Which Of The Following Is True If An Auditor Performs Nonaudit Services For A Government Entity?

ET Section 100

Independence, Integrity, and Objectivity

ET Section 101
Independence

.01

Dominion 101–Independence. A member in public practice shall exist contained in the performance of professional services as required past standards promulgated past bodies designated by Quango.

[As adopted January 12, 1988.]

Interpretations under Rule 101
–Independence

In performing an attest appointment, a member should consult the rules of his or her state board of accountancy, his or her state CPA society, the U.S. Securities and Substitution Committee (SEC) if the member's report volition be filed with the SEC, the U.Due south. Section of Labor (DOL) if the fellow member's report will be filed with the DOL, the AICPA SEC Do Department (SECPS) if the member's firm is a member of the SECPS, the General Bookkeeping Office (GAO) if law, regulation, understanding, policy or contract requires the member's written report to be filed under GAO regulations, and whatever organization that bug or enforces standards of independence that would use to the member's engagement. Such organizations may have independence requirements or rulings that differ from (eastward.yard., may be more restrictive than) those of the AICPA.

.02

101-one—Interpretation of Rule 101. Independence shall exist considered to exist impaired if:

During the period of the professional person engagement ^fn * a covered member
1. Had or was committed to acquire whatever direct or material indirect financial interest in the customer
2. Was a trustee of whatsoever trust or executor or administrator of whatsoever estate if such trust or manor had or was committed to learn whatsoever direct or cloth indirect financial interest in the client and
  1. The covered member (individually or with others) had the authority to make investment decisions for the trust or estate; or
  2. The trust or estate owned or was committed to acquire more than than 10 per centum of the client's outstanding equity securities or other ownership interests; or
  3. The value of the trust'southward or estate'south holdings in the client exceeded 10 percent of the full avails of the trust or estate.
3. Had a joint closely held investment that was fabric to the covered member.
4. [Deleted]
During the flow of the professional appointment, a partner or professional employee of the firm, his or her firsthand family unit, or any group of such persons interim together owned more than 5 percent of a client'south outstanding equity securities or other buying interests.
During the menses covered by the financial statements or during the catamenia of the professional date, a firm, or partner or professional employee of the firm was simultaneously associated with the client as a(n)
1. Director, officer, or employee, or in whatsoever capacity equivalent to that of a fellow member of management;
2. Promoter, underwriter, or voting trustee; or
3. Trustee for whatsoever pension or profit-sharing trust of the client.

Transition Period for Certain Business organisation and Employment Relationships

A concern or employment relationship with a customer that impairs independence nether interpretation 101-1.C [ET department 101.02], and that existed equally of November 2001, will not be deemed to impair independence provided such relationship was permitted under dominion 101 [ET department 101.01], and its interpretations and rulings equally of November 2001, and the individual severed that relationship on or before May 31, 2002.

Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated With a Client

An private who was formerly (i) employed by a client or (2) associated with a client as a(n) officeholder, director, promoter, underwriter, voting trustee, or trustee for a pension or profit-sharing trust of the customer would impair his or her business firm's independence if the individual—

Participated on the attest engagement team or was an individual in a position to influence the attest engagement for the customer when the adjure date covers any period that includes his or her old employment or association with that client; or
Was otherwise a covered member with respect to the client unless the individual start dissociates from the client by—

Terminating whatever relationships with the client described in interpretation 101-i.C [ET section 101.02];
Disposing of any direct or material indirect financial interest in the client;
[Deleted];
Ceasing to participate^fn 1 in all employee benefit plans sponsored by the customer, unless the customer is legally required to allow the individual to participate in the plan (for example, COBRA) and the individual pays 100 percent of the cost of participation on a current basis; and
Liquidating or transferring all vested benefits in the client'due south divers benefit plans, defined contribution plans, deferred compensation plans, and other like arrangements at the primeval date permitted under the plan. However, liquidation or transfer is not required if a penalization^fn 2 significant to the benefits is imposed upon liquidation or transfer.

Application of the Independence Rules to a Covered Member's Immediate Family

Except as stated in the following paragraph, a covered member's immediate family is bailiwick to dominion 101 [ET section 101.01], and its interpretations and rulings.

The exceptions are that independence would not be considered to exist dumb solely equally a event of the following:

An individual in a covered member's firsthand family was employed past the customer in a position other than a fundamental position.
In connection with his or her employment, an individual in the immediate family of one of the following covered members participated in a retirement, savings, bounty, or similar plan that is a client, is sponsored by a customer, or that invests in a client (provided such plan is usually offered to all employees in similar positions):
1. A partner or manager who provides ten or more hours of non-attest services to the client; or
2. Whatever partner in the office in which the lead adjure engagement partner primarily practices in connection with the adjure engagement.

For purposes of determining materiality nether rule 101 [ET section 101.01] the fiscal interests of the covered fellow member and his or her immediate family should be aggregated.

Application of the Independence Rules to Close Relatives

Independence would be considered to be impaired if—

An individual participating on the attest engagement team has a close relative who had
1. A central position with the customer, or
2. A fiscal involvement in the client that
1. Was material to the close relative and of which the individual has noesis; or
2. Enabled the close relative to exercise significant influence over the client.
An private in a position to influence the adjure appointment or any partner in the role in which the pb attest appointment partner primarily practices in connection with the attest engagement has a shut relative who had
1. A fundamental position with the customer; or
2. A financial involvement in the client that
1. Was material to the close relative and of which the individual or partner has cognition; and
2. Enabled the close relative to practise significant influence over the client.

