Ethics Test

 

Ethics Test

1. Yes, the sole practitioner can perform the nonattest services and maintain compliance with Interpretation 101-3. As stated in the Interpretation 101-3 “a practitioner could prepare monthly bank reconciliations for an audit client without impairing independence provided the general requirements are met, such as ensuring that the client reviews and approves the bank reconciliations and sufficiently understands the services performed to oversee them”. One of the main concepts in accounting is maintaining independence. Once independence is gone, then it does not remain in compliance with Interpretation 101-3 of issuing nonattest services. Although, the two partners and the office manager have neither any CPA certification nor accounting experience, they must make significant judgements and decisions from the engagement and assigning an individual who “has the skill, knowledge, and/or experience to oversee the services” to evaluate the results of the services. A change in the language of implementing the phrase “accepting responsibility for” provided more clarity that yes practitioners are able to assist their clients by “performing services to design, implement, or maintain certain aspects of internal control when management accepts responsibility for such services”.

2. In this scenario, the practitioner’s independence would not be impaired, even if they are hired for future services completing the deferred tax asset. As stated in my readings from the Journal of Accountancy, “the interpretation does not apply to member who are performing only nonattest services such as tax, for which independence is unnecessary.” Although it is not necessary for the partner nor the office manager to understand how to perform the deferred tax asset calculations, they must be aware of the effect the deferred tax asset done by the practitioner has on its companies financial statements.

3. In this scenario, the CPA can provide advice to the owners of the company without being subject to nonattest services as per Interpretation 101-3. Providing advice is a relatively normal procedure during audits with respect to CPA-client relationships. As stated in AICPA Plain English Guide to Independence, “You and your firm are not required to be independent to perform services that are not attest services (for example, financial statement preparation, tax preparation or advice or consulting services” as well as “Routine activities such as providing advice and responding to questions as part of the normal client-member relationship are exempt”. Given the fact that it is only advice being provided the CPA, they do not lose any sort of independence or conflicting any rules of the Interpretation 101-3.

4. In accordance to Interpretation 101-3 the proposal of the journal entries would not be considered a nonattaest service. As the proposing journal entries is normal practice in auditing. Since it is only a proposition by the CPA, it is still subject to the managements review and approval. In readings of AICPA Plain English Guide to Independence, “Proposing adjusting entries to an attest client’s financial statements as part of the member’s audit, review, or compilation services is considered a normal part of those engagements and would not be considered performance of a nonattest services” as per the review and approval of the client.

5. With respect to this situation, this not considered determining or changing journal entries, account codings or classifications prohibited by Interpretation 101-3. Since the client is able to identify each of the cash disbursement, invoice and purchase orders the CPA is able to make the journal entries accordingly and assign the general ledger account for each type of expense, while maintaining their independence.

6. The CPA preparing the client’s bank reconciliation would not be considered maintaining controls nor impairing of independence with respect to Interpretation 101-3. As stated in my readings, “a practitioner could prepare monthly bank reconciliations for an audit client without impairing independence provided the general requirements of the interpretation are met, such as ensuring that the client reviews and approves the bank reconciliations and sufficiently understands the services performed to oversee them”. However, it must be clarified that prior to the revisions made it was considered maintaining internal controls if the CPA prepared the bank reconciliations for clients. It wasn’t until the Professional Ethics Executive Committee (PEEC) decided to make a revision. The revision states “it was never the PEEC’s intent to have the permitted activities listed in the interpretation be considered as impairing independence, the committee agreed to revise the general activity to state accepting responsibility for designing, implementing or maintaining internal control”. Therefore, the CPA is indeed allowed to prepare bank reconciliations for the client without it being considered maintaining of internal controls as long as the client reviews and approves the reconciliations completed.

7. The CPA is not required to document the client’s reviews and approval. Before the services can even begin there must be a formal agreement on the understanding of the nonattaest services engagement by the CPA. As per readings of AICPA Plain English Guide to Independence, “prior to agreeing to perform any nonattest services for the attest client, the member must obtain the attest client’s agreement that the attest client will: assume all management responsibilities, oversee the service by designating an individual, preferably within senior management, who possesses suitable skill, knowledge, and experience, evaluate the adequacy and results of the services performed and accept responsibility for the results of the services”. It is crucial that the responsibilities of both parties are laid out in detail in order to avoid any kind of violation of independence for the CPA.

8. If the two owners of the company ask the CPA to perform financial activities on a personal basis, then these services would not be subject to Interpretation 101-3. As stated in the AICPA Plain English Guide to Independence, “you and your firm are not required to be independent to perform services that are not attest services (for example, financial statement preparation, tax preparation or advice or consulting services, such as personal financial planning),” this clearly states the language of the CPA being able to perform personal activities.

 

9. With respect to the scenario being presented, the service of the CPA having access to client funds is not permitted under Interpretation 101-3. As stated in AICPA Plain English Guide to Independence, “the AICPA rules also indicate that you and your firm may not do the following: Take custody of an attest client’s assets”. Even if the transfers are approved and requested by the client, the CPA firm is not allowed to have access to the client funds as per AICPA rules.

10. In this scenario there would be no independence impaired by the CPA in preparing a fixed asset schedule for the client under the Interpretation 101-3. As stated in answers above the key factor would be the client’s “subject to review and approval” of such documentation. An aspect in remaining independent here is that the client is fully aware and transparent with the work being done and taking on full responsibility and understanding the information of the work of the CPA. In my readings it states that “Under the new rules, members may not perform appraisal, valuation or actuarial services if they will have a material effect on the client’s financial statements  and the service involves considerable subjectivity”, meaning that if the CPA starts to tinker with the schedule in any way that can cause significant effect, they would lose their independence. But in terms of the scenario stated, there is not independence being impaired.

References

· AICPA Plain English Guide to Independence

· AICPA Issues Nonattest Service Independence Rules

· Ethics Interpretation No. 101-3, Performance of Nonattest Services Proposed Revisions Clarify Independence Requirements