Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Explain what Rule 103-1 is which is basically about Independence about Non-Attest Services. And just explain what the rule is and how to use it.
Explain what Rule 103-1 is which is basically about Independence about Non-Attest Services. And just explain what the rule is and how to use it. Two page summary .The attachment could help
05 101-3Nonattest Services Before a member or his or her firm ("member") performs nonattest services (for example, tax or consulting services) for an attest client, fn 14 the member should determine that the requirements described in this interpretation have been met. In cases where the requirements of this interpretation have not been met during the period of the professional engagement or the period covered by the financial statements, the member's independence would be impaired, except as noted in the following paragraph. A member's independence would not be impaired if the member performed nonattest services that would have impaired independence during the period covered by the financial statements, provided that a. b. the nonattest services were provided prior to the period of the professional engagement, the nonattest services related to periods prior to the period covered by the financial statements, and c. the financial statements for the period to which the nonattest services relate were audited by another firm (or in the case of a review engagement, reviewed or audited by another firm). Activities Related to Attest Services Performing attest services often involves communication between the member and client management regarding (a) the client's selection and application of accounting standards or policies and financial statement disclosure requirements; (b) the appropriateness of the client's methods used in determining the accounting and financial reporting; (c) adjusting journal entries that the member has prepared or proposed for client management consideration; and (d) the form or content of the financial statements. These communications are considered a normal part of the attest engagement and would not constitute performing a nonattest service subject to this interpretation. However, the member should exercise judgment in determining whether his or her involvement has become so extensive that it would constitute performing a separate service which would be subject to the interpretation's General Requirements for Performing Nonattest Services. Engagements Subject to Independence Rules of Certain Regulatory Bodies This interpretation requires compliance with independence regulations of authoritative regulatory bodies (such as the Securities and Exchange Commission [SEC], the Government Accountability Office [GAO], the Department of Labor [DOL], the Public Company Accounting Oversight Board [PCAOB], and state boards of accountancy) when a member performs nonattest services for an attest client and is required to be independent of the client under the regulations of the applicable regulatory body. Accordingly, failure to comply with the nonattest services provisions contained in the independence rules of the applicable regulatory body that are more restrictive than the provisions of this interpretation would constitute a violation of this interpretation. General Requirements for Performing Nonattest Services 1. 2. The member should not assume management responsibilities for the attest client. Before performing nonattest service, the member should determine that the client has agreed to: a. b. Assume all management responsibilities. c. d. Evaluate the adequacy and results of the services performed. Oversee the service, by designating an individual, preferably within senior management who possesses suitable skill, knowledge, and/or experience. The member should assess and be satisfied that such individual understands the services to be performed sufficiently to oversee them. However, the individual is not required to possess the expertise to perform or reperform the services. Accept responsibility for the results of the services To avoid assuming management responsibilities when providing nonattest services to the client, the member should be satisfied that management will be able to meet all these criteria, make an informed judgment on the results of the member's nonattest services, and be responsible for making the significant judgments and decisions that are the proper responsibility of management. In cases in which the client is unable or unwilling to assume these responsibilities (for example, the client cannot oversee the nonattest services provided or is unwilling to carry out such responsibilities due to lack of time or desire), the member's provision of these services would impair independence. 3. Before performing nonattest services, the member should establish and document in writing fn 15 his or her understanding with the client (board of directors, audit committee, or management, as appropriate in the circumstances) regarding the following: a. b. c. d. e. Objectives of the engagement Services to be performed Client's acceptance of its responsibilities Member's responsibilities Any limitations of the engagement The documentation requirement does not apply to nonattest services performed prior to the client becoming an attest client. fn 16 The preceding general requirements 2 - 3, do not apply to certain routine activities performed by the member, such as providing advice and responding to the client's questions as part of the client-member relationship. Management Responsibilities If a member were to assume a management responsibility for an attest client, the management participation threat created would be so significant that no safeguards could reduce the threat to an acceptable level. It is not possible to specify every activity that is