Which Of The Following Nonattest Services May Be Performed By The Auditors Of A Public Company?

ET Department 100

Independence, Integrity, and Objectivity

ET Section 101
Independence

.01

Rule 101–Independence. A fellow member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

[As adopted January 12, 1988.]

Interpretations under Rule 101
–Independence

In performing an attest engagement, a fellow member should consult the rules of his or her land board of accountancy, his or her state CPA guild, the U.Southward. Securities and Exchange Commission (SEC) if the member's study will be filed with the SEC, the U.Southward. Department of Labor (DOL) if the member'due south written report will exist filed with the DOL, the AICPA SEC Practice Section (SECPS) if the member's firm is a fellow member of the SECPS, the General Accounting Role (GAO) if police, regulation, agreement, policy or contract requires the member's report to exist filed under GAO regulations, and whatever arrangement that bug or enforces standards of independence that would apply to the member'due south appointment. Such organizations may accept independence requirements or rulings that differ from (e.chiliad., may be more restrictive than) those of the AICPA.

.02

101-1—Interpretation of Rule 101. Independence shall exist considered to be impaired if:

During the menses of the professional person engagement ^fn * a covered member
1. Had or was committed to acquire whatsoever direct or cloth indirect fiscal interest in the customer
2. Was a trustee of any trust or executor or ambassador of whatever estate if such trust or manor had or was committed to acquire any straight or material indirect financial interest in the client and
  1. The covered member (individually or with others) had the authority to brand investment decisions for the trust or estate; or
  2. The trust or estate owned or was committed to acquire more than 10 percentage of the client's outstanding equity securities or other ownership interests; or
  3. The value of the trust's or manor'south holdings in the client exceeded x percent of the total assets of the trust or estate.
3. Had a joint closely held investment that was fabric to the covered member.
4. [Deleted]
During the period of the professional engagement, a partner or professional employee of the firm, his or her immediate family, or any group of such persons interim together owned more than 5 percentage of a customer'southward outstanding equity securities or other ownership interests.
During the period covered by the financial statements or during the catamenia of the professional engagement, a firm, or partner or professional employee of the firm was simultaneously associated with the client as a(n)
1. Director, officer, or employee, or in whatsoever capacity equivalent to that of a fellow member of direction;
2. Promoter, underwriter, or voting trustee; or
3. Trustee for whatever alimony or profit-sharing trust of the client.

Transition Period for Certain Business concern and Employment Relationships

A business or employment human relationship with a client that impairs independence nether estimation 101-1.C [ET section 101.02], and that existed as of Nov 2001, volition not exist accounted to impair independence provided such relationship was permitted nether rule 101 [ET department 101.01], and its interpretations and rulings as of November 2001, and the private severed that relationship on or before May 31, 2002.

Awarding of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated With a Client

An individual who was formerly (i) employed by a client or (ii) associated with a client every bit a(n) officer, director, promoter, underwriter, voting trustee, or trustee for a alimony or turn a profit-sharing trust of the client would impair his or her firm's independence if the individual—

Participated on the adjure date team or was an individual in a position to influence the adjure engagement for the customer when the adjure appointment covers any period that includes his or her former employment or association with that client; or
Was otherwise a covered member with respect to the client unless the individual first dissociates from the customer by—

Terminating any relationships with the client described in interpretation 101-one.C [ET section 101.02];
Disposing of whatsoever directly or cloth indirect fiscal involvement in the client;
[Deleted];
Ceasing to participate^fn 1 in all employee benefit plans sponsored by the client, unless the customer is legally required to allow the individual to participate in the plan (for example, COBRA) and the individual pays 100 percent of the price of participation on a electric current basis; and
Liquidating or transferring all vested benefits in the customer'southward divers benefit plans, defined contribution plans, deferred bounty plans, and other similar arrangements at the earliest date permitted under the plan. Nonetheless, liquidation or transfer is not required if a penalty^fn 2 meaning to the benefits is imposed upon liquidation or transfer.

Application of the Independence Rules to a Covered Member's Immediate Family

Except as stated in the post-obit paragraph, a covered member's immediate family is subject to rule 101 [ET department 101.01], and its interpretations and rulings.

The exceptions are that independence would not be considered to be dumb solely equally a result of the following:

An individual in a covered member's immediate family was employed past the client in a position other than a cardinal position.
In connexion with his or her employment, an private in the immediate family of one of the following covered members participated in a retirement, savings, compensation, or like programme that is a client, is sponsored by a client, or that invests in a customer (provided such plan is unremarkably offered to all employees in similar positions):
1. A partner or manager who provides ten or more than hours of non-attest services to the customer; or
2. Any partner in the part in which the atomic number 82 adjure engagement partner primarily practices in connexion with the attest engagement.

