Non-audit Services Flashcards
covered members should monitor total amount of their nonaudit services to ensure that
their total involvement with client does not become so extensive that it would constitute performing a separate service
management responsibilities - can members assume mgt resp of attest client?
members must not assume any management responsibilities of attest clients.
general requirements for performing nonaudit services - when covered members do provide nonaudit services for attest client, if other rules do not state otherwise, independence would not be impaired if ALL safeguards are met as follows:
a. in order to ensure that ultimate management of the attest client stays with client’s management the members must determine that client and management have engagement letter
b. client and mgt must make informed judgment on results of member’s nonaudit services.
c. accept responsibility for making significant judgments and decisions
d. members must establish and document their understanding with attest client
engagement letter for non audit services
- management assumes all responsibility
- client oversee the service by designing an individual, preferably within senior management, who possesses the skill knowledge and/or experience to do the job. the member should assess the situation to ensure that the individual is up to the task
- evaluate adequacy and results of services performed
- accept responsibility for results for the services
before performing nonaudit services, members must establish and document in writing their understanding with attest client regarding
- objectives of engagement
- services to be performed
- attest client’s acceptance of its responsibilities
- members’ responsibilities
- any limitation on the engagement
if general requirements are met, member may provide the following nonattest services
- provide advice, research materials, and recommendations to assist management in performing its functions and making decisions
- attend board meetings as a nonvoting adviser
- interpret fs, forecasts and other analysis
- provide mgt with advice regarding its potential plans strategies or relationships
sox limits nonattest (consulting or advisory services) that attest firms may provide to attest clients that are
public companies
sox limitations on non-audit services are based on three fundamental notions
a. accounting firms should not audit their own work
b. auditors should not advocate for their clients,
c. accounting forms should not serve as their clients’ managers
sox provides that an independent auditor cannot perform the following nonaudit services for a public company audit client
- bookkeeping or other services related to accounting records of FS
- financial information systems design and implementation
- appraisal or valuation services, fairness opinions, or contributions in kind reports
- actuarial services
- internal audit outsourcing services
- management functions or human resources
- broker or dealer investment advisor or investment banking services
- legal services and expert services unrelated to audit
=9. any other service that PCAOB determines is impermissible
sox does not prohibit attest firms from providing tax services to their attest clients, but PCAOB rules do provide that public company’s auditor’s independence is impaired regarding a tax client if the firm:
- enters into a contingent fee arrangement with audit client
- provides marketing, planning or opinion services in favor of tax treatment of confidential transaction, or if transactions is based on aggressive interpretation of tax law
- provides tax services to members of management who serve in financial reporting oversight role for a client or their immediate family
sox requires that rather than the audit client’s management selecting the auditors…
client audit committees should select, evaluate and compensate auditors.
audit committees are composed of
entirely of outside directors and presumably independent of management’s influence, must pre-approve any permitted nonaudit services (tax services).
when firms seeks permission of audit client audit committee to provide tax services, it must:
- describe proposed services in writing
- discuss with committee potential effects on independence
- document it in writing
appraisal valuation or actuarial services - results would be material to FS and services involve high degree of subjectivity - valuing employee stock option plan, business combination, or appraisals of assets and liabilities
independence impaired
appraisal valuation or actuarial services - services not requiring high degree of subjectivity - valuing client’s pension or post employment benefit liabilities
independence not impaired
appraisal valuation or actuarial services - services performed for non financial statement purpose - appraising or actuarial services for tax planning, estate and gift taxation and divorce proceedings
independence not impaired
is independence impaired?
communicate summary plan data to plan trustee
not impaired
is independence impaired?
advise client management regarding impact of plan provisions
not impaired
is independence impaired?
process transactions initiated by plan participants
not impaired
is independence impaired?
make policy decisions on client’s behalf
impaired
is independence impaired?
interpret plan for participants without management’s concurrence
impaired
is independence impaired?
make disbursements on plan’s behalf
impaired
is independence impaired?
take custody of plan assets
impaired
is independence impaired?
serve as plan fiduciary
impaired
is independence impaired?
record management approved transactions in client’s general ledger
not impaired
is independence impaired?
post client coded transactions to client’s general ledger
not impaired
is independence impaired?
prepare fs based on client’s trail balance
no
is independence impaired?
post clients approved journal entry to clients tb
no
is independence impaired?
propse standard adjusting or correcting je
no
is independence impaired?
generate unsigned checks using client’s source documents
no
is independence impaired?
process clients payroll using client provided records
no
is independence impaired?