a management responsibility. However, management responsibilities involve leading and directing an entity, including making significant decisions regarding the acquisition, deployment, and control of human, financial, physical, and intangible resources. Whether an activity is a management responsibility depends on the circumstances and requires the exercise of judgment. Examples of activities that would be considered a management responsibility and would, therefore, impair independence if performed for an attest client include setting policies or strategic direction for the client. directing or accepting responsibility for the actions of the client's employees except to the extent permitted when using internal auditors to provide assistance for services performed under auditing or attestation standards. authorizing, executing, or consummating a transaction, or otherwise exercising authority on behalf of a client or having the authority to do so. preparing source documents, fn 17 in electronic or other form evidencing the occurrence of a transaction. having custody of client assets. deciding which recommendations of the member or other third parties to implement or prioritize. reporting to those in charge of governance on behalf of management. serving as a client's stock transfer or escrow agent, registrar, general counsel, or its equivalent. accepting responsibility for the management of a client's project. accepting responsibility for the preparation and fair presentation of the client's financial statements in accordance with the applicable financial reporting framework. accepting responsibility for designing, implementing, or maintaining internal control. [fn18 ] performing ongoing evaluations of the client's internal control as part of its monitoring activities. Specific Examples of Nonattest Services The examples in the following table identify the effect that performance of certain nonattest services for an attest client can have on a member's independence. These examples presume that the general requirements in the previous section, "General Requirements for Performing Nonattest Services", have been met and are not intended to be all-inclusive of the types of nonattest services performed by members. Impact on Independence of Performance of Nonattest Services Type of Nonattest Service Bookkeeping Independence Would Not Be Impaired Independence Would Be Impaired Record transactions for which management has determined or approved the appropriate account classification, or post coded transactions to a client's general ledger. Determine or change journal entries, account codings or classification for transactions, or other accounting records without obtaining client approval. Prepare financial statements based on information in the trial balance. Post client-approved entries to a client's trial balance. Prepare a reconciliation (for example, bank, accounts receivable, and so forth) that identifies reconciling items for the client's evaluation. Using payroll time records provided and approved by the client, generate unsigned checks, or process client's payroll. Transmit client-approved payroll or other disbursement information to a financial institution provided the client has authorized the member to make the transmission and has made arrangements for the financial institution to limit the corresponding individual payments as to amount and payee. In addition, once transmitted, the client must authorize the financial institution to process the information. [fn 19 ] Accept responsibility to authorize payment of client funds, electronically or otherwise, except as specifically provided for with respect to electronic payroll tax payments. Accept responsibility to sign or cosign client checks, even if only in emergency situations. Maintain a client's bank account or otherwise have custody of a client's funds or make credit or banking decisions for the client. Benefit plan administration fn 20 Communicate summary plan data to plan trustee. Advise client management regarding the application or impact of provisions of the plan document. Process transactions (e.g., investment/benefit elections or increase/decrease contributions to the plan; data Prepare source documents. Make changes to source documents without client approval. Propose standard, adjusting, or correcting journal entries or other changes affecting the financial statements to the client provided the client reviews the entries and the member is satisfied that management understands the nature of the proposed entries and the impact the entries have on the financial statements. Non tax disbursement Authorize or approve transactions. Approve vendor invoices for payment Make policy decisions on behalf of client management. When dealing with plan participants, interpret the plan document on behalf of entry; participant confirmations; and processing of distributions and loans) initiated by plan participants through the member's electronic medium, such as an interactive voice response system or Internet connection or other media. Prepare account valuations for plan participants using data collected through the member's electronic or other media. Prepare and transmit participant statements to plan participants based on data collected through the member's electronic or other medium. Investment advisory or management Recommend the allocation of funds that a client should invest in various asset classes, depending upon the client's desired rate of return, risk tolerance, etc. Perform recordkeeping and reporting of client's portfolio balances including providing a comparative analysis of the client's investments to third-party benchmarks. Review the manner in which a client's portfolio is being managed by investment account managers, including determining whether the managers are (1) following the