Tag Archives for " Independence "

Jun 25

Yellow Book Independence Documentation is Important

By Charles Hall | Accounting and Auditing , Local Governments

I just received the June 2016 AICPA Reviewer Alert (a monthly newsletter for peer reviewers). It provides the following Yellow Book independence documentation guidance:

Yellow Book contains specific requirements for documentation related to independence which may be in addition to the documentation that auditors have previously maintained. The 2011 Yellow Book Chapter 3 emphasizes that documentation is required for the evaluation of each of the elements of independence, which consists of:

  1. Management’s ability to oversee the nonaudit services, including whether management has skills, knowledge, and experience
  2. Significant threats that require the application of safeguards along with the safeguards applied
  3. Understanding established with the audited entity regarding the nonaudit services to be performed

Failure to document one or more of these elements is considered a departure from professional standards that causes the engagement to be deemed nonconforming. The reviewed firm and reviewer should be aware that verbal explanation and vague completion of a checklist does not provide for a thoughtful evaluation and documentation of management’s abilities related to each nonaudit service and will be unlikely sufficient to comply with the standards.

Yellow Book Independence

Yellow Book Independence Forms

All firms that perform Yellow Book engagements need to make sure their system of quality control provides guidance for documentation of the three items listed above. Consider using the AICPA’s 2011 Yellow Book Independence form. The electronically fill-able version is $28 for AICPA members and can be found here. The free PDF version can be found here.

For information about determining if your client’s skill, knowledge, and experience are sufficient, click here.

Jan 08

Why Your Independence Might Be Impaired (By Nonattest Services)

By Charles Hall | Auditing

A CPA’s independence can be impaired by performing nonattest services. 

Cause of Independence Impairment

The AICPA Code of Conduct requires that clients accept responsibility for nonattest services if attest services are also provided. Why? If the client has no one to assume responsibility (for the nonattest work), then the auditor could be performing management responsibilities that impair independence.

Nonattest Examples

What are some examples of nonattest services?

Documentation of SKE

The client should appoint someone with appropriate skill, knowledge, and experience (sometimes referred to as SKE) to oversee nonattest services provided by the public accounting firm. The CPA firm should document their consideration of independence — usually in the enagagement letter and/or a memorandum. Document the nonattest services to be provided and the client personnel overseeing the work. It is helpful to also document the skill, knowledge, and experience of the designated person. What is their educational background? How long have they served in their role? Do they have any certifications (e.g., CPA, CISA)? What qualifies the designated (client) person to oversee the nonattest service performed by the attest firm?

AICPA independence

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Jul 07

Nonattest Services and Independence: What Peer Reviewers are Looking For

By Charles Hall | Accounting and Auditing , SSARS

Future peer reviews will have an increased focus upon nonattest services provided to attest clients. How do we know? Well, see the new peer review checklist questions below (for an attest engagement).

nonattest services

The big “no-no” is to assume management responsibilities and then perform an attest service. Here are additional questions from the peer review checklists. Notice the first item below: Accepting responsibility for the preparation and fair presentation of the client’s financial statements. The client must assume responsibility for the financial statements, even if we (as the CPA) prepare them.

If we prepare financial statements and perform an audit, review, or compilation, we have performed a nonattest service (preparation of financial statements) and an attest service (audit, review, compilation). Why is this important? Because if we perform a nonattest service and an attest service for the same client, we must assess our independence. And if we are not independent, then we can’t perform an audit or review engagement.

nonattest1

The peer review checklists also ask for:

  • The name and title of the client personnel overseeing the nonattest service and
  • A description of the accountant’s “assessment and factors leading to your satisfaction that the client personnel overseeing the service had sufficient skills, knowledge and experience”

Interestingly, later on in the peer review checklist (the one I’m presently referring to is the Not-for-Profit checklist), the following appears:

Does the auditor’s assessment of the skills, knowledge, and experience of client personnel overseeing non-attest services appear reasonable given indications within the engagement? Consider whether the auditor performed significant reconciliations and took into consideration the extent and significance of adjustments and journal entries, the control deficiencies, and so on.

Translation: If the auditor made several significant journal entries to clean up the records, does the client possess sufficient skill, knowledge, and experience?

Documentation of Nonattest Services

So do we need a new form to document our independence?

It certainly would not hurt to add a new form to document our independence. PPC offers such a form (and I am sure other work paper providers do the same). What I like about such forms (at least the one I have seen) is they provide us with a place to document all nonattest services and then to assess and document our client’s ability to assume responsibility for the nonattest services provided.

If the client can’t–or is unwilling to–assume responsibility for the financial statements, then we are not independent, and we cannot perform an audit or a review. This assumption of responsibility does not mean the client has the ability to create the financial statements, but it does mean that:

  • that the client will oversee the nonattest service,
  • that the client will evaluate the adequacy and results of the nonattest service, and
  • that the client will accept responsibility for the nonattest service

Documentation of the above in our engagement letters is sufficient to meet standards (even though I like the idea of adding a separate independence form to the file). We should–in the engagement letter–specify the nonattest services and the responsibilities of management.

We have, for some time now, included the client responsibility language (about overseeing, evaluating, and accepting) in our engagement letters. But the language referring to nonattest services usually addressed tax preparation, depreciation schedule preparation, bookkeeping and the like. Now preparation of financial statements should be included as another nonattest service (assuming the accounting firm prepares the financials, which we usually do).

The requirement to treat financial statement preparation as a nonattest service is effective for engagements covering periods beginning on or after December 15, 2014.

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