For purposes of determining materiality under rule 101 [ET section 101.01] the fiscal interests of the covered member and his or her immediate family should exist aggregated.

Application of the Independence Rules to Shut Relatives

Independence would exist considered to be impaired if—

An individual participating on the attest appointment squad has a close relative who had
1. A fundamental position with the client, or
2. A financial involvement in the client that
1. Was material to the shut relative and of which the private has knowledge; or
2. Enabled the close relative to practise significant influence over the customer.
An individual in a position to influence the attest engagement or any partner in the office in which the pb attest appointment partner primarily practices in connexion with the adjure engagement has a close relative who had
1. A key position with the client; or
2. A fiscal interest in the customer that
1. Was fabric to the close relative and of which the individual or partner has knowledge; and
2. Enabled the close relative to do significant influence over the client.

Grandfathered Employment Relationships

Employment relationships of a covered member's immediate family and close relatives with an existing attest customer that impair independence under this interpretation and that existed as of November 2001, will non be deemed to impair independence provided such relationships were permitted under preexisting requirements of rule 101 [ET section 101.01], and its interpretations and rulings.

Other Considerations

It is impossible to enumerate all circumstances in which the appearance of independence might exist questioned. Members should consider whether personal and business organisation relationships betwixt the member and the client or an private associated with the client would lead a reasonable person aware of all the relevant facts to conclude that there is an unacceptable threat to the member'due south and the firm'due south independence.

[Paragraph added past adoption of the Code of Professional Conduct on Jan 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, November 1991, constructive January 1, 1992, with earlier application encouraged, by the Professional Ethics Executive Commission. Revised, effective February 28, 1998, by the Professional Ethics Executive Committee. Revised, November 2001, constructive May 31, 2002, with before awarding encouraged, past the Professional Ethics Executive Committee. Revised, constructive July 31, 2002, past the Professional person Ideals Executive Committee. Revised, constructive March 31, 2003, by the Professional Ethics Executive Commission. Revised, constructive April 30, 2003, by the Professional Ethics Executive Committee.]

[.03]

[Formerly paragraph .02 renumbered by adoption of the Code of Professional Behave on Jan 12, 1988. Formerly interpretation 101-ane, renumbered as 101-4 and moved to paragraph .06, April 1992.]

.04

101-two—Employment or association with attest clients. A firm's independence volition be considered to be impaired with respect to a client if a partner or professional employee leaves the firm and is subsequently employed by or associated with that customer in a key position unless all the following conditions are met:

Amounts due to the onetime partner or professional person employee for his or her previous interest in the house and for unfunded, vested retirement benefits are not material to the house, and the underlying formula used to summate the payments remains stock-still during the payout period. Retirement benefits may besides be adapted for inflation and involvement may exist paid on amounts due.
The former partner or professional employee is not in a position to influence the accounting business firm'south operations or financial policies.
The old partner or professional employee does not participate or appear to participate in, and is not associated with the firm, whether or not compensated for such participation or clan, once employment or association with the client begins. An appearance of participation or association results from such actions as:
- The private provides consultation to the firm.
- The firm provides the individual with an part and related amenities (for instance, secretarial and telephone services).
- The individual'due south proper name is included in the house's office directory.
- The individual's name is included as a member of the business firm in other membership lists of business concern, professional, or civic organizations, unless the private is clearly designated as retired.
The ongoing attest engagement squad considers the appropriateness or necessity of modifying the engagement procedures to suit for the risk that, by virtue of the former partner or professional employee'due south prior knowledge of the audit programme, audit effectiveness could exist reduced.
The house assesses whether existing adjure date team members have the appropriate experience and stature to effectively bargain with the old partner or professional employee and his or her work, when that person will take significant interaction with the adjure engagement team.
The subsequent attest date is reviewed to determine whether the appointment squad members maintained the appropriate level of skepticism when evaluating the representations and piece of work of the former partner or professional person employee, when the person joins the customer in a key position within one twelvemonth of disassociating from the firm and has significant interaction with the attest engagement team. The review should be performed past a professional with appropriate stature, expertise, and objectivity and should exist tailored based on the position that the person assumed at the client, the position he or she held at the firm, the nature of the services he or she provided to the customer, and other relevant facts and circumstances. Appropriate deportment, equally deemed necessary, should be taken based on the results of the review.