guidelines of the client's investment policy statement; (2) meeting the client's investment objectives; and (3) conforming to the client's stated investment styles. management without first obtaining management's concurrence. Make disbursements on behalf of the plan. Have custody of assets of a plan. Serve a plan as a fiduciary as defined by ERISA. Make investment decisions on behalf of client management or otherwise have discretionary authority over a client's investments. Execute a transaction to buy or sell a client's investment. Have custody of client assets, such as taking temporary possession of securities purchased by a client. Transmit a client's investment selection to a brokerdealer or equivalent provided the client has authorized the broker-dealer or equivalent to execute the transaction. Corporate finance consulting or advisory Assist in developing corporate strategies. Assist in identifying or introducing the client to possible sources of capital that meet the client's specifications or criteria. Assist in analyzing the effects of proposed transactions including providing advice to a client during negotiations with potential buyers, sellers, or capital sources. Assist in drafting an offering document or memorandum. Executive or employee search Commit the client to the terms of a transaction or consummate a transaction on behalf of the client. Act as a promoter, underwriter, broker-dealer, or guarantor of client securities, or distributor of private placement memoranda or offering documents. Participate in transaction negotiations in an advisory capacity. Maintain custody of client securities. Be named as a financial adviser in a client's private placement memoranda or offering documents. Solicit and perform screening of candidates and recommend qualified candidates to a client based on the client-approved criteria (e.g., required skills and experience). Recommend a position description or candidate specifications. Participate in employee hiring or compensation Commit the client to employee compensation or benefit arrangements. Hire or terminate client employees. discussions in an advisory capacity. Business risk consulting Recommend a plan for making improvements to a client's control processes and assist in implementing these improvements. Information systemsdesign, installation or integration Provide assistance in assessing the client's business risks and control processes. Make or approve business risk decisions. Present business risk considerations to the board or others on behalf of management. Install or integrate a client's financial information system that was not designed or developed by the member (for example, an off-the-shelf accounting package). Assist in setting up the client's chart of accounts and financial statement format with respect to the client's financial information system. Design, develop, install, or integrate a client's information system that is unrelated to the client's financial statements or accounting records. Provide training and instruction to client employees on an information and control system. Perform network maintenance, such as updating virus protection, applying routine updates and patches, or configuring user settings, consistent with management's request. Design or develop a client's financial information system. Make other than insignificant modifications to source code underlying a client's existing financial information system. Supervise client personnel in the daily operation of a client's information system. Operate a client's local area network (LAN) system. Tax Compliance Services Tax compliance services addressed by this interpretation are preparation of a tax return, fn 21 transmittal of a tax return and transmittal of any related tax payment to the taxing authority, signing and filing a tax return, and authorized representation of clients in administrative proceedings before a taxing authority. Preparing a tax return and transmitting the tax return and related tax payment to a taxing authority, in paper or electronic form, would not impair a member's independence provided the member does not have custody or control fn 22 over the client's funds and the individual designated by the client to oversee the tax services: Reviews and approves the tax return and related tax payment; and, If required for filing, signs the tax return prior to the member transmitting the return to the taxing authority. However, signing and filing a tax return on behalf of client management would impair independence, unless the member has the legal authority to do so and: a. The taxing authority has prescribed procedures in place for a client to permit a member to sign and file a tax return on behalf of the client (for example, Form 8879 or 8453), and such procedures meet, at the minimum, standards for electronic return originators and officers outlined in I.R.S. Form 8879; or b. An individual in client management who is authorized to sign and file the client's tax return provides the member with a signed statement that clearly identifies the return being filed and represents that: 1. 2. Such individual is authorized to sign and file the tax return; Such individual has reviewed the tax return, including accompanying schedules and statements, and it is true, correct and complete to the best of his or her knowledge and belief; and 3. Such individual authorizes the member or another named individual in the member's firm to sign and file the tax return on behalf of the client. Authorized representation of a client in administrative proceedings before a taxing authority would not impair a member's independence provided the member obtains client agreement prior to committing the client to a specific resolution with the taxing authority. However, representing a client in a court fn 23 to resolve a tax dispute would impair a member's independence. Transition Independence would not be impaired as a result of the more restrictive requirements of the tax compliance services provisions provided such services are pursuant to engagements commenced prior to February 28, 2007, and completed prior to January 1, 2008, and the member complied with all applicable independence interpretations and rulings in effect on February 28, 2007. Appraisal, Valuation, and Actuarial Services Independence would be impaired if a member performs an appraisal, valuation, or actuarial service for an attest client where the results of the service, individually or in the aggregate, would be material to the financial statements and the appraisal, valuation, or actuarial service involves a significant degree of subjectivity. Valuations performed in connection with, for example, employee stock ownership plans, business combinations, or appraisals of assets or liabilities generally involve a significant degree of subjectivity. Accordingly, if these services produce results that are material to the financial statements, independence would be impaired. An actuarial valuation of a client's pension or postemployment benefit liabilities generally produces reasonably consistent results because the valuation does not require a significant degree of subjectivity. Therefore, such services would not impair independence. In addition, appraisal, valuation, and actuarial services performed for nonfinancial statement purposes would not impair independence. fn 24 However, in performing such services, all other requirements of this interpretation should be met, including that all significant assumptions and matters of judgment are determined or approved by the client and the client is in a position to have an informed judgment on, and accepts responsibility for, the results of the service. Forensic Accounting Services For purposes of this interpretation, forensic accounting services fn 25 are nonattest services that involve the application of special skills in accounting, auditing, finance, quantitative methods and certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings and consist of: Litigation services; and Investigative services. Litigation services recognize the role of the member as an expert or consultant and consist of providing assistance for actual or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputes between parties. Litigation services consist of the following services: a. Expert witness services fn 26 are those litigation services where a member is engaged to render an opinion before a trier of fact as to the matter(s) in dispute based on the member's expertise, rather than his or her direct knowledge of the disputed facts or events. Expert witness services create the appearance that a member is advocating or promoting a client's position. fn 27 Accordingly, if a member conditionally or unconditionally agrees to provide expert witness testimony for a client, fn 28 independence would be considered to be impaired. However, independence would not be considered impaired if a member provides expert witness services for a large group of plaintiffs or defendants that includes one or more attest clients of the firm provided that at the outset of the engagement: 1) the member's attest clients constitute less than 20 percent of (i) the members of the group (ii) the voting interests of the group, and (iii) the claim; (2) no attest client within the group is designated as the "lead" plaintiff or defendant of the group; and (3) no attest client has the sole decision-making power to select or approve the expert witness. While testifying as a fact witness, fn 29 a member may be questioned by the trier of fact or counsel as to his or her opinions pertaining to matters within the member's area of expertise. Answering such questions would not impair the member's independence. b. Litigation consulting services are those litigation services where a member provides advice about the facts, issues, and strategy of a matter. The consultant does not testify as an expert witness before a trier of fact. The performance of litigation consulting services would not impair independence provided the member complies with the general requirements set forth under this interpretation. fn 30 However, if the member subsequently agrees to serve as an expert witness, independence would be considered to be impaired. c. Other services are those litigation services where a member serves as a trier of fact, special master, court-appointed expert, or arbitrator (including serving on an arbitration panel), in a matter involving a client. These other services create the appearance that the member is not independent. Accordingly, if a member serves in such a role, independence would be considered to be impaired. However, independence would not be considered impaired if a member serves as a mediator or any similar role in a matter involving a client provided the member is not making any decisions on behalf of the parties, but rather is acting as a facilitator by assisting the parties in reaching their own agreement. fn 31 Investigative services include all forensic services not involving actual or threatened litigation such as performing analyses or investigations that may require the same skills as used in litigation services. Such services would not impair independence provided the member complies with the general requirements set forth under this interpretation. Transition Independence would not be impaired as a result of the more restrictive requirements of the forensic accounting services provisions, provided such services are pursuant to engagements commenced prior to February 28, 2007, and the member complied with all applicable independence interpretations and rulings in existence on February 28, 2007. Internal Audit