Grandfathered Employment Relationships

Employment relationships of a covered fellow member's immediate family and close relatives with an existing attest client that impair independence under this estimation and that existed every bit of November 2001, will not be accounted to impair independence provided such relationships were permitted under preexisting requirements of rule 101 [ET section 101.01], and its interpretations and rulings.

Other Considerations

It is impossible to enumerate all circumstances in which the appearance of independence might be questioned. Members should consider whether personal and business relationships between the member and the customer or an individual associated with the customer would atomic number 82 a reasonable person enlightened of all the relevant facts to conclude that in that location is an unacceptable threat to the member'south and the firm's independence.

[Paragraph added by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, November 1991, effective January one, 1992, with earlier application encouraged, by the Professional Ethics Executive Committee. Revised, effective Feb 28, 1998, by the Professional Ideals Executive Committee. Revised, November 2001, effective May 31, 2002, with earlier awarding encouraged, past the Professional Ethics Executive Committee. Revised, effective July 31, 2002, by the Professional Ethics Executive Committee. Revised, constructive March 31, 2003, past the Professional person Ethics Executive Committee. Revised, effective Apr 30, 2003, by the Professional Ideals Executive Committee.]

[.03]

[Formerly paragraph .02 renumbered by adoption of the Code of Professional Comport on January 12, 1988. Formerly interpretation 101-1, renumbered as 101-4 and moved to paragraph .06, April 1992.]

.04

101-two—Employment or clan with attest clients. A business firm'south independence will be considered to be dumb with respect to a client if a partner or professional employee leaves the firm and is later employed by or associated with that customer in a fundamental position unless all the post-obit conditions are met:

Amounts due to the former partner or professional employee for his or her previous involvement in the firm and for unfunded, vested retirement benefits are not material to the firm, and the underlying formula used to calculate the payments remains fixed during the payout catamenia. Retirement benefits may also exist adjusted for inflation and interest may be paid on amounts due.
The former partner or professional employee is non in a position to influence the accounting firm's operations or fiscal policies.
The quondam partner or professional employee does not participate or announced to participate in, and is non associated with the business firm, whether or not compensated for such participation or association, once employment or association with the client begins. An appearance of participation or clan results from such actions equally:
- The private provides consultation to the firm.
- The firm provides the individual with an office and related amenities (for example, secretarial and telephone services).
- The individual's name is included in the firm'south office directory.
- The individual's name is included equally a member of the house in other membership lists of business, professional, or civic organizations, unless the individual is conspicuously designated as retired.
The ongoing attest appointment team considers the appropriateness or necessity of modifying the engagement procedures to adjust for the risk that, by virtue of the former partner or professional person employee'southward prior noesis of the audit programme, audit effectiveness could be reduced.
The business firm assesses whether existing adjure date team members take the appropriate experience and stature to effectively deal with the former partner or professional person employee and his or her work, when that person will accept significant interaction with the attest engagement squad.
The subsequent attest appointment is reviewed to determine whether the engagement team members maintained the appropriate level of skepticism when evaluating the representations and work of the former partner or professional employee, when the person joins the client in a key position inside one year of disassociating from the firm and has significant interaction with the adjure engagement team. The review should be performed by a professional with advisable stature, expertise, and objectivity and should exist tailored based on the position that the person assumed at the customer, the position he or she held at the firm, the nature of the services he or she provided to the client, and other relevant facts and circumstances. Appropriate deportment, as accounted necessary, should be taken based on the results of the review.

Responsible members within the firm should implement procedures for compliance with the preceding conditions when house professionals are employed or associated with attest clients.

With respect to conditions 4, 5, and 6, the procedures adopted will depend on several factors, including whether the former partner or professional person employee served as a member of the engagement team, the positions he or she held at the business firm and has accustomed at the customer, the length of time that has elapsed since the professional left the firm, and the circumstances of his or her divergence.^fn 3

Considering Employment or Association With the Customer

When a member of the attest engagement team or an individual in a position to influence the attest engagement intends to seek or discuss potential employment or association with an attest client, or is in receipt of a specific offer of employment from an attest client, independence will be impaired with respect to the client unless the person promptly reports such consideration or offer to an appropriate person in the house, and removes himself or herself from the appointment until the employment offer is rejected or employment is no longer being sought. When a covered member becomes aware that a fellow member of the attest engagement team or an individual in a position to influence the attest engagement is considering employment or association with a client, the covered member should notify an appropriate person in the firm.

The appropriate person should consider what additional procedures may be necessary to provide reasonable balls that any work performed for the customer by that person was performed with objectivity and integrity as required under dominion 102 [ET section 102.01]. Additional procedures, such as reperformance of work already done, volition depend on the nature of the engagement and the individual involved.

[Replaces previous interpretation 101-2, Retired Partners and Firm Independence, August, 1989, effective August 31, 1989. Revised, effective Dec 31, 1998, by the Professional Ideals Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-one. Revised, constructive Apr 30, 2003, by the Professional Ethics Executive Commission.]