transmit client approved payroll or other disbursement information to financial institution chosen by client
no
is independence impaired?
prepare reconciliation for client’s evaluation
no
is independence impaired?
detemine or make changes in accounting records without client approval
yes
is independence impaired?
approve or authorize client transactions
yes
is independence impaired?
prepare source documents
yes
is independence impaired?
make changes to source documents without client approval
yes
is independence impaired?
accept responsibility to authorize payment of client funds
yes
is independence impaired?
accept responsibility to sign or cosign checks
yes
is independence impaired?
maintain clients bank account take custody of client funds or make credit or banking decisions for client
yes
is independence impaired?
approve vendor invoices for payments
yes
is independence impaired?
assist management in its assessment of client’s business risk control process
no
is independence impaired?
recommend a plan for improving control processes and assisting in implementation
no
is independence impaired?
make or approve business risk decisions
yes
is independence impaired?
present business risk consideration to board on management’s behalf
yes
is independence impaired?
assist in developing corporate strategies
no
is independence impaired?
assist in identifying sources of capital meeting client’s criteria
no
is independence impaired?
introduce management to sources of capital meeting client’s criteria
no
is independence impaired?
advise client in transaction negotiations
no
is independence impaired?
participate in transaction negotiation in advisory capacity
no
is independence impaired?
be named as financial advisory in client’s offering documents
no
is independence impaired?
commit client to a transaction
yes
is independence impaired?
consummate transaction on client’s behalf
yes
is independence impaired?
act as a promoter, underwriter, broker dealer or guarantor of client’s securities
yes
is independence impaired?
maintain custody of client’s securities
yes
is independence impaired?
recommend position description or candidate specifications
no
is independence impaired?
solicit screen and recommend candidates based on client approved criteria
no
is independence impaired?
recommend qualified candidates based on client approved criteria
no
is independence impaired?
advise employer on employee hiring or benefits
no
is independence impaired?
hire or terminate client employees
yes
is independence impaired?
commit client to employee compensation or benefits
yes
is independence impaired?
expert witness for a client
yes
is independence impaired?
expert for a large group where attest clients
a. <20% of members voting interest and claims
b. are not lead plaintiffs
c. do not have sole decision making power to select expert witness
no
is independence impaired?
fact witness
no
is independence impaired?
litigation consulting providing advice to attest client (without serving as expert witness)
no
litigation consulting serving as trier of fact, special master, court appointed expert or arbitrator
yes
is independence impaired?
litigation consulting mediator
no
is independence impaired?
initial or ingrate a clients financial information system if it is off the shelf (not designated by client)
no
is independence impaired?
assist in setting up client’s chart of accounts and financial statement format
no
is independence impaired?
design develop install or integrate client’s information system that is unrelated to clients fs or accounting records
no
is independence impaired?
provide training and instruction to client’s employees on information and control system
no
is independence impaired?
perform network maintenance
no
is independence impaired?
design or develop clients financial information system
yes
is independence impaired?
design or develop client’s financial information system
yes
is independence impaired?
make other than insignificant modifications to source code underlying client’s existing financial information system
yes
is independence impaired?
supervise client personnel in the daily operation of financial information system
yes
is independence impaired?
operate client’s network
yes
is independence impaired?
assess whether performance complies with management policies
no
is independence impaired?
identify opportunities for improvement
no
is independence impaired?
recommend improvement for management consideration
no
is independence impaired?
performing ongoing monitoring activities or control activities (reviewing customer credit info as part of sales process) that affects execution of transaction
yes
is independence impaired?
performing separate evaluation of significant control such that member is in effect performing routine operations built into client’s business process
yes
is independence impaired?
having management rely on member’s work as primary basis for client’s assertions on design of operating effectiveness of internal controls
yes
is independence impaired?
determining which if any recommendations for improving internal control system should be implemented
yes
is independence impaired?
approving or being responsible for overall internal audit work including determining internal audit risk and scope, project priorities, and frequency of performance of audit procedures
yes
is independence impaired?
being connected with client as employee or in any management position (being listed as an employee in client’s directory)
yes
is independence impaired?
recommend allocation of funds that client should invest in various asset classes
no
is independence impaired?
perform bookkeeping and reporting of client’s portfolio balance
no
is independence impaired?
review management of client’s portfolio by others to determine if managers are meeting client’s investment objectives
hno
is independence impaired?
transmit client’s investment selection to broker
noq
is independence impaired?
make investment decisions on client’s behalf
yes
is independence impaired?
execute transactions to buy or sell for client
yes
is independence impaired?
