First read, Ethics Interpretation No. 101-3, Performance of Nonattest Services Proposed Revisions Clarify Independence Requirements. Then, answer all 10 questions. No outside sources
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?
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