.05

101-3—Operation of other services. A member or his or her firm ("member") who performs an attest engagement for a client may likewise perform other nonattest services ("other services") for that client. Before a member performs other services for an attest customer, he or she must evaluate the result of such services on his or her independence. In particular, care should exist taken not to perform direction functions or make management decisions for the attest client, the responsibility for which remains with the client's board of directors and management.

Before performing other services, the member should establish an understanding with the client regarding the objectives of the engagement, the services to be performed, management's responsibilities, the member'due south responsibilities, and the limitations of the engagement. It is preferable that this understanding be documented in an engagement letter. In addition, the member should be satisfied that the customer is in a position to have an informed judgment on the results of the other services and that the customer understands its responsibility to—

Designate a direction-level private or individuals to exist responsible for overseeing the services existence provided.
Evaluate the adequacy of the services performed and whatsoever findings that result.
Brand management decisions, including accepting responsibleness for the results of the other services.
Found and maintain internal controls, including monitoring ongoing activities.

General Activities

The following are some general activities that would be considered to impair a fellow member's independence:

Authorizing, executing or consummating a transaction, or otherwise exercising dominance on behalf of a client or having the authority to exercise so
Preparing source documents ^fn 4 or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, buy orders, payroll fourth dimension records, and customer orders)
Having custody of client avails
Supervising client employees in the performance of their normal recurring activities
Determining which recommendations of the member should exist implemented
Reporting to the board of directors on behalf of management
Serving as a customer's stock transfer or escrow agent, registrar, general counsel or its equivalent

The examples in the following table identify the effect that performance of other services for an attest client can have on a fellow member'due south independence. These examples are not intended to be spread-out of the types of other services performed by members.

[Formerly paragraph .04, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, constructive June thirty, 1990, by the Professional person Ethics Executive Committee. Revised, effective May 31, 1999, by the Professional Ethics Executive Committee. Revised, effective April 30, 2000, by the Professional Ethics Executive Committee. Revised, July 2002, to reverberate befitting changes necessary due to the revision of interpretation 101-1.]

.06

101-four—Honorary directorships and trusteeships of non-for-profit organisation. Partners or professional employees of a house (individual) may be asked to lend the prestige of their names to not-for-turn a profit organizations that limit their activities to those of a charitable, religious, borough, or similar nature by existence named every bit a director or a trustee. An individual who permits his or her name to be used in this way would not be considered to impair independence nether dominion 101 [ET section 101.01] provided his or her position is conspicuously honorary, and he or she cannot vote or otherwise participate in board or management functions. If the individual is named in letterheads and externally circulated materials, he or she must exist identified as an honorary director or honorary trustee. [Formerly paragraph .05, renumbered by adoption of the Code of Professional Conduct on Jan 12, 1988. Formerly interpretation 101-ane. Revised, effective June xxx, 1990, past the Professional person Ethics Executive Committee. Renumbered as estimation 101-iv and moved from paragraph .03, April, 1992. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.07

101-5—Loans from financial institution clients and related terminology.

[Paragraphs deleted.]

.08

101-6—The effect of actual or threatened litigation on independence. In some circumstances, independence may be considered to exist dumb as a outcome of litigation or the expressed intention to commence litigation as discussed below.

Litigation between client and member

The relationship between the management of the client and a covered member must be characterized by complete candor and total disclosure regarding all aspects of the customer's concern operations. In add-on, there must be an absence of bias on the part of the covered member so that he or she can exercise professional person judgment on the financial reporting decisions made by the management. When the present management of a customer company commences, or expresses an intention to commence, legal activity against a covered member, the covered member and the client's management may be placed in adversarial positions in which the management's willingness to make complete disclosures and the covered member's objectivity may be affected by cocky-involvement.

For the reasons outlined above, independence may be dumb whenever the covered member and the covered member'south customer or its direction are in threatened or actual positions of material agin interests by reason of threatened or actual litigation. Considering of the complication and diversity of the situations of adverse interests which may arise, nonetheless, it is difficult to prescribe precise points at which independence may be impaired. The following criteria are offered as guidelines:

The showtime of litigation by the nowadays management alleging deficiencies in audit work for the customer would be considered to impair independence.
The beginning of litigation by the covered member confronting the nowadays direction alleging direction fraud or deceit would be considered to impair independence.
An expressed intention by the present management to commence litigation against the covered member alleging deficiencies in audit piece of work for the client would be considered to impair independence if the auditor concludes that information technology is probable that such a claim volition be filed.
Litigation not related to performance of an attest engagement for the customer (whether threatened or actual) for an amount not material to the covered member's firm ^fn 9 or to the client visitor ^fn 9 would not more often than not exist considered to bear upon the relationship in such a way equally to impair independence. Such claims may arise, for instance, out of disputes equally to billings for services, results of revenue enhancement or direction services advice or like matters.

Litigation by security holders

A covered member may likewise become involved in litigation ("primary litigation") in which the covered member and the client or its management are defendants. Such litigation may arise, for case, when one or more than stockholders bring a stockholders' derivative activeness or a so-called "course activity" against the client or its management, its officers, directors, underwriters and covered members under the securities laws. Such primary litigation in itself would not modify central relationships between the customer or its direction and the covered member and therefore would non be accounted to take an agin impact on independence. These situations should be examined advisedly, even so, since the potential for adverse interests may exist if cross-claims are filed against the covered member alleging that the covered member is responsible for any deficiencies or if the covered member alleges fraud or deceit by the present management as a defense. In assessing the extent to which independence may be impaired under these conditions, the covered member should consider the following boosted guidelines:

The being of cantankerous-claims filed by the client, its management, or any of its directors to protect a correct to legal redress in the result of a future adverse decision in the primary litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations) would not unremarkably affect the human relationship between client management and the covered fellow member in such a way as to impair independence, unless there exists a significant take chances that the cantankerous-claim will result in a settlement or judgment in an amount cloth to the covered member's firm ^fn 10 or to the client.
The exclamation of cross-claims against the covered member by underwriters would not generally impair independence if no such claims are asserted past the client or the present management.
If any of the persons who file cross-claims confronting the covered member are likewise officers or directors of other clients of the covered member, independence with respect to such other clients would non generally be considered to be impaired.

Other third-party litigation

Another blazon of third-party litigation confronting the covered fellow member may be commenced by a lending institution, other creditor, security holder, or insurance company who alleges reliance on fiscal statements of the client with which the covered member is associated as a ground for extending credit or insurance coverage to the client. In some instances, an insurance company may commence litigation (under subrogation rights) against the covered member in the proper noun of the customer to recover losses reimbursed to the client. These types of litigation would not commonly affect independence with respect to a client who is either not the plaintiff or is merely the nominal plaintiff, since the relationship betwixt the covered fellow member and customer management would not be affected. They should be examined carefully, still, since the potential for agin interests may exist if the covered member alleges, in his defense, fraud, or deceit past the present management.

If the existent party in interest in the litigation (eastward.g., the insurance company) is also a client of the covered fellow member ("the plaintiff client"), independence with respect to the plaintiff customer may be impaired if the litigation involves a pregnant gamble of a settlement or judgment in an amount which would be material to the covered member's firm ^fn 11 or to the plaintiff customer.

Effects of impairment of independence

If the covered fellow member believes that the circumstances would pb a reasonable person having knowledge of the facts to conclude that the bodily or intended litigation poses an unacceptable threat to independence, the covered member should either ( a) disengage himself or herself, or (b) disclaim an stance because of lack of independence. Such disengagement may take the form of resignation or abeyance of any adjure appointment and then in progress pending resolution of the event between the parties.

Termination of impairment

The conditions giving ascension to a lack of independence are more often than not eliminated when a last resolution is reached and the matters at issue no longer touch on the relationship between the covered fellow member and customer. The covered member should carefully review the atmospheric condition of such resolution to determine that all impairments to the covered fellow member'due south objectivity have been removed.

[Formerly paragraph .07, renumbered by adoption of the Lawmaking of Professional Conduct on January 12, 1988. Revised, constructive June 30, 1990, by the Professional person Ideals Executive Commission. Revised, effective September 30, 1995, by the Professional Ethics Executive Commission, by deletion of subhead and paragraph and reissuance every bit ideals ruling No. 100, Actions Permitted When Independence is Impaired, nether rule 101. Revised, July 2002, to reflect befitting changes necessary due to the revision of interpretation 101-1.]

[.09]

[101-7]—[Deleted] [Formerly paragraph .08, renumbered past adoption of the Lawmaking of Professional person Carry on January 12, 1988.]

.ten

101-8—Effect on independence of financial interests in nonclients having investor or investee relationships with a covered member's client.

Introduction

Financial interests in nonclients that are related in diverse ways to a client may impair independence. Situations in which the nonclient investor is a partnership are covered in other rulings [ET section 191.138–.139, .158–.159, and .162–.163].

Terminology

The following specifically identified terms are used in this interpretation every bit indicated:

Client. The term client ways the person or entity with whose financial statements a covered member is associated.
Significant Influence. The term significant influence is as defined in Accounting Principles Board (APB) Opinion 18 [Ac I82].
Investor. The term investor means (a) a parent, (b) a general partner, or (c) a natural person or corporation that has the ability to exercise pregnant influence.
Investee. The term investee ways (a) a subsidiary or (b) an entity over which an investor has the ability to exercise significant influence.

Interpretation

Where a nonclient investee is material to a client investor, any directly or material indirect financial interest of a covered member in the nonclient investee would be considered to impair independence with respect to the client investor. If the nonclient investee is immaterial to the client investor, a covered fellow member's material investment in the nonclient investee would crusade an impairment of independence.

Where a client investee is textile to nonclient investor, any straight or textile indirect fiscal interest of a covered member in the nonclient investor would be considered to impair independence with respect to the client investee. If the client investee is immaterial to the nonclient investor, and if a covered fellow member's financial interest in the nonclient investor allows the covered fellow member to practise significant influence over the actions of the nonclient investor, independence would be considered to be impaired.

Other relationships, such as those involving brother-sister common command or client-nonclient joint ventures, may affect the advent of independence. The covered member should make a reasonable inquiry to make up one's mind whether such relationships exist, and if they practice, careful consideration should be given to whether the fiscal interests in question would pb a reasonable observer to conclude that the specified relationships pose an unacceptable threat to independence.