Responsible members within the firm should implement procedures for compliance with the preceding conditions when business firm professionals are employed or associated with attest clients.

With respect to conditions iv, 5, and half-dozen, the procedures adopted will depend on several factors, including whether the former partner or professional employee served as a member of the engagement squad, the positions he or she held at the firm and has accepted at the client, the length of fourth dimension that has elapsed since the professional person left the house, and the circumstances of his or her departure.^fn three

Considering Employment or Association With the Client

When a member of the adjure appointment team or an private in a position to influence the adjure engagement intends to seek or discuss potential employment or association with an adjure client, or is in receipt of a specific offer of employment from an attest client, independence will be dumb with respect to the client unless the person promptly reports such consideration or offer to an appropriate person in the firm, and removes himself or herself from the engagement until the employment offering is rejected or employment is no longer beingness sought. When a covered member becomes aware that a member of the attest date team or an individual in a position to influence the attest engagement is considering employment or association with a customer, the covered fellow member should notify an appropriate person in the business firm.

The advisable person should consider what additional procedures may exist necessary to provide reasonable assurance that whatever work performed for the client by that person was performed with objectivity and integrity as required under rule 102 [ET department 102.01]. Boosted procedures, such as reperformance of work already done, will depend on the nature of the engagement and the individual involved.

[Replaces previous interpretation 101-2, Retired Partners and Business firm Independence, Baronial, 1989, constructive August 31, 1989. Revised, effective Dec 31, 1998, past the Professional Ethics Executive Committee. Revised, July 2002, to reverberate befitting changes necessary due to the revision of interpretation 101-ane. Revised, constructive Apr xxx, 2003, by the Professional Ideals Executive Commission.]

.05

101-iii—Performance of other services. A fellow member or his or her house ("member") who performs an attest appointment for a client may also perform other nonattest services ("other services") for that customer. Before a member performs other services for an attest client, he or she must evaluate the outcome of such services on his or her independence. In detail, care should be taken not to perform direction functions or make direction decisions for the adjure client, the responsibleness for which remains with the customer'southward board of directors and management.

Before performing other services, the member should establish an understanding with the client regarding the objectives of the appointment, the services to be performed, management's responsibilities, the fellow member's responsibilities, and the limitations of the engagement. It is preferable that this understanding be documented in an engagement letter. In add-on, the member should be satisfied that the customer is in a position to have an informed judgment on the results of the other services and that the client understands its responsibility to—

Designate a management-level individual or individuals to exist responsible for overseeing the services being provided.
Evaluate the adequacy of the services performed and any findings that result.
Brand management decisions, including accepting responsibleness for the results of the other services.
Constitute and maintain internal controls, including monitoring ongoing activities.

General Activities

The following are some general activities that would be considered to impair a member'due south independence:

Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of a client or having the potency to practise and then
Preparing source documents ^fn 4 or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll time records, and customer orders)
Having custody of client avails
Supervising client employees in the performance of their normal recurring activities
Determining which recommendations of the member should be implemented
Reporting to the lath of directors on behalf of management
Serving as a customer's stock transfer or escrow agent, registrar, general counsel or its equivalent

The examples in the following tabular array identify the consequence that performance of other services for an attest customer can have on a member's independence. These examples are non intended to be all-inclusive of the types of other services performed by members.

[Formerly paragraph .04, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, past the Professional person Ethics Executive Committee. Revised, effective May 31, 1999, by the Professional person Ethics Executive Committee. Revised, effective Apr thirty, 2000, by the Professional Ethics Executive Commission. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.06

101-four—Honorary directorships and trusteeships of not-for-turn a profit organization. Partners or professional employees of a firm (individual) may be asked to lend the prestige of their names to not-for-profit organizations that limit their activities to those of a charitable, religious, borough, or similar nature by beingness named as a director or a trustee. An individual who permits his or her name to exist used in this style would not exist considered to impair independence under rule 101 [ET department 101.01] provided his or her position is clearly honorary, and he or she cannot vote or otherwise participate in board or direction functions. If the individual is named in letterheads and externally circulated materials, he or she must be identified equally an honorary managing director or honorary trustee. [Formerly paragraph .05, renumbered by adoption of the Code of Professional person Conduct on January 12, 1988. Formerly interpretation 101-1. Revised, constructive June 30, 1990, past the Professional Ethics Executive Commission. Renumbered as interpretation 101-4 and moved from paragraph .03, April, 1992. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-i.]

