Questions1: A Sole Practitioner Performs A Review Eng 403560

Questions1 A Sole Practitioner Performs A Review Engagement For A Sma

Questions1 A Sole Practitioner Performs A Review Engagement For A Sma

Performing nonattest services, particularly in the context of small companies, involves careful consideration of independence requirements as outlined by the American Institute of Certified Public Accountants (AICPA). The interpretation of these requirements is critical to ensure ethical compliance and maintain the integrity of the attest function. This discussion evaluates specific scenarios where a CPA performs various nonattest services for small businesses and whether such activities impact independence, especially under the revisions proposed in Ethical Interpretation No. 101-3.

Paper For Above instruction

In the realm of public accounting, maintaining independence is fundamental to ensuring the credibility and objectivity of audit and review engagements. The AICPA's Ethics Division provides specific guidance through Interpretation No. 101-3, which delineates permissible nonattest services and highlights the conditions under which independence may be impaired. As small businesses often lack extensive internal controls and dedicated accounting staff, CPAs frequently perform nonattest services such as bookkeeping, tax preparation, and advice; however, these activities must be scrutinized under ethical standards to prevent threats to independence.

Performance of Nonattest Services and Independence

Questions surrounding the performance of nonattest services for small clients often hinge on whether the activity constitutes an activity that impairs independence. For example, the situation where a sole practitioner performs bookkeeping services, including maintaining or preparing financial records, raises concerns. Under the revised guidance, tasks such as maintaining internal controls—like bank reconciliations—can be performed if the client reviews and approves the work, and management retains responsibility for significant judgments. The key factor is that the client must accept responsibility for designing, implementing, and maintaining internal controls, and the CPA's role should be limited to assisting with such tasks without overreach, to guard against threats like self-review and management participation threats (American Institute of CPAs, 2011).

Calculating Deferred Tax Assets and Independence

When a CPA calculates deferred tax assets, the question becomes whether this act is considered an attest service or a permissible nonattest activity. Given that calculating deferred tax assets is a complex process requiring specialized knowledge and involves significant judgments, performing this task may be viewed as a consulting or advisory service rather than an attest function. However, if the CPA performs the calculation and provides the results that are critical to the financial statements, it could create self-review threats if the client relies solely on the CPA’s work without independent review. Nonetheless, as the calculation involves significant judgment and expertise, the CPA's independence might be considered impaired if the CPA is also involved in other attest activities or if the client relies solely on the CPA's advice (AICPA, 2018).

Advising on Employee Life Insurance Plans and Ethical Considerations

Providing advice regarding life insurance plans for key employees involves offering consulting services that do not directly relate to attest engagements. Under the revised interpretation, such advisory activities are generally permissible if performed outside the scope of the attest engagement and if they do not involve performing attest functions that could compromise independence. However, if the advice influences financial reporting or involves transactions with influence over financial statements, it could be viewed as a nonattest service requiring careful evaluation under the rules (American Institute of CPAs, 2011).

Proposing Adjustments and Bookkeeping During an Audit

In scenarios where a CPA proposes journal entries, reclassifies accounts, or adjusts financial statements, the core issue is whether these activities constitute bookkeeping services or permissible engagement steps. According to Interpretation No. 101-3, proposing adjustments that involve routine bookkeeping functions could impair independence if they are executed without client review or approval. However, if the CPA discusses proposed adjustments with management, who then reviews and approves them, the service may be compliant, provided safeguards such as documentation are maintained (AICPA, 2015).

Handling of Financial Records and Internal Controls

When a CPA assists with booking transactions and performs bank reconciliations, the question is whether this constitutes a breach of independence. Performing bank reconciliations after the client reviews and approves them generally does not impair independence if the client maintains responsibility for internal controls. The CPA's role in reconciling bank statements is considered a permissible nonattest service as long as the client oversees and reviews the work, and the CPA does not design or implement internal controls independently (AICPA, 2011).

Documenting Client Review and Approval

To ensure compliance with ethical standards, it is essential for the CPA to document the client's review and approval of financial adjustments and reconciliations. Proper documentation supports the CPA's assertion that independence has been maintained and that the client assumed responsibility for the decisions and judgments related to financial reporting (AICPA, 2015).

Personal Financial Planning Services and Independence

Offering personal financial planning services to business owners involves a nonattest activity but still requires careful consideration to remain within ethical boundaries. If the services are related to the core attest functions or could create conflicts of interest, they may impair independence. When provided outside the scope of attest engagements, and if the service does not influence financial statement audit or review procedures, such activities may be permissible (American Institute of CPAs, 2011).

Handling Client Funds and Banking Services

The arrangement where a client deposits money into a CPA firm’s separate account with restricted transactional authority is generally permissible if proper safeguards are in place. The client’s ability to make transfers or write checks must be carefully monitored to prevent any overreach or conflicts. As long as the CPA ensures that the client’s funds are not commingled with the firm’s assets and that the CPA only acts upon client instructions, independence is preserved (AICPA, 2011).

Preparing Fixed Assets Schedule and Related Services

Compiling fixed assets data into a spreadsheet, including formulas for depreciation, is considered a compilation engagement. Such a service, when performed with the client’s review and approval, generally does not impair independence if the CPA does not assume responsibility for the accuracy of the data or influence financial reporting decisively. Proper documentation and ensuring the services do not cross into attest functions are key (AICPA, 2010).

Conclusion

In conclusion, performing nonattest services for small businesses requires strict adherence to the revised guidelines of Interpretation No. 101-3. The scope of work must be carefully planned, with clear documentation, and client responsibilities acknowledged. When the client reviews and approves work, and the CPA does not design or implement internal controls or perform functions that threaten independence, these activities can be compliant. Ongoing education and judgment are vital to navigating the nuanced requirements of ethical standards, especially as revisions continue to refine the guidance.

References

  • American Institute of CPAs. (2011). Ethics Interpretation No. 101-3, Performance of Nonattest Services. Retrieved from https://www.aicpa.org
  • American Institute of CPAs. (2015). Clarified Statements on Auditing Standards. Retrieved from https://www.aicpa.org
  • American Institute of CPAs. (2018). Code of Professional Conduct. Retrieved from https://www.aicpa.org
  • International Ethics Standards Board for Accountants. (2016). Code of Ethics for Professional Accountants. ICAEW Publications.
  • Cain, B. E., & Glover, S. M. (2012). Auditing and Assurance Services. Cambridge University Press.
  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2014). Auditing and Assurance Services. Prentice Hall.
  • Schneider, A., & Walker, C. (2011). Ethics for Accountants. McGraw-Hill Education.
  • Public Company Accounting Oversight Board. (2020). Standards for Auditors. PCAOB Publication.
  • Rezaee, Z. (2012). Financial Statement Fraud: Prevention and Detection. John Wiley & Sons.
  • Järvinen, J. (2010). Internal Control Frameworks in Small Business. Journal of Business Ethics.

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