In full general, in brother-sister mutual control situations, an immaterial fiscal interest of a covered member in the nonclient investee would not impair independence with respect to the customer investee, provided the covered member could not exercise meaning influence over the nonclient investor. However, if a covered member'south financial interest in a nonclient investee is material, the covered member could be influenced past the nonclient investor, thereby impairing independence with respect to the customer investee. In like style, in a articulation venture situation, an immaterial financial interest of a covered member in the nonclient investor would not impair the independence of the covered member with respect to the client investor, provided that the covered member could non practise significant influence over the nonclient investor.

If a covered fellow member does not and could not reasonably be expected to take knowledge of the fiscal interests or human relationship described in this interpretation, independence would non be considered to be impaired under this interpretation.

[Revised, December 31, 1983, by the Professional Ideals Executive Commission. Formerly paragraph .09 renumbered by adoption of the Code of Professional person Conduct on January 12, 1988. References inverse to reflect the issuance of the AICPA Lawmaking of Professional Conduct on January 12, 1988. Replaces previous interpretation 101-8, Consequence on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Fellow member'southward Client, April 1991, effective April 30, 1991. Revised, December 31, 1991, by the Professional Ideals Executive Committee. Revised, July 2002, to reflect befitting changes necessary due to the revision of interpretation 101-i.]

[.11]

[101-ix]—[Deleted]

.12

101-10—The effect on independence of relationships with entities included in the governmental financial statements. ^fn 12 For purposes of this Estimation, a financial reporting entity's basic financial statements, issued in conformity with by and large accustomed accounting principles in the United States of America, include the government-broad fiscal statements (consisting of the entity'south governmental activities, concern-type activities, and discretely presented component units), the fund fiscal statements (consisting of major funds, nonmajor governmental and enterprise funds, internal service funds, blended component units, and fiduciary funds) and other entities disclosed in the notes to the basic financial statements. Entities that should be disclosed in the notes to the basic financial statements include, but are not limited to, related organizations, articulation ventures, jointly governed organizations, and component units of another government with characteristics of a articulation venture or jointly governed organization.

Accountant of Fiscal Reporting Entity

A covered member issuing a study on the basic fiscal statements of the financial reporting entity must exist independent of the financial reporting entity, equally defined in paragraph 1 of this Interpretation. Notwithstanding, independence is non required with respect to any major or nonmajor fund, internal service fund, fiduciary fund, or component unit or other entities disclosed in the financial statements, where the primary auditor explicitly states reliance on other auditors reports thereon. In add-on, independence is non required with respect to an entity disclosed in the notes to the bones financial statements, if the fiscal reporting entity is not financially accountable for the organization and the required disclosure does not include financial data. For instance, a disclosure limited to the financial reporting entity's ability to appoint the governing lath members would not require a fellow member to exist independent of that system.

However, the covered member and his or her immediate family should not hold a key position with a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or other entity that should be disclosed in the notes to the basic financial statements.

Auditor of a Major Fund, Nonmajor Fund, Internal Service Fund, Fiduciary Fund, or Component Unit of the Financial Reporting Entity or Other Entity That Should Be Disclosed in the Notes to the Basic Fiscal Statements

A covered member who is auditing the fiscal statements of a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or an entity that should be disclosed in the notes to the basic financial statements of the fiscal reporting entity, only is not auditing the master government, should exist independent with respect to those financial statements that the covered member is reporting upon. The covered member is not required to exist independent of the primary government or other funds or component units of the reporting entity or entities that should be disclosed in the notes to the basic financial statements. Even so, the covered member and his or her firsthand family should not concord a key position inside the primary government. For purposes of this Interpretation, a covered member and immediate family member would non exist considered employed past the primary authorities if the exceptions provided for in ET department 92.03 are met. ^{[fns 13–14]}

[Formerly paragraph .xi, renumbered past adoption of the Code of Professional Conduct on Jan 12, 1988. References changed to reverberate the issuance of the AICPA Code of Professional person Conduct on Jan 12, 1988. Replaces previous estimation 101-x, The Effect on Independence of Relationships Proscribed by Rule 101 and its Interpretations With Nonclient Entities Included With a Fellow member's Client in the Fiscal Statements of a Governmental Reporting Entity, April 1991, effective April 30, 1991. Replaces previous interpretation 101-10, The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements, January 1996, effective Jan 31, 1996. Revised, July 2002, to reflect conforming changes necessary due to the revision of estimation 101-ane. Revised, effective March 31, 2003, past the Professional Ethics Executive Committee.]

.13

101-11—Modified application of rule 101 for certain engagements to issue restricted-employ reports under the Statements on Standards for Attestation Engagements

Rule 101: Independence [ET section 101.01], and its interpretations and rulings apply to all attest engagements. However, for purposes of performing engagements to issue reports under the Statements on Standards for Attestation Engagements (SSAEs) that are restricted to identified parties, just the following covered members, and their immediate families, are required to be independent with respect to the responsible party ^{fn 15} in accordance with rule 101 [ET department 101.01]:

Individuals participating on the attest engagement squad;
Individuals who straight supervise or manage the attest engagement partner; and
Individuals who consult with the adjure engagement team regarding technical or manufacture-related issues specific to the adjure engagement.

In addition, independence would exist considered to be impaired if the business firm had a fiscal relationship covered past interpretation 101-one.A [ET section 101.02] with the responsible political party that was material to the firm.

