Network Firms and Affiliates

Question 1

What are network firms?

Answer 1

Smaller firms that band together to have more market power to compete with the BIG 4.

They share the following

• Brand name
• Common control
• Profits and cost
• common business stat
• professional resources
• common quality controls policies

Question 2

T/F: Network firms must comply with the independence rules of other network firms if the use of the audit or review report for the client is not restricted

Answer 2

TRUE

For all other attest clients, look at conceptual framework

Question 3

Can you use an nonindependent firm to participate on the engagement?

Answer 3

If you’re in a jam and need help, you might bring in an independent firm. If the partner or employee are not independent. This will be a problem if they are on the engagement team.

If you bring them in and just to internal audit work. You are required to look at AU-C 610.

Question 4

How do independence issues arise if covered members having a relationship with an affiliate of the client?

Answer 4

An affiliate of a client includes:

• Client controls the entity (subsidiary of the client)
• Client has direct and material financial interest in the entity (You have an interest in the parent but you’re auditing the sub)
• Entity has material and direct investment over the client
• A sister entity of the client and sister entity are material to the entity that controls both