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Does determining which recommendations for improving internal control should be implemented as nonattest services for a nonpublic attest client impairs a CPA’s independence?
YES - Performing nonattest services for a nonpublic attest client generally does not impair independence if the AICPA member does not assume management responsibilities. However, the client must agree to make all such decisions and perform all such functions. Moreover, the client must agree to (1) designate an individual with suitable skill, knowledge, or experience to oversee the services; (2) evaluate their adequacy and results; (3) accept responsibility for the results; and (4) establish and maintain internal control. Also, the member should have a documented agreement with the client about the objectives and limitations of the engagement, the services to be performed, and mutual responsibilities. Accordingly, determining which, if any, recommendations for improving internal control should be implemented impairs independence because it is a management decision.
Fenn & Co., CPAs, has time available on a computer that it uses primarily for its own internal record keeping. Aware that the computer facilities of Delta Equipment Co., one of Fenn’s audit clients, are inadequate for the company’s needs, Fenn offers to maintain on its computer certain routine accounting records for Delta. If Delta were to accept the offer and Fenn were to continue to function as independent auditor for Delta, Fenn most likely would be in violation of
SEC, but not AICPA, provisions pertaining to auditors’ independence.
Under the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated under it, performing bookkeeping or accounting services for a public company audit client impairs the independence of the audit firm. The major exception to this rule is for results that are not subject to audit. The AICPA view is that the firm ordinarily may retain its independence while keeping client accounting records, provided certain requirements are met. For example, when providing bookkeeping services, independence would not be impaired if the member records transactions for which management has approved the account classifications, posts coded transactions to the general ledger, prepares financial statements based on the trial balance, posts client-approved entries to the trial balance, or proposes entries or other changes in the financial statements if they are reviewed by the client and its management understands their nature and effects. However, determining or changing entries, account codings or classifications for transactions, and other accounting records without client approval; authorizing or approving transactions; preparing source documents; and making changes in source documents without client approval are activities that would impair independence. The application of these inconsistent positions seldom causes conflict because large clients, which are the most likely to report to the SEC, usually have their own accounting and computer systems and need not request these services from their auditors. Moreover, the SEC rules apply to publicly traded companies only.
According to the AICPA Code of Professional Conduct, under what circumstances may a CPA receive a contingent fee for services?
Representing a client in an IRS examination of the client’s federal income tax return.
A contingent fee is permitted for representing a client in an IRS examination by a revenue agent of the client’s federal (or state) income tax return. A contingent fee also is permitted for representing a client who is (1) seeking a private letter ruling from the IRS or (2) lobbying with regard to the drafting of a statute or regulation.
would actual litigation by the auditor against the current management alleging management fraud or deceit. impair the auditor’s independence?
yes - The following are situations in which actual or threatened litigation impairs independence: (1) litigation has begun alleging deficient audit work; (2) litigation has begun alleging fraud or deceit by current management; and (3) management has expressed an intention to commence litigation alleging deficient audit work, and the auditor concludes that it is probable that such a claim will be filed.
On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client’s financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client’s December 31, Year 2, financial statements?
Yes, because the CPA was not required to be independent at the time the loan was granted.
An attest engagement requires independence as required by AICPA standards (ET 92). Accountants who perform audits and reviews are required by AICPA standards to be independent. However, a compilation merely assists management in presenting information in the form of financial statements. It does not provide any assurance that no material modifications should be made for them to be in accordance with the applicable reporting framework. Although a compilation is not an assurance engagement, it is an attest engagement (AR 60). Furthermore, AICPA standards do not require an accountant to be independent to perform a compilation. But if (s)he is not independent, a final paragraph of the report should so state (AR 80). Thus, the CPA was not required to be, and was not, independent during Year 1. Because the loan was paid in full during Year 1, the CPA is considered independent with respect to the audit of the client’s Year 2 financial statements. The CPA had no loan from the client during the engagement.