.07

101-5—Loans from financial establishment clients and related terminology.

[Paragraphs deleted.]

.08

101-6—The outcome of actual or threatened litigation on independence. In some circumstances, independence may exist considered to be impaired equally a result of litigation or the expressed intention to commence litigation as discussed beneath.

Litigation between client and member

The relationship between the management of the client and a covered fellow member must be characterized by complete candor and full disclosure regarding all aspects of the client's business operations. In addition, at that place must be an absence of bias on the office of the covered fellow member and so that he or she tin can exercise professional person judgment on the financial reporting decisions made by the management. When the present direction of a customer visitor commences, or expresses an intention to commence, legal action confronting a covered member, the covered member and the customer's management may be placed in adversarial positions in which the direction'southward willingness to brand complete disclosures and the covered member's objectivity may be affected by cocky-interest.

For the reasons outlined higher up, independence may exist impaired whenever the covered member and the covered member's client or its management are in threatened or actual positions of material agin interests past reason of threatened or actual litigation. Because of the complexity and variety of the situations of adverse interests which may arise, however, it is hard to prescribe precise points at which independence may be impaired. The following criteria are offered as guidelines:

The offset of litigation by the nowadays management alleging deficiencies in audit work for the client would be considered to impair independence.
The starting time of litigation by the covered member against the present management alleging direction fraud or deceit would exist considered to impair independence.
An expressed intention by the present direction to commence litigation confronting the covered member alleging deficiencies in audit work for the client would exist considered to impair independence if the auditor concludes that it is probable that such a claim will exist filed.
Litigation not related to performance of an attest date for the customer (whether threatened or bodily) for an amount not textile to the covered member's firm ^fn 9 or to the client company ^fn 9 would non mostly be considered to affect the relationship in such a fashion as to impair independence. Such claims may ascend, for instance, out of disputes as to billings for services, results of taxation or management services advice or like matters.

Litigation by security holders

A covered member may as well go involved in litigation ("primary litigation") in which the covered fellow member and the customer or its direction are defendants. Such litigation may arise, for example, when ane or more stockholders bring a stockholders' derivative activeness or a and then-chosen "class activity" against the client or its management, its officers, directors, underwriters and covered members under the securities laws. Such main litigation in itself would not alter fundamental relationships between the client or its management and the covered member and therefore would not be deemed to have an adverse affect on independence. These situations should be examined advisedly, even so, since the potential for adverse interests may exist if cross-claims are filed against the covered fellow member alleging that the covered member is responsible for any deficiencies or if the covered fellow member alleges fraud or cant past the present management as a defense. In assessing the extent to which independence may exist dumb under these conditions, the covered fellow member should consider the following boosted guidelines:

The existence of cross-claims filed past the client, its management, or any of its directors to protect a right to legal redress in the consequence of a future adverse decision in the primary litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations) would not commonly affect the relationship between customer management and the covered member in such a way equally to impair independence, unless at that place exists a significant risk that the cross-merits will result in a settlement or judgment in an amount textile to the covered fellow member'southward firm ^fn 10 or to the client.
The assertion of cross-claims against the covered member past underwriters would not generally impair independence if no such claims are asserted by the client or the present management.
If any of the persons who file cantankerous-claims confronting the covered fellow member are besides officers or directors of other clients of the covered member, independence with respect to such other clients would not by and large be considered to be impaired.

Other third-political party litigation

Another type of third-party litigation against the covered member may be commenced by a lending institution, other creditor, security holder, or insurance company who alleges reliance on financial statements of the client with which the covered fellow member is associated as a basis for extending credit or insurance coverage to the customer. In some instances, an insurance company may commence litigation (under subrogation rights) against the covered fellow member in the name of the client to recover losses reimbursed to the customer. These types of litigation would not normally affect independence with respect to a client who is either not the plaintiff or is merely the nominal plaintiff, since the relationship between the covered member and client management would not be affected. They should be examined carefully, all the same, since the potential for adverse interests may exist if the covered member alleges, in his defense, fraud, or deceit by the nowadays direction.

If the existent party in interest in the litigation (east.g., the insurance company) is also a customer of the covered member ("the plaintiff client"), independence with respect to the plaintiff client may exist dumb if the litigation involves a pregnant run a risk of a settlement or judgment in an amount which would be material to the covered member'due south firm ^fn 11 or to the plaintiff client.

