Visit the AICPA's website and read section ET 100, paragraphs 0.6 to 0.26 of the Code of Professional Conduct and Bylaws. Prepare a memo to your professor providing: 1.) The definition of independence 2.) Types of threats a CPA might encounter 3.) The effectiveness of a sageguard 4.) The broad categories of safeguards 5.) one example of a safeguard suggested by this section of the Code. in your conclusion, discuss the value of understanding each of these rules

Denitions .06 Independence is dened as: a. Independence of mindThe state of mind that permits the performance of an attest service without being affected by inuences that compromise professional judgment, thereby allowing an individual to actwithintegrityandexerciseobjectivityandprofessionalskepticism. b. Independence in appearanceThe avoidance of circumstances that wouldcauseareasonableandinformedthirdparty,havingknowledge of all relevant information, including safeguards2 applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a rm or a member of the attest engagement team had been compromised. .07 Thisdenitionreectsthelongstandingprofessionalrequirementthat members who provide services to entities for which independence is required beindependentbothinfactandinappearance.3 Thestateofmindofamember who is independent "in fact" assists the member in performing an attest engagement in an objective manner. Accordingly, independence of mind reects the longstanding requirement that members be independent in fact. .08 This denition is used as part of the risk-based approach to analyze independence. Because the risk-based approach requires judgment, the denitionshouldnotbeinterpretedasanabsolute.Forexample,thephrase"without 1 In cases where threats to independence are not at an acceptable level, thereby requiring the applicationofsafeguards,thethreatsidentiedandthesafeguardsappliedtoeliminatethethreatsor reduce them to an acceptable level should be documented as required under "Other Considerations" of Interpretation 101-1, Interpretation of Rule 101 [ET section 101.02]. 2 The term safeguards is dened in paragraph .20. 3 ET section 55, Article IVObjectivity and Independence, states, "A member in public practice shouldbeindependentinfactandappearancewhenprovidingauditingandotherattestationservices." Conceptual Framework for AICPA Independence Standards 1629 being affected by inuences that compromise professional judgment" is not intended to convey that the member must be free of any and all inuences that mightcompromiseobjectivejudgment.Instead,adeterminationmustbemade about whether such inuences, if present, create an unacceptable risk that a member would not act with integrity and exercise objectivity and professional skepticism in the conduct of a particular engagement, or would be perceived as not being able to do so by a reasonable and informed third party that has knowledge of all relevant information. .09 ImpairFor purposes of this framework, impair means to effectively extinguish (independence). When a member's independence is impaired, the member is not independent. .10 ThreatsThreats to independence are circumstances that could impair independence. Whether independence is impaired depends on the nature of the threat, whether it would be reasonable to expect that the threat would compromise the member's professional judgment and, if so, the specic safeguards applied to reduce or eliminate the threat, and the effectiveness of those safeguards as described in paragraph .21. .11 Threats might not involve violations of existing interpretations or rulings. For example, the circumstance described in paragraph .18b of this framework is permissible in limited instances under current AICPA independence interpretations and rulings. .12 Many different circumstances (or combinations of circumstances) can create threats to independence. It is impossible to identify every situation that creates a threat. However, seven broad categories of threats should always be evaluated when threats to independence are being identied and assessed. They are self-review, advocacy, adverse interest, familiarity, undue inuence, nancial self-interest, and management participation threats The following paragraphs dene and provide examples, which are not all-inclusive, of each of thesethreatcategories.Someoftheseexamplesarethesubjectofindependence interpretations and rulings contained in the Code of Professional Conduct. .13 Self-review threatMembers reviewing as part of an attest engagement evidence that results from their own, or their rm's, nonattest work such as, preparing source documents used to generate the client's nancial statements .14 Advocacy threatActions promoting an attest client's interests or position.4 a. Promoting the client's securities as part of an initial public offering b. Representing a client in U.S. tax court .15 Adverse interest threatActions or interests between the member and the client that are in opposition, such as, commencing, or the expressed intention to commence, litigation by either the client or the member against the other. .16 Familiarity threatMembers having a close or longstanding relationship with an attest client or knowing individuals or entities (including by reputation) who performed nonattest services for the client. a. A member of the attest engagement team whose spouse is in a key position at the client, such as the client's chief executive ofcer 4 This threat does not arise from testifying as a fact witness or defending the results of a professional service that the member performed for the client. 1630 Independence, Integrity, and Objectivity b. A partner of the rm who has provided the client with attest services for a prolonged period c. Amemberwhoperformsinsufcientauditprocedureswhenreviewing the results of a nonattest service because the service was performed by the member's rm d. A member of the rm having recently been a director or ofcer of the client e. A member of the attest engagement team whose close friend is in a key position at the client .17 Undue inuence threatAttempts by an attest client's management orotherinterestedpartiestocoercethememberorexerciseexcessiveinuence over the member. a. A threat to replace the member or the member's rm over a disagreementwithclientmanagementontheapplicationofanaccountingprinciple b. Pressure from the client to reduce necessary audit procedures for the purpose of reducing audit fees c. Agiftfromtheclienttothememberthatisotherthanclearlyinsignificant to the member .18 Financial self-interest threatPotential benet to a member from a nancial interest in, or from some other nancial relationship with, an attest client. a. Havingadirectnancialinterestormaterialindirectnancialinterest in the client b. Having a loan from the client, from an ofcer or director of the client, or from an individual who owns 10 percent or more of the client's outstanding equity securities c. Excessive reliance on revenue from a single