsibility for any person acting or refraining to act as a result of any material contained in this helpsheet. This helpsheet is designed to alert members to an important issue of general application. It is not intended to be a definitive statement covering all aspects but is a brief comment on a specific point.

ICAEW members have permission to use and reproduce this helpsheet on the following conditions:

  • This permission is strictly limited to ICAEW members only who are using the helpsheet for guidance only.
  • The helpsheet is to be reproduced for personal, non-commercial use only and is not for re-distribution.

For further details members are invited to telephone the Technical Advisory Service T +44 (0)1908 248250. The Technical Advisory Service comprises the technical enquiries, ethics advice and anti-money laundering helplines. For further details visit icaew.com/tas.

Changelog Anchor
  • Update History
    03 Dec 2020 (11: 15 AM GMT)
    Changelog created, helpsheet converted to new template
    03 Dec 2020 (11: 16 AM GMT)
    Minor update to change an “or” to an “and”. Corrected a couple of typos.
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