Effects of impairment of independence

If the covered member believes that the circumstances would atomic number 82 a reasonable person having knowledge of the facts to conclude that the bodily or intended litigation poses an unacceptable threat to independence, the covered member should either ( a) disengage himself or herself, or (b) disclaim an opinion because of lack of independence. Such disengagement may take the form of resignation or cessation of whatsoever adjure engagement so in progress pending resolution of the result between the parties.

Termination of impairment

The weather condition giving rise to a lack of independence are generally eliminated when a final resolution is reached and the matters at issue no longer affect the relationship between the covered member and client. The covered member should carefully review the weather of such resolution to make up one's mind that all impairments to the covered member's objectivity have been removed.

[Formerly paragraph .07, renumbered past adoption of the Lawmaking of Professional person Conduct on January 12, 1988. Revised, constructive June 30, 1990, by the Professional Ideals Executive Commission. Revised, effective September thirty, 1995, by the Professional Ideals Executive Committee, past deletion of subhead and paragraph and reissuance as ethics ruling No. 100, Actions Permitted When Independence is Impaired, under dominion 101. Revised, July 2002, to reflect befitting changes necessary due to the revision of interpretation 101-1.]

[.09]

[101-7]—[Deleted] [Formerly paragraph .08, renumbered by adoption of the Code of Professional Deport on Jan 12, 1988.]

.10

101-eight—Effect on independence of fiscal interests in nonclients having investor or investee relationships with a covered member's client.

Introduction

Fiscal interests in nonclients that are related in various means to a client may impair independence. Situations in which the nonclient investor is a partnership are covered in other rulings [ET department 191.138–.139, .158–.159, and .162–.163].

Terminology

The following specifically identified terms are used in this interpretation as indicated:

Client. The term client ways the person or entity with whose financial statements a covered member is associated.
Significant Influence. The term significant influence is as defined in Bookkeeping Principles Board (APB) Stance 18 [Ac I82].
Investor. The term investor means (a) a parent, (b) a general partner, or (c) a natural person or corporation that has the ability to practice pregnant influence.
Investee. The term investee means (a) a subsidiary or (b) an entity over which an investor has the power to practice pregnant influence.

Estimation

Where a nonclient investee is material to a client investor, any direct or material indirect fiscal interest of a covered member in the nonclient investee would be considered to impair independence with respect to the client investor. If the nonclient investee is immaterial to the client investor, a covered member'southward material investment in the nonclient investee would cause an harm of independence.

Where a customer investee is material to nonclient investor, any straight or fabric indirect financial interest of a covered member in the nonclient investor would be considered to impair independence with respect to the client investee. If the client investee is immaterial to the nonclient investor, and if a covered member'due south fiscal involvement in the nonclient investor allows the covered member to exercise significant influence over the deportment of the nonclient investor, independence would be considered to be dumb.

Other relationships, such equally those involving blood brother-sister common command or client-nonclient joint ventures, may bear on the appearance of independence. The covered member should brand a reasonable inquiry to determine whether such relationships exist, and if they do, careful consideration should exist given to whether the fiscal interests in question would atomic number 82 a reasonable observer to conclude that the specified relationships pose an unacceptable threat to independence.

In full general, in brother-sis mutual command situations, an immaterial financial interest of a covered member in the nonclient investee would not impair independence with respect to the client investee, provided the covered member could non exercise significant influence over the nonclient investor. Yet, if a covered member's financial interest in a nonclient investee is textile, the covered member could be influenced by the nonclient investor, thereby impairing independence with respect to the client investee. In like manner, in a joint venture situation, an immaterial financial involvement of a covered member in the nonclient investor would not impair the independence of the covered member with respect to the client investor, provided that the covered fellow member could not do significant influence over the nonclient investor.

If a covered fellow member does non and could not reasonably exist expected to have noesis of the financial interests or relationship described in this estimation, independence would not be considered to exist impaired nether this estimation.

[Revised, Dec 31, 1983, by the Professional person Ethics Executive Committee. Formerly paragraph .09 renumbered by adoption of the Lawmaking of Professional Bear on Jan 12, 1988. References inverse to reflect the issuance of the AICPA Code of Professional Conduct on January 12, 1988. Replaces previous interpretation 101-8, Consequence on Independence of Fiscal Interests in Nonclients Having Investor or Investee Relationships With a Member'due south Client, Apr 1991, effective Apr xxx, 1991. Revised, December 31, 1991, by the Professional Ethics Executive Commission. Revised, July 2002, to reflect befitting changes necessary due to the revision of interpretation 101-1.]