In cases where the firm provides not-adjure services to the responsible party that are proscribed under interpretation 101-3 [ET section 101.05] and that do not direct relate to the subject area thing of the attest engagement, independence would not be considered to exist dumb.

In circumstances where the private or entity that engages the firm is not the responsible party or associated with the responsible party, individuals on the attest engagement team demand not be independent of the private or entity, merely should consider their responsibilities under estimation 102-ii [ET section 102.03] with regard to any relationships that may exist with the individual or entity that engages them to perform these services.

This interpretation does not employ to an engagement performed under the Statements on Auditing Standards or Statements on Standards for Accounting and Review Services, or to an examination or review engagement performed under the Statements on Standards for Testament Engagements.

[Replaces previous estimation 101-xi, Independence and Attest Engagements, January 1996, effective January 31, 1996. Revised, effective Nov 30, 2001, by the Professional Ethics Executive Commission.]

.14

101-12—Independence and cooperative arrangements with clients. Independence will be considered to be impaired if, during the menstruation of a professional engagement, a fellow member or his or her firm had whatsoever cooperative organization with the client that was material to the member's firm or to the client.

Cooperative Arrangement—A cooperative system exists when a member's firm and a client jointly participate in a business activity. The following are examples, which are not all inclusive, of cooperative arrangements:

Prime number/subcontractor arrangements to provide services or products to a third political party
Joint ventures to develop or marketplace products or services
Arrangements to combine one or more services or products of the firm with ane or more services or products of the client and market the packet with references to both parties
Distribution or marketing arrangements under which the firm acts every bit a benefactor or marketer of the customer'due south products or services, or the client acts every bit the distributor or marketer of the products or services of the house

Nevertheless, joint participation with a client in a business activity does not normally constitute a cooperative arrangement when all the following conditions are present:

The participation of the firm and the participation of the client are governed by separate agreements, arrangements, or understandings.
The firm assumes no responsibleness for the activities or results of the client, and vice versa.
Neither party has the authorization to deed as the representative or agent of the other party.

In add-on, the member'south firm should consider the requirements of rule 302 [ET section 302.01] and rule 503 [ET section 503.01].

[Constructive November xxx, 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.15

101-xiii—Extended audit services. A member or his or her firm ("member") may be asked by a client, for which the member performs an adjure engagement, to perform extended audit services. These services may include aid in the functioning of the client'southward internal inspect activities and/or an extension of the member'south audit service beyond the requirements of generally accepted auditing standards (hereinafter referred to as "extended audit services").

A member's performance of extended inspect services would not be considered to impair independence with respect to a client for which the fellow member likewise performs an attest engagement, provided that the fellow member or his or her firm is not an employee of the client or does not act or appear to act in a chapters equivalent to a member of client management .

The responsibilities of the client, including its lath of directors, inspect commission, and management, and the responsibilities of the member, every bit described below, should be understood past both the fellow member and the customer. Information technology is preferable that this understanding exist documented in an date letter that indicates that the member may not perform direction functions or make management decisions.

A member should be satisfied that the customer understands its responsibility for establishing and maintaining internal control and directing the internal audit function, if whatever. As part of its responsibility to establish and maintain internal control, direction monitors internal control to assess the quality of its performance over time. Monitoring can be achieved through ongoing activities, separate evaluations or a combination of both.

Ongoing monitoring activities are the procedures designed to appraise the quality of internal control performance over time and that are built into the normal recurring activities of an entity and include regular management and supervisory activities, comparisons, reconciliations and other routine actions. Carve up evaluations focus on the continued effectiveness of a client'southward internal control. A fellow member's independence would not exist impaired by the performance of separate evaluations of the effectiveness of a client's internal control, including separate evaluations of the client'due south ongoing monitoring activities.

The member should understand that, with respect to the internal audit office, the customer is responsible for—

Designating a competent individual or individuals, preferably inside senior direction, to be responsible for the internal audit function
Determining the scope, take chances and frequency of internal audit activities, including those to be performed by the member providing extended audit services
Evaluating the findings and results arising from the internal audit activities, including those performed by the member providing extended audit services
Evaluating the adequacy of the audit procedures performed and the findings resulting from the functioning of those procedures by, amongst other things, obtaining reports from the member

The fellow member should be satisfied that the lath of directors and/or audit committee is informed of roles and responsibilities of both client management and the member with respect to the engagement to provide extended audit services every bit a basis for the board of directors and/or audit committee to establish guidelines for both management and the member to follow in carrying out these responsibilities and monitoring how well the respective responsibilities take been met.

The member should be responsible for performing the audit procedures in accordance with the terms of the date and reporting thereon. The solar day-to-day performance of the audit procedures should exist directed, reviewed, and supervised by the member. The written report should include information that allows the individual responsible for the internal inspect function to evaluate the adequacy of the audit procedures performed and the findings resulting from the operation of those procedures. This report may include recommendations for improvements in systems, processes, and procedures. The member may help the private responsible for the internal audit function in performing preliminary audit take a chance assessments, preparing audit plans, and recommending audit priorities. However, the member should not undertake any responsibilities that are required, every bit described above, to be performed past the private responsible for the internal audit function.

