Many AICPA members have expressed confusion about provisions covered under Interpretation 101-3, Performance of Nonattest Services, of the AICPA Code of Professional Conduct. For example, what nonattest services can a CPA perform for an attest client? What are the requirements involving management responsibilities to oversee the project? This quiz is based on those and other frequently asked questions (FAQs) found on the Institute’s Professional Ethics Division’s website.
When in doubt, refer to the section titled “Specific Examples of Nonattest Services” in ET section 101, Independence, for highlights of the impact on independence of performance of nonattest services. Questions about the Code also can be directed to the Professional Ethics Division at email@example.com or by calling the AICPA’s hotline for guidance.
To access the Ethics Hotline, dial 888-777-7077, menu option #5, followed by menu option #2. You will be asked to leave a message with your name, phone number and whether you are an AICPA member. The call will be returned regardless of your membership status. Anonymous callers must leave a phone number.
1. A sole practitioner performs a review engagement for a small company owned by two partners. The two partners are involved in the sale of the company’s products and neither has ever performed an accounting function. The client has an office manager who maintains the accounting records among his various responsibilities. The office manager is not a CPA and does not have a degree in accounting. The company’s remaining employees work in the production facilities. The sole practitioner performs certain tax and bookkeeping services permitted under Interpretation 101-3 for the client. Based on the fact that none of the client’s employees have an accounting background, can the sole practitioner perform the nonattest services and still remain in compliance with the general requirements of Interpretation 101-3?
2. Based on the fact pattern in Question 1, the sole practitioner calculates the deferred tax asset for the financial statements. Neither of the partners nor the office manager possesses the skills to calculate the deferred tax asset in the current year nor do they intend to learn how to perform such a calculation in future years. Is the sole practitioner’s independence impaired?
3. A CPA audits a small privately held company. The owners of the company are considering offering some key employees life insurance as part of their compensation. The owners inquired with the CPA on the effects such a plan may have on their financial statements. Would the CPA have to follow the general requirements of Interpretation 101-3 in providing the advice?
4. A CPA performs the audit of a small privately held company. The client has a bookkeeper, but no CPA on staff. During the audit, the CPA proposes adjustments to the financial statements. The journal entries include adjustments to the accumulated depreciation account, a reclassification of long-term assets and an adjustment based on sales cutoff testing. Would the proposal of these entries be considered a bookkeeping service subject to Interpretation 101-3?
5. A CPA performs a review engagement for a small company that has limited staff for its accounting and finance functions. The CPA receives copies of check disbursements, invoices and purchase orders, and books the journal entries accordingly for the client. The client has identified each cash disbursement, invoice and purchase order (for example, inventory, phone bill, payroll, misc., etc.). As the CPA is booking the entry, the CPA assigns the general ledger account number for the type of expense as identified by the client. Would this be considered determining or changing journal entries, account codings or classifications as prohibited by Interpretation 101-3?
6. Based on the fact pattern in Question 5, the CPA also receives a copy of the client’s bank statement and performs a bank reconciliation at the end of each month. The client reviews and approves the bank reconciliation. Would preparing the client’s bank reconciliation be considered “maintaining internal controls” for the client and impair independence?
7. In the questions above, must the CPA document the client’s review and approval of the bank reconciliation and the journal entries made?
8. A CPA performs an audit for a private closely held company. The two owners of the company are heavily involved in day-to-day operations and the accounting and finance functions. The CPA is asked to perform financial planning activities for the owners on a personal basis. Would these services be subject to Interpretation 101-3?
9. A CPA performs the audit of a company. The client deposits money into the CPA firm’s account. The account is totally separated from that of the firm’s money and other accounts. The client is a signer on the account and is able to make transfers and write checks from the account. The CPA only transfers money to vendors of the client when the client requests and formally approves. Would this service be permitted under Interpretation 101-3?
10. A review client of a CPA has a pile of invoices indicating the purchase date and purchase price of all of its fixed assets. The CPA compiles the information into an Excel spreadsheet creating a fixed assets schedule with formulas to calculate monthly depreciation on the assets. Would this service impair independence under Interpretation 101-3?