attest client d. Having a material joint venture or other material joint business arrangement with the client .19 Management participation threatTaking on the role of client managementorotherwiseperformingmanagementfunctionsonbehalfofanattest client. a. Serving as an ofcer or director of the client b. Establishing and maintaining internal controls for the client c. Hiring, supervising, or terminating the client's employees .20 SafeguardsControls that mitigate or eliminate threats to independence. Safeguards range from partial to complete prohibitions of the threatening circumstance to procedures that counteract the potential inuence of a threat. The nature and extent of the safeguards to be applied depend on many factors,includingthesizeofthermandwhethertheclientisapublicinterest Conceptual Framework for AICPA Independence Standards 1631 entity.5 To be effective, safeguards should eliminate the threat or reduce to an acceptable level the threat's potential to impair independence. .21 The effectiveness of a safeguard depends on many factors, including those listed here: a. The facts and circumstances specic to a particular situation b. The proper identication of threats c. Whether the safeguard is suitably designed to meet its objectives d. The party or parties that will be subject to the safeguard e. How the safeguard is applied f. The consistency with which the safeguard is applied g. Who applies the safeguard .22 There are three broad categories of safeguards. The relative importance of a safeguard depends on its appropriateness in light of the facts and circumstances. a. Safeguards created by the profession, legislation, or regulation b. Safeguards implemented by the attest client c. Safeguardsimplementedbytherm,includingpoliciesandprocedures to implement professional and regulatory requirements .23 Examples of various safeguards within each category are presented in the following paragraphs. The examples are not intended to be all-inclusive and, conversely, the examples of safeguards implemented by the attest client and within the rm's own systems and procedures may not all be present in each instance. In addition, threats may be sufciently mitigated through the application of other safeguards not specically identied herein. .24 Examples of safeguards created by the profession, legislation, or regulation a. Education and training requirements on independence and ethics rules for new professionals b. Continuing education requirements on independence and ethics c. Professional standards and monitoring and disciplinary processes d. External review of a rm's quality control system e. Legislation governing the independence requirements of the rm f. Competency and experience requirements for professional licensure .25 Examples of safeguards implemented by the attest client that would operate in combination with other safeguards a. The attest client has personnel with suitable skill, knowledge, and/or experiencewhomakemanagerialdecisionswithrespecttothedelivery of nonattest services by the member to the attest client 5 Solely for the purpose of this conceptual framework, the following entities are considered to be public interest entities: (1) entities subject to Securities and Exchange Commission reporting requirements; (2) employee benet and health and welfare plans subject to Employee Retirement Income Security Act audit requirements; (3) governmental retirement plans; (4) entities orprograms (including for-prot entities) subject to Single Audit Act OMB Circular A-133 requirements and entities or programs subject to similar program oversight; and (5) nancial institutions, credit unions, and insurance companies. These entities a republic interest entities because their audited nancial statements are directly relied upon by signicant numbers of stakeholders to make investment, credit, or similar decisions (for example, in the case of a publicly held company) or indirectly relied upon through regulatory oversight (for example, in the case of pension plans, banks, and insurance companies) and, therefore, the potential extent of harm to the public from an audit failure involving one of these entities would generally be signicant. 1632 Independence, Integrity, and Objectivity b. A tone at the top that emphasizes the attest client's commitment to fair nancial reporting c. Policies and procedures that are designed to achieve fair nancial reporting d. A governance structure, such as an active audit committee, that is designed to ensure appropriate decision making, oversight, and communications regarding a rm's services e. Policies that dictate the types of services that the entity can hire the audit rm to provide without causing the rm's independence to be considered impaired .26 Examples of safeguards implemented by the rm a. Firm leadership that stresses the importance of independence and the expectation that members of attest engagement teams will act in the public interest b. Policies and procedures that are designed to implement and monitor quality control in attest engagements c. Documented independence policies regarding the identication of threats to independence, the evaluation of the signicance of those threats, and the identication and application of safeguards that can eliminate the threats or reduce them to an acceptable level d. Internal policies and procedures that are designed to monitor compliance with the rm's independence policies and procedures e. Policies and procedures that are designed to identify interests or relationships between the rm or its partners and professional staff and attest clients f. The use of different partners and engagement teams that have separate reporting lines in the delivery of permitted nonattest services to an attest client, particularly when the separation between reporting lines is signicant g. Training on and timely communication of a rm's policies and procedures, and any changes to them, for all partners and professional staff h. Policies and procedures that are designed to monitor the rm or partner's reliance on revenue from a single client and, if necessary, cause action to be taken to address excessive reliance i. Designating someone from senior management as the person who is responsible for overseeing the adequate functioning of the rm's quality control system j. A means of informing partners and professional staff of attest clients and related entities from which they must be independent. A disciplinary mechanism that is designed to promote compliance with policies and procedures l. Policies and procedures that are designed to empower staff to communicate to senior members of the rm any engagement issues that concern them without fear of retribution m. Policiesandproceduresrelatingtoindependencecommunicationswith audit committees or others charged with client governance n. Discussing independence issues with the audit committee or others responsible for the client's governance