First Read Ethics Interpretation No 101: Performance Of Nona

First Readethics Interpretation No 101 3 Performance Of Nonattest S

First read, Ethics Interpretation No. 101-3, Performance of Nonattest Services Proposed Revisions Clarify Independence Requirements. Then, answer all 10 questions. No outside sources.

Paper For Above instruction

Introduction

The Ethics Interpretation No. 101-3 addresses the independence implications that arise when a CPA performs nonattest services for a client. It provides guidance on how such services can be executed without impairing independence. This paper analyzes ten specific scenarios to determine whether the performance of these services would align with the requirements outlined in Interpretation 101-3, emphasizing the importance of maintaining independence in all attest engagements.

Question 1

A sole practitioner performs a review engagement for a small company owned by two partners. The partners are involved in sales but have no accounting background. The office manager, who maintains the accounting records, is not a CPA and lacks a degree in accounting. The practitioner performs tax and bookkeeping services permitted under Interpretation 101-3.

Based on this scenario, the key consideration is whether the nonattest services performed by the sole practitioner compromise independence. According to Interpretation 101-3, performing bookkeeping services such as maintaining accounting records is permissible provided that the client maintains oversight and reviews the work. Since the partners are not involved in the accounting function and the office manager, who handles records, is not a CPA, the practitioner’s services are unlikely to impair independence. However, the practitioner must ensure that the client maintains proper oversight and that the services do not create a mutual or conflicting interest that could threaten independence. Therefore, the sole practitioner can perform the nonattest services, assuming all oversight and review protocols are followed.

Question 2

In the second scenario, the sole practitioner calculates the deferred tax asset for the financial statements of the same client. The partners and office manager do not have the skills to perform this calculation and do not wish to learn. The question is whether the independence is impaired.

Interpretation 101-3 emphasizes that the independence is potentially compromised if the practitioner performs services that involve making significant judgments or estimates that the client is incapable of performing and relies upon the practitioner’s expertise. Since the client’s personnel are not skilled in calculating the deferred tax asset and the practitioner is solely responsible, the exercise of professional judgment becomes crucial. If the practitioner provides the calculation without undue influence or bias, and the client does not participate in or review the work concerning significant estimates, independence may not be impaired. Nonetheless, the CPA must consider whether performing such a complex estimate exceeds permissible nonattest services because it involves a significant judgment. In this case, if the practitioner performs the calculation independently and the client’s lack of capability is acknowledged, independence is likely maintained.

Question 3

A CPA provides advice to a privately held company on how offering life insurance to key employees might affect their financial statements. The owners inquire whether this advice falls under the scope of Interpretation 101-3.

Providing consulting advice about the impact of financial arrangements, such as life insurance, pertains to nonattest services. According to Interpretation 101-3, such advisory services are permissible provided that the CPA remains objective and does not perform managerial functions. The critical issue is whether offering such advice could impair independence. Since the advice is limited and does not involve performing management functions or making managerial decisions, the service would not typically impair independence, assuming the CPA does not engage in activities that compromise objectivity or involve management oversight responsibilities.

Question 4

During an audit, the CPA proposes adjustments to the financial statements, including adjustments to accumulated depreciation, reclassification of assets, and sales cutoff testing. The question is whether these proposals are considered bookkeeping services subject to Interpretation 101-3.

According to Interpretation 101-3, bookkeeping services involve maintaining or preparing financial information, such as recording journal entries or adjusting accounts. Proposing adjustments related to depreciation, reclassification, and sales cutoff, especially during an audit, is generally viewed as performing or modifying client-prepared entries rather than purely suggesting adjustments. As such, recommending or preparing journal entries for the client can be considered a bookkeeping service, which might impair independence if not properly managed. The CPA should ensure that such services do not undermine the objectivity and independence of the audit.

Question 5

A CPA books journal entries by assigning account numbers based on client-provided information during a review engagement. The client has identified each expense type. The question is whether this constitutes determining or changing journal entries or classifications prohibited by Interpretation 101-3.

Interpretation 101-3 prohibits the CPA from determining or changing journal entries or classifications. In this case, the CPA is applying the client's provided information and assigning account codes without creating or altering entries, which may be considered a bookkeeping service. However, if the CPA merely follows the client’s instructions and does not determine the nature or classification of transactions, this service might be permissible, provided that proper safeguards are in place. Nonetheless, if the CPA influences the classification or modifies entries beyond following client instructions, independence could be impaired.