Performing procedures that are more often than not of the type considered to be extensions of the member'due south audit telescopic applied in the audit of the customer's financial statements, such as confirming of accounts receivable and analyzing fluctuations in account balances, would non impair the independence even if the extent of such testing exceeds that required past generally accustomed auditing standards.

The post-obit are examples of activities that, if performed equally function of an extended inspect service, would be considered to impair independence:

Performing ongoing monitoring activities or command activities (for example, reviewing loan originations as part of the client's approving process or reviewing client credit information as part of the client'south sales authorization process) that affect the execution of transactions or ensure that transactions are properly executed, deemed for, or both, and performing routine activities in connection with the client'southward operating or production processes that are equivalent to those of an ongoing compliance or quality control function
Determining which, if any, recommendations for improving the internal control system should be implemented
Reporting to the board of directors or audit committee on behalf of management or the individual responsible for the internal inspect function
Authorizing, executing, or consummating transactions or otherwise exercising authority on behalf of the client
Preparing source documents on transactions
Having custody of avails
Blessing or being responsible for the overall internal audit piece of work plan including the conclusion of the internal audit adventure and scope, project priorities and frequency of performance of audit procedures
Being connected with the customer as an employee or in any capacity equivalent to a member of client management (for example, being listed as an employee in client directories or other client publications, permitting himself or herself to be referred to by title or description as supervising or being in charge of the client's internal audit role, or using the client's letterhead or internal correspondence forms in communications)

The foregoing list in non intended to be all inclusive.

[Effective August 31, 1996. Revised, constructive September 30, 1999, past the Professional person Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.sixteen

101-14—The effect of alternative practice structures on the applicability of independence rules. Because of changes in the style in which members ^{fn #} are structuring their practices, the AICPA'south professional person ethics executive committee (PEEC) studied various alternatives to "traditional structures" to determine whether boosted independence requirements are necessary to ensure the protection of the public interest.

In many "nontraditional structures," a substantial (the nonattest) portion of a member'south practice is conducted under public or private ownership, and the attest portion of the exercise is conducted through a split firm owned and controlled by the fellow member. All such structures must comply with applicable laws, regulations, and Rule 505, Form of System and Name [ET section 505.01]. In complying with laws, regulations, and rule 505 [ET section 505.01], many elements of quality control are required to ensure that the public interest is fairly protected. For case, all services performed by members and persons over whom they accept command must comply with standards promulgated by AICPA Council-designated bodies, and, for all other firms providing attest services, enrollment is required in an AICPA-approved practice-monitoring program. Finally, and importantly, the members are responsible, financially and otherwise, for all the attest work performed. Considering the extent of such measures, PEEC believes that the additional independence rules set along in this interpretation are sufficient to ensure that adjure services can be performed with objectivity and, therefore, the boosted rules satisfactorily protect the public interest.

Rule 505 [ET department 505.01] and the following independence rules for an alternative do construction (APS) are intended to be conceptual and applicable to all structures where the "traditional firm" engaged in attest services is closely aligned with some other organisation, public or individual, that performs other professional services. The following paragraph and the chart below provide an case of a structure in employ at the time this interpretation was adult. Many of the references in this interpretation are to the instance. PEEC intends that the concepts expressed herein be practical, in spirit and in substance, to variations of the case construction every bit they develop.

The example APS in this interpretation is one where an existing CPA practice ("Oldfirm") is sold past its owners to some other (mayhap public) entity ("PublicCo"). PublicCo has subsidiaries or divisions such as a banking concern, insurance company or broker-dealer, and it also has one or more than professional service subsidiaries or divisions that offer to clients nonattest professional person services (due east.k., revenue enhancement, personal financial planning, and management consulting). The owners and employees of Oldfirm become employees of i of PublicCo'due south subsidiaries or divisions and may provide those nonattest services. In addition, the owners of Oldfirm class a new CPA firm ("Newfirm") to provide attest services. CPAs, including the onetime owners of Oldfirm, ain a majority of Newfirm (every bit to vote and financial interests). Attest services are performed by Newfirm and are supervised by its owners. The arrangement between Newfirm and PublicCo (or one of its subsidiaries or divisions) includes the lease of employees, office space and equipment; the functioning of back-office functions such as billing and collections; and advertising. Newfirm pays a negotiated amount for these services.

APS Independence Rules for Covered Members

The term covered member in an APS includes both employed and leased individuals. The business firm in such definition would be Newfirm in the case APS. All covered members, including the firm, are subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety. For example, no covered member may accept, among other things, a straight financial interest in or a loan to or from an adjure client of Newfirm.

Partners of one Newfirm generally would not be considered partners of another Newfirm except in situations where those partners perform services for the other Newfirm or where there are significant shared economic interests betwixt partners of more than than one Newfirm. If, for example, partners of Newfirm ane perform services in Newfirm two, such owners would be considered to be partners of both Newfirms for purposes of applying the independence rules.

APS Independence Rules for Persons and Entities Other Than Covered Members

As stated above, the independence rules normally extend only to those persons and entities included in the definition of covered member. This usually would include only the "traditional house" (Newfirm in the example APS), those covered members who ain or are employed or leased by Newfirm, and entities controlled by ane or more than of such persons. Because of the shut alignment in many APSs betwixt persons and entities included in covered fellow member and other persons and entities, to ensure the protection of the public interest, PEEC believes it advisable to require restrictions in addition to those required in a traditional house construction. Those restrictions are divided into two groups:

1.Direct Superiors. Direct Superiors are divers to include those persons and so closely associated with a partner or managing director who is a covered member, that such persons can directly control the activities of such partner or managing director. For this purpose, a person who can directly control is the firsthand superior of the partner or manager who has the power to direct the activities of that person so as to exist able to directly or indirectly (e.grand. through some other entity over which the Direct Superior can exercise significant influence^fn 16) derive a benefit from that person's activities. Examples would be the person who has day-to-day responsibleness for the activities of the partner or director and is in a position to recommend promotions and compensation levels. This grouping of persons is, in the view of PEEC, so closely aligned through direct reporting relationships with such persons that their interests would seem to be inseparable. Consequently, persons considered Direct Superiors, and entities within the APS over which such persons tin exercise meaning influence ^fn 17 are subject to dominion 101 [ET department 101.01] and its interpretations and rulings in their entirety.

2.Indirect Superiors and Other PublicCo Entities. Indirect Superiors are those persons who are 1 or more than levels to a higher place persons included in Direct Superior. More often than not, this would first with persons in an organization construction to whom Direct Superiors report and go upwards the line from at that place. PEEC believes that sure restrictions must be placed on Indirect Superiors, just also believes that such persons are sufficiently removed from partners and managers who are covered persons to allow a somewhat less restrictive standard. Indirect Superiors are not continued with partners and managers who are covered members through direct reporting relationships; there always is a level in between. The PEEC too believes that, for purposes of the following, the definition of Indirect Superior likewise includes the firsthand family unit of the Indirect Superior.

PEEC carefully considered the risk that an Indirect Superior, through a Direct Superior, might attempt to influence the decisions made during the engagement for a Newfirm adjure client. PEEC believes that this take chances is reduced to a sufficiently low level past prohibiting certain relationships betwixt Indirect Superiors and Newfirm attest clients and by applying a materiality concept with respect to financial relationships. If the financial relationship is not material to the Indirect Superior, PEEC believes that he or she would non be sufficiently financially motivated to attempt such influence particularly with sufficient effort to overcome the presumed integrity, objectivity and strength of graphic symbol of individuals involved in the engagement.

Similar standards also are appropriate for Other PublicCo Entities. These entities are defined to include PublicCo and all entities consolidated in the PublicCo financial statements that are not discipline to rule 101 [ET department 101.01] and its interpretations and rulings in their entirety.

The rules for Indirect Superiors and Other PublicCo Entities are equally follows:

Indirect Superiors and Other PublicCo Entities may not have a relationship contemplated by interpretation 101-1.A [ET section 101.02] (e.thou., investments, loans, etc.) with an attest client of Newfirm that is material. In making the test for materiality for financial relationships of an Indirect Superior, all the financial relationships with an attest client held past such person should be aggregated and, to determine materiality, assessed in relation to the person's cyberspace worth. In making the materiality test for fiscal relationships of Other PublicCo Entities, all the financial relationships with an adjure client held by such entities should exist aggregated and, to determine materiality, assessed in relation to the consolidated financial statements of PublicCo. In addition, any Other PublicCo Entity over which an Indirect Superior has direct responsibility cannot have a financial relationship with an attest client that is material in relation to the Other PublicCo Entity'south financial statements.
Further, financial relationships of Indirect Superiors or Other PublicCo Entities should not let such persons or entities to exercise pregnant influence^fn eighteen over the attest client. In making the examination for significant influence, financial relationships of all Indirect Superiors and Other PublicCo Entities should be aggregated.
Neither Other PublicCo Entities nor any of their employees may be continued with an attest customer of Newfirm equally a promoter, underwriter, voting trustee, manager or officer.
Except as noted in C above, Indirect Superiors and Other PublicCo Entities may provide services to an attest client of Newfirm that would impair independence if performed by Newfirm. For example, trustee and nugget custodial services in the ordinary grade of concern by a bank subsidiary of PublicCo would be acceptable as long every bit the depository financial institution was non subject area to rule 101 [ET department 101.01] and its interpretations and rulings in their entirety.

Other Matters

1. An example, using the chart below, of the application of the concept of Direct and Indirect Superiors would be every bit follows: The main executive of the local office of the Professional person Services Subsidiary (PSS), where the partners of Newfirm are employed, would be a Direct Superior. The chief executive of PSS itself would be an Indirect Superior, and at that place may be Indirect Superiors in between such equally a regional main executive of all PSS offices inside a geographic area.

2. PEEC has concluded that Newfirm (and its partners and employees) may non perform an attest engagement for PublicCo or whatsoever of its subsidiaries or divisions.

iii. PEEC has concluded that independence would be considered to be impaired with respect to an adjure customer of Newfirm if such attest client holds an investment in PublicCo that is textile to the adjure customer or allows the attest client to practice significant influence^fn nineteen over PublicCo.

three. When making referrals of services betwixt Newfirm and any of the entities inside PublicCo, a member should consider the provisions of Interpretation 102-ii, Conflicts of Interest [ET section 102.03].

Alternative Practice Structure (APS) Model

[Effective February 28, 1999; Revised, Nov 2002, to reflect conforming changes necessary due to the revision of interpretation 101-i.]