2. Professional Standards, ET sec.
101 par. .05). The PEEC believes these revisions will add
clarity to the nonattest services
guidance and enhance practitioners’ understanding of the
interpretation’s requirements. An
overview of the proposed revisions follows.
Establishing or maintaining internal control
One of the proposed revisions relates to a general activity that
would impair a member’s
independence: establishing or maintaining internal controls,
including performing ongoing
monitoring activities for a client. The PEEC recognized that an
inconsistency existed within the
current interpretation in that certain bookkeeping and other
nonattest services permitted under
the interpretation could be viewed as maintaining internal
controls for the client and, as such,
may appear to be prohibited by the general activity. For
example, under the proposed revisions to
the interpretation, a practitioner could prepare monthly bank
reconciliations for an audit client
without impairing independence provided the general
requirements of the interpretation are met,
3. such as ensuring that the client reviews and approves the bank
reconciliations and sufficiently
understands the services performed to oversee them. However,
preparing bank reconciliations for
a client is also considered to be maintaining an internal control
for the client. Because it was
never the PEEC’s intent to have the permitted activities listed in
the interpretation be considered
as impairing independence, the committee agreed to revise the
general activity to state accepting
responsibility for designing, implementing or maintaining
internal control. The PEEC believes
the phrase “designing and implementing” is not only clearer
than “establishing,” but is more
reflective of the language used in the professional standards (for
example, auditing standards)
and the Code of Ethics for Professional Accountants issued by
the International Ethics Standards
Boards for Accountants (IESBA Code). The addition of the
phrase “accepting responsibility for”
is intended to clarify that practitioners are able to assist their
clients by performing services to
design, implement, or maintain certain aspects of internal
control when management accepts
4. responsibility for such services and the other general
requirements of the interpretation are met.
Even if client management accepts responsibility for internal
control related services,
threats to independence (for example, self-review and
management participation threats) may
still exist. The general requirements of the interpretation serve
as safeguards to mitigate these
threats to an acceptable level and, therefore, are necessary in
order to maintain independence.
American Institute of CPAs Page 2
Specifically, in addition to accepting responsibility for the
services, management must make all
significant judgments and decisions in connection with the
engagement and must also designate
an individual who has the skill, knowledge, and or experience to
oversee the services and
evaluate the adequacy and results of the services performed.
While the general requirements are
generally sufficient to safeguard independence, there could be
situations in which the practitioner
may cross the line and impair independence due to the scope
5. and extent of internal control
services performed. For example, as discussed in the proposed
revisions to the interpretation, the
management participation threat created when a practitioner
performs ongoing monitoring
procedures is so significant that no safeguards could reduce the
threat to an acceptable level. In
addition, management is responsible for designing and
maintaining the company’s internal
control process and, therefore, should not rely on the
practitioner’s work as the primary basis for
its assertion regarding the effectiveness of its internal control
over financial reporting.
Accordingly, in cases in which the practitioner’s involvement in
the client’s internal control
process is so extensive that it results in management relying on
the practitioner’s work as the
primary basis for its assertion, no safeguards could reduce the
threats to independence to an
acceptable level, and independence would be impaired.
Practitioners should use judgment in
determining whether services performed would constitute
ongoing monitoring activities or
whether management appears to be relying on its work as the
6. basis for its assertion on internal
control effectiveness.
Defining management responsibilities
In addition to the proposed revision to the general activity, the
PEEC is proposing several other
clarifications to enhance the guidance in the interpretation. For
example, the PEEC believes the
term management responsibilities is clearer than management
functions and, therefore, proposes
certain revisions to reflect this change. The revised
interpretation also incorporates a description
of the term management responsibilities as well as additional
examples of management
responsibilities. The examples previously referred to as general
activities have also been merged
into the examples of management responsibilities because the
reason they impair independence
is because they are deemed to be responsibilities of
management. The proposed language is
consistent with the IESBA Code, and, therefore, it aligns the
AICPA Code closer with
international standards. The PEEC does not consider these
revisions to be more restrictive than
7. the existing independence requirements of Interpretation No.
101-3, and, therefore, such changes
are not expected to change current practice.
Performing ongoing monitoring versus separate evaluations
One proposed revision to the interpretation may be viewed as
more restrictive. Specifically, the
PEEC is proposing to include a requirement that members
evaluate the significance of the
management participation threat created by performing separate
evaluations on the client’s
internal control system. The PEEC believes that an
inconsistency in the interpretation exists by
prohibiting a member from performing ongoing monitoring
procedures for a client while
permitting separate evaluations because, depending on the scope
or extent of the controls being
tested and frequency of the separate evaluations, the member
may be performing services
equivalent to ongoing monitoring procedures. Accordingly, the
PEEC is proposing that the
significance of the threat created by performing separate
evaluations should be evaluated and
safeguards applied when necessary to eliminate the threat or
reduce it to an acceptable level.
8. Incorporating nonauthoritative guidance
American Institute of CPAs Page 3
Other proposed revisions to the interpretation involve
incorporating certain nonauthoritative
guidance contained in the Ethics Division’s answers to
Frequently Asked Questions:
Performance of Nonattest Services. One such revision relates to
clarifying the difference
between performing bookkeeping services and performing
activities that are considered to be
part of the attest engagement. For example, proposing adjusting
journal entries or making
suggestions about the form or content of the financial
statements for a client (subject to
management’s review and approval) as part of an audit
engagement would generally not be
considered a nonattest service subject to the requirements of
Interpretation No. 101-3. However,
the practitioner is expected to use judgment in determining
whether his or her involvement has
become so extensive that it would constitute performing a
9. separate service which would be
subject to the interpretation’s general requirements. A client’s
books and records should be
substantially complete and current in order to perform an audit
or review of those books and
records. If practitioners find themselves performing a service to
bring those books and records
current or complete, the service may be considered outside the
scope of the normal audit or
review process and, therefore, a bookkeeping service subject to
Interpretation No. 101-3.
To learn more about these and other proposed revisions to
Interpretation No. 101-3, view
the exposure draft. Comments on revised Interpretation No.
101-3 and other proposals contained
in the exposure draft are due by May 31, 2011.
http://www.aicpa.org/InterestAreas/ProfessionalEthics/Resource
s/Tools/DownloadableDocuments/NonattestServicesFAQs.doc
http://www.aicpa.org/InterestAreas/ProfessionalEthics/Resource
s/Tools/DownloadableDocuments/NonattestServicesFAQs.doc
http://www.aicpa.org/InterestAreas/ProfessionalEthics/Commun
ity/ExposureDrafts/DownloadableDocuments/2011February28O
mnibusProposalExpDraft.pdf
10. QUESTIONS
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
11. 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
12. 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?