Question 6

The CPA performs a bank reconciliation using a copy of the client’s bank statement, which the client reviews and approves. The question is whether this service is considered maintaining internal controls that could impair independence.

Interpretation 101-3 cautions that maintaining internal controls involves ongoing activities that influence financial reporting. Performing bank reconciliations is generally an internal control activity, but if the client reviews and approves the reconciliation, the CPA is acting as a reviewer or reviewer of internal controls rather than maintaining or designing them. This typically does not impair independence, as the client maintains oversight. The CPA’s role is limited to verifying the accuracy of the reconciliation, not establishing or maintaining internal controls.

Question 7

In the previously discussed scenarios, whether the CPA must document the client’s review and approval of bank reconciliations and journal entries.

Proper documentation is always recommended to support independence and for audit purposes. According to professional standards and Interpretation 101-3, documenting the client’s review and approval helps demonstrate that the services were performed in accordance with independence standards and that the client maintained oversight. Therefore, the CPA should document such reviews and approvals to substantiate independence and ensure compliance with professional standards.

Question 8

A CPA performs financial planning services for the owners of a closely held company who are heavily involved in operations. The question is whether these services are subject to Interpretation 101-3.

Financial planning services are nonattest services. When owners are involved deeply in operations, providing these services can create conflicts of interest or familiarity threats that may impair independence. Under Interpretation 101-3, performing services that involve making managerial or operational decisions can threaten independence. Given the owners' involvement, the CPA must carefully evaluate whether providing financial planning services would impair objectivity or independence, and whether safeguards are sufficient to mitigate these threats.

Question 9

A client deposits money into a CPA firm’s separate account, with the client being a signer and able to transfer funds. The CPA only transfers funds after client requests and approvals. The question is whether this service violates independence standards.

The key issue is whether the CPA’s role involves performing managerial functions or operating the client’s asset accounts. Since the client controls the account and the CPA acts only on client instructions after approval, this service does not involve unmanaged access or managerial responsibilities concerning the client’s funds. Provided that the CPA maintains independence in the attest engagement and does not manipulate or manage the client’s funds outside authorized transactions, this service generally does not impair independence under Interpretation 101-3.

Question 10

A CPA compiles a fixed assets schedule from client-provided invoices and formulas that calculate depreciation. The question is whether this service impairs independence.

Compilation services that involve inputting data provided by the client and applying formulas are generally considered nonattest services. As long as the CPA does not perform judgment or make recommendations beyond implementing the fixed assets schedule, the service is unlikely to impair independence. Proper disclosure and adherence to professional standards reinforce that the CPA does not perform attest work that diminishes objectivity.

Conclusion

Each scenario must be carefully evaluated to ensure compliance with Interpretation 101-3, emphasizing the safeguarding of independence. Services that involve significant judgment, managerial oversight, or could influence financial reporting require careful consideration and documentation to prevent impairments of independence. Maintaining clear boundaries between attest and nonattest services is vital to uphold the integrity of the CPA’s independence and professional reputation.

References

  • American Institute of Certified Public Accountants. (2024). Code of Professional Conduct. AICPA.
  • American Institute of Certified Public Accountants. (2023). Interpretation No. 101-3, Performance of Nonattest Services. AICPA.
  • Hodge, K., & Trotman, K. (2019). Auditing & Assurance Services. Cengage Learning.
  • Louwers, T., Ramsay, R., Sinason, D., & Strawser, J. (2020). Auditing & Assurance Services. McGraw-Hill Education.
  • Philip, R., & Whittington, G. (2022). Principles of Auditing & Other Assurance Services. McGraw-Hill Education.
  • IFAC. (2018). International Standard on Assurance Engagements (ISAE) 3000.
  • Public Company Accounting Oversight Board (PCAOB). (2023). Auditing Standards.
  • Carcello, J., Hermanson, D., & Raghunandan, K. (2017). Principles of Auditing & Assurance. Wiley.
  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2020). Auditing and Assurance Services. Pearson.
  • Igoe, J. G., & Balsam, S. (2021). Ethics in Auditing. Journal of Accountancy, 231(3).

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