Assistance Services Internal audit services involve assisting the client in the performance of its internal audit activities, sometimes referred to as "internal audit outsourcing." In evaluating whether independence would be impaired with respect to an attest client, the nature of the service needs to be considered. Assisting the client in performing financial and operational fn 32 internal audit activities would impair independence unless the member takes appropriate steps to ensure that the client understands its responsibility for [fn 33]directing the internal audit function, including the management thereof. Accordingly, any outsourcing of the internal audit function to the member whereby the member in effect manages the internal audit activities of the client would impair independence. In addition to the general requirements of this interpretation, the member should ensure that client management: Designates an[fn 34] individual or individuals, who possess suitable skill, knowledge, and/or experience, preferably within senior management, to be responsible for the internal audit function; Determines the scope, risk, and frequency of internal audit activities, including those to be performed by the member providing internal audit assistance services; Evaluates the findings and results arising from the internal audit activities, including those performed by the member providing internal audit assistance services; and Evaluates the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures by, among other things, obtaining reports from the member. The member should also be satisfied that the client's board of directors, audit committee, or other governing body is informed about the member's and management's respective roles and responsibilities in connection with the engagement. Such information should provide the client's governing body a basis for developing guidelines for management and the member to follow in carrying out these responsibilities and monitoring how well the respective responsibilities have been met. The member is responsible for performing the internal audit procedures in accordance with the terms of the engagement and reporting thereon. The performance of such procedures should be directed, reviewed, and supervised by the member. The report should include information that allows the individual responsible for the internal audit function to evaluate the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures. This report may include recommendations for improvements in systems, processes, and procedures. The member may assist the individual responsible for the internal audit function in performing preliminary audit risk assessments, preparing audit plans, and recommending audit priorities. However, the member should not undertake any responsibilities that are required, as described above, to be performed by the individual responsible for the internal audit function. The following are examples of activities (in addition to those listed in the "General Activities" section of this interpretation) that, if performed as part of an internal audit assistance engagement, would impair independence: Performing ongoing monitoring activities or control activities (for example, reviewing loan originations as part of the client's approval process or reviewing customer credit information as part of the customer's sales authorization process) that affect the execution of transactions or ensure that transactions are properly executed, accounted for, or both, and performing routine activities in connection with the client's 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 audit function Approving or being responsible for the overall internal audit work plan including the determination of the internal audit risk and scope, project priorities, and frequency of performance of audit procedures Being connected with the client 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 function, or using the client's letterhead or internal correspondence forms in communications) The foregoing list is not intended to be all-inclusive. Services involving an extension of the procedures that are generally of the type considered to be extensions of the member's audit scope applied in the audit of the client's financial statements, such as confirming of accounts receivable and analyzing fluctuations in account balances, are not considered internal audit assistance services and would not impair independence even if the extent of such testing exceeds that required by generally accepted auditing standards. In addition, engagements performed under the attestation standards would not be considered internal audit assistance services and therefore would not impair independence. Transition Independence would not be impaired as a result of the more restrictive requirements of interpretation 101-3, provided the provision of any such nonattest services are pursuant to arrangements in existence on December 31, 2003, and are completed by December 31, 2004, and the member was in compliance with the preexisting requirements of this interpretation. [Formerly paragraph .04, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional 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 reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective December 31, 2003 (except for the documentation requirement, which takes effect for any new engagements that begin after December 31, 2004), with earlier application permitted, by the Professional Ethics Executive Committee. Revised, effective October 31, 2004, by the Professional Ethics Executive Committee. Revised, effective January 27, 2005, by the Professional Ethics Executive Committee. Revised, effective August 31, 2012, by the Professional Ethics Executive Committee.]Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started