take custody of client assets such as security purchased by client
yes
is independence impaired?
assuming cpa does not have custody or control over client’s funds and that client employee reviews and approves tax return prior to transmission to taxing authority and if required for filing signs tax return then:
preparing tax return
no
is independence impaired?
assuming cpa does not have custody or control over client’s funds and that client employee reviews and approves tax return prior to transmission to taxing authority and if required for filing signs tax return then:
transmitting tax return to taxing authority
no
is independence impaired?
assuming cpa does not have custody or control over client’s funds and that client employee reviews and approves tax return prior to transmission to taxing authority and if required for filing signs tax return then:
transmitting payment
no
is independence impaired?
signing and filing tax return on behalf of client management if authorized by management and requirements are met
yes
is independence impaired?
representing client in administrative proceedings before taxing authority
no
is independence impaired?
representing client in court to resolve tax dispute
no
who are members in business
members who are employed or engaged on a contractual or volunteer basis in an executive, staff, governance, advisor or administrative capacity in such area as industry, the public sector, education the not for profit sector and regulatory or professional bodies. this would include staff accountants, internal auditors, and other accountants not engaged in public practice
do members in business have to worry about independence rules?
no. they have other responsibilities that generally mirror those of members in public practice
what are the threats for members in business
- adverse interest threats
- advocacy threats
- familiarity threats
- self interest threats
- self review threats
- undue influence threats
members in business - examples of adverse interest threats
- member in business’s close relative is an investor in her employer’s closest competitor
- member in business has sued her employer
members in business - examples of advocacy threats
- obtaining favorable financing is dependent on information that member in business includes in prospectus
- member in business gives or fails to give information that he know will unduly influence conclusions reached by third party
members in business - examples of familiarity threats
- member in business has a long relationship with third party and therefore stops reviewing quality of third party’s work
- member in business hires a relative as subordinate
- member in business regularly accepts gifts or entertainment from firm that sells goods or services to member’s employer
member in business - examples of self interest threats
- member in business close relative owns stock in employer
- member in business is eligible for performance related bonus and its value will be directly affected by member in business decisions
member in business - self review threats examples
- an internal auditor accepts work that she previously performed before she was promoted to her current position
- member in business accepts work that she previously performed that will be the basis for providing another professional service - for example, sally gives tax advice to her client and late, while doing attest work for the client, automatically accepts the validity of tax advice
member in business - undue influence threats include
- members in business being pressured to
- become associated with misleading information
- deviate from company policy
- change a conclusion regarding tax accounting position
when attempting to eliminate these threats or reduce them to an acceptable level, members in business cannot turn to safeguards generated by their accounting form, of course, but can turn to those created by:
- profession, legislation, or regulation
- their employer
offering or accepting gifts or entertainment by members in business
should not accept any gifts or entertainment that would violate law or policies of other firms of their won employer. gifts or entertainment not reasonable in the circumstances would create a violation of the integrity and objectivity rule
preparing and reporting information by members in business. they must never:
- make or direct another to make false entry
- fail to correct inaccurate financial statement or entries
- sign or permit another to sign a document containing materially false information
subordination of judgment - members in business
rules against subordination of judgment for members in business are essentially identical for those of members in public practice
obligation of a member to his or her employer’s external accountant - members in business
are to be candid and no knowingly misrepresent facts or knowingly fail to disclose material facts to their employers external auditor
educational services - members in business
when teaching at a university or performing other educational services, a member in business is viewed as performing professional services and therefore must act with integrity and objectivity
what are general standards for members in business
- act with professional competence
- exercise due professional care
- adequately plan and supervise performance of professional services
- have sufficient relevant data to back up any conclusions or recommendations they make
discreditable acts - members in business
are held to essentially the same standards as members in public practice
- discrimination and harassment of employment
- solicitation or disclosure of cpa exam questions and answers
- failure to file a tax return or pay tax liability
- negligence in preparing fs or other records
- failure to follow rules for preparation of fs
- entering into prohibited indemnification agreements and limited liability provisions
- promoting or marketing their firm by use of false, misleading or deceptive ads
- improper use of cpa credential
who are other members
unemployed, retired, or otherwise not working in the profession, so most of the code that applies to members in public practice and members in business doe snot apply to them
discreditable acts of other members
- discrimination and harassment in employment practices
- solicitation or disclosure of cpa exam
- failure to file tax return or pay tax liability
- improper disclosure of confidential information obtained from employment or previous volunteer work
- false, misleading or deceptive acts in promoting or marketing services
- improper use of cpa credentials