1. Yes. The general requirements for performing nonattest services under Interpretation 101-3 include a requirement that the client must designate an individual who possesses suitable skill, knowledge and/or experience, preferably within senior management, to oversee the service. While the client does not have anyone who is a CPA or anyone who has a formal accounting education, the owners of the company and/or the office manager may possess the suitable skills and knowledge to understand and oversee the nature of the services provided based on their working knowledge of the client’s operations, the industry and general business knowledge. Overseeing the service does not require the designated individual to supervise the member in the day-to-day rendering of the services. Rather, the individual should agree on the nature, objective and scope of the services; receive periodic progress reports when appropriate; make all significant judgments; evaluate the adequacy and results of the service; accept responsibility for the service results; and ensure that the resulting work product meets the agreed-upon specifications. The skill, knowledge and/or experience needed will vary depending on the nature of the nonattest service.
2. No. Interpretation 101-3 does not require that the client have a representative who can re-perform the nonattest services. In this instance, the client is not expected to possess the expertise of the member in terms of deferred tax assets. The client must, however, understand the basis for the deferred tax assets and the impact the deferred taxes have on the financial statements.
3. No. Providing such advice to the owners would generally be considered a routine activity that would not be considered a nonattest service that is subject to Interpretation 101-3. Routine activities involve providing advice or assistance to a client on an informal basis in the normal course of a client-CPA relationship. Routine activities typically are insignificant in terms of time incurred or resources expended and generally do not result in a specific project or engagement or in the member’s producing a formal report or other formal work product.
4. No. Proposing adjusting journal entries is considered to be a normal function of an audit and is not considered a nonattest service subject to Interpretation 101-3.
5. No. If the client sufficiently identifies the type of expense and the CPA books the entry to the general ledger account based on the expense identified by the client, independence has not been impaired.
6. No. For purposes of Interpretation 101-3, preparing the client’s bank reconciliation would not be considered maintaining internal controls and is permitted provided the client reviews and approves the bank reconciliation and meets the other requirements of Interpretation 101-3. The client, however, must still accept responsibility for designing, implementing and maintaining internal controls for the company.
7. No. Interpretation 101-3 states that, before a member begins performing nonattest services, he or she should document in writing his or her understanding with the client regarding the objective of the engagement, the services to be performed, the client’s acceptance of its responsibilities, the member’s responsibilities, and any limitations of the engagement. However, the member does not have to document who reviewed and approved the work performed, although the member may wish to provide documentation to provide evidence that such a review and approval took place.
8. No. The engagement to perform personal financial services for the owners would not be subject to Interpretation 101-3 since the owners are considered to be separate from the company, which is the attest client.
9. No. The member must not have custody of client funds.
10. No. Independence would not be impaired provided the client reviews and approves the amounts and calculations in the schedule and makes any necessary decisions (for example, useful lives of the assets), understands the nature of the service, and accepts responsibility for the schedule.
Jason Evans (firstname.lastname@example.org) is the senior technical manager of the Independence and Behavioral Standards (IND/BHS) Group of the Professional Ethics Division at the AICPA.
To comment on this article or to suggest an idea for another article, contact Loanna Overcash, senior editor, at email@example.com or 919- 402-4462.
This quiz is based on responses of the AICPA Professional Ethics Division staff to members’ inquiries. It is not a pronouncement of the Professional Ethics Executive Committee nor does it purport to set forth an official position of the AICPA. In addition, the questions and answers do not address the requirements of other regulatory bodies, such as state boards of accountancy and the SEC, whose positions may differ from those of the AICPA.
- Professional Ethics: AICPA’s Comprehensive Course (#732313)
- Real World Business Ethics for CPAs in Business & Industry: How Will You React? (#733593)
- Selected Topics in Professional Ethics (#158384)
For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.
Real-World Business Ethics: How Will You React? (#RWBE)
Go to aicpalearning.org to access courses. Click on “On-Site Training” then search by “Acronym Index.” If you need assistance, please contact a training representative at 800-634-6780 (option 1).
To access the Ethics Hotline, dial 888-777-7077, menu option #5, followed by menu option #2, or e-mail at firstname.lastname@example.org.
More from the JofA: