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Unformatted text preview: managerial responsibilities. EXAMPLE
An auditor’s name is placed on the letterhead as “Honorary Director” of a not-for-profit charity who is a client. As long as
the relationship is purely honorary, the auditor is independent. q. Financial interests in, and other relationships with, entities that are related in various
ways (affiliates) to a financial statement attest client may impair independence. In
general, members should apply the independence provisions to the attest client’s
affiliates. There are many relationships typically considered to be the client’s
3) An entity that a client can control
An entity that controls the client
An entity in which a client has a direct financial interest that gives the client the
significant influence over such entity
4) An entity with a direct financial interest in the client
5) A sister entity of a client
6) A trustee deemed to control a client’s trust that is not an investment company
7) The sponsor of a single employer employee benefit plan client
8) Any union or participating employer that has significant influence over a multiple
or multiemployer employee benefit plan client
9) An employee benefit plan sponsored by either a client or an entity controlled by
10) An investment adviser, general partner, or trustee of an investment company
Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com 9 SU 2: Professional Responsibilities CONCEPT
Various member involvements with affiliates create an indirect interest in an attest client. Thus, some measure of
materiality is considered as with other indirect interests. What should be recognized is that significant mutual interests
between a member and client may cause an impairment of independence. EXAMPLE
A member could not be an investor or be on the board of directors of an attest client’s affiliate. r. An auditor of the basic financial statements of a governmental entity must be
independent of the entity.
1) However, a primary auditor need not be independent in the following
3) With respect to any fund, component unit, or disclosed entity, if the auditor
explicitly relies on reports by other auditors on such entity
b) With respect to a disclosed entity, if the reporting entity is not financially
accountable for it and the required disclosure does not include financial
Neither the member nor a member of his/her immediate family should occupy a
key position with the disclosed entity.
An auditor who is not auditing the primary government must be independent only
of the statements reported on.
a) Nevertheless, the covered member or a member of his/her immediate
family may not occupy a key position with the primary government.
CONCEPT Governmental financial statements often display combinations of reporting entities. The basic financial statements may
include a fund or entity audited by another auditor. Even if the auditor of the basic financial statements is not independent
of the fund, it is acceptable to report on the basic financial statements. EXAMPLE
The reporting entity is a local government. A state authority with a state-approved board provides temporary fiscal
oversight. Because it issues bonds and collects revenues on behalf of the local government, it is included in the reporting
entity. Moreover, the primary auditor must be independent of the authority although the reporting entity is not financially
accountable for it. The disclosures required for the authority consist in part of financial information. However, the primary
auditor need not be independent of the authority if (s)he relies on the report of another auditor. s. Alternative Practice Structures (APSs)
3) Independence rules for an alternative practice structure (APS) apply when the
“traditional CPA firm” is closely aligned with another organization that performs
other professional services.
In an APS, direct superiors of covered members are subject to the same
independence rules as covered members.
In an APS, indirect superiors (including a spouse or dependents) may not have
a material financial interest in an attest client of the new firm. They also should
not have significant influence over an attest client.
CONCEPT Today’s business environment has created many alternative structures for CPA firms. Regardless of the structure,
relationships that create concern about the influence on the attest function are not permitted. Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com 10 SU 2: Professional Responsibilities EXAMPLE
A CPA firm becomes a subsidiary of a non-CPA firm that provides nonattest services (tax, consulting, etc.). The owners
and employees of the CPA firm become employees of a subsidiary and may offer nonattest services. The original owners
create a new CPA firm to offer attest services within the structure. The relationship i...
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- Spring '13