[.11]

[101-9]—[Deleted]

.12

101-x—The result on independence of relationships with entities included in the governmental financial statements. ^fn 12 For purposes of this Estimation, a financial reporting entity's basic financial statements, issued in conformity with generally accustomed accounting principles in the U.s.a. of America, include the government-wide fiscal statements (consisting of the entity's governmental activities, business-type activities, and discretely presented component units), the fund financial statements (consisting of major funds, nonmajor governmental and enterprise funds, internal service funds, blended component units, and fiduciary funds) and other entities disclosed in the notes to the basic financial statements. Entities that should exist disclosed in the notes to the basic financial statements include, but are not express to, related organizations, joint ventures, jointly governed organizations, and component units of some other government with characteristics of a joint venture or jointly governed organization.

Auditor of Financial Reporting Entity

A covered member issuing a report on the basic fiscal statements of the fiscal reporting entity must exist independent of the fiscal reporting entity, as defined in paragraph ane of this Interpretation. However, independence is non required with respect to any major or nonmajor fund, internal service fund, fiduciary fund, or component unit or other entities disclosed in the financial statements, where the principal auditor explicitly states reliance on other auditors reports thereon. In addition, independence is not required with respect to an entity disclosed in the notes to the bones fiscal statements, if the financial reporting entity is not financially accountable for the organisation and the required disclosure does non include financial information. For example, a disclosure limited to the fiscal reporting entity's ability to appoint the governing board members would not require a member to exist contained of that organization.

All the same, the covered member and his or her immediate family should non hold a fundamental position with a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or other entity that should be disclosed in the notes to the basic financial statements.

Auditor of a Major Fund, Nonmajor Fund, Internal Service Fund, Fiduciary Fund, or Component Unit of measurement of the Fiscal Reporting Entity or Other Entity That Should Be Disclosed in the Notes to the Bones Financial Statements

A covered member who is auditing the fiscal statements of a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or an entity that should be disclosed in the notes to the bones financial statements of the financial reporting entity, but is non auditing the master government, should be independent with respect to those fiscal statements that the covered member is reporting upon. The covered member is not required to be contained of the primary government or other funds or component units of the reporting entity or entities that should exist disclosed in the notes to the bones financial statements. However, the covered member and his or her immediate family unit should not hold a key position within the main government. For purposes of this Interpretation, a covered member and firsthand family fellow member would not be considered employed by the main government if the exceptions provided for in ET section 92.03 are met. ^{[fns 13–14]}

[Formerly paragraph .11, renumbered by adoption of the Code of Professional Deport on January 12, 1988. References changed to reflect the issuance of the AICPA Code of Professional Bear on January 12, 1988. Replaces previous interpretation 101-10, The Effect on Independence of Relationships Proscribed past Rule 101 and its Interpretations With Nonclient Entities Included With a Member's Client in the Financial Statements of a Governmental Reporting Entity, April 1991, effective April 30, 1991. Replaces previous interpretation 101-x, The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements, January 1996, effective January 31, 1996. Revised, July 2002, to reflect befitting changes necessary due to the revision of estimation 101-1. Revised, effective March 31, 2003, by the Professional person Ideals Executive Commission.]

.13

101-11—Modified application of dominion 101 for certain engagements to upshot restricted-use reports under the Statements on Standards for Attestation Engagements

Rule 101: Independence [ET section 101.01], and its interpretations and rulings utilize to all attest engagements. However, for purposes of performing engagements to issue reports under the Statements on Standards for Attestation Engagements (SSAEs) that are restricted to identified parties, only the following covered members, and their firsthand families, are required to exist contained with respect to the responsible party ^{fn 15} in accordance with dominion 101 [ET section 101.01]:

Individuals participating on the attest appointment team;
Individuals who directly supervise or manage the adjure engagement partner; and
Individuals who consult with the adjure engagement squad regarding technical or industry-related issues specific to the attest engagement.

In addition, independence would be considered to be impaired if the firm had a financial human relationship covered by interpretation 101-1.A [ET section 101.02] with the responsible party that was material to the firm.

In cases where the firm provides not-adjure services to the responsible political party that are proscribed under interpretation 101-3 [ET section 101.05] and that do not directly relate to the field of study matter of the adjure engagement, independence would non exist considered to be impaired.

In circumstances where the individual or entity that engages the house is non the responsible party or associated with the responsible party, individuals on the adjure engagement squad need not be independent of the individual or entity, but should consider their responsibilities under interpretation 102-2 [ET section 102.03] with regard to any relationships that may exist with the individual or entity that engages them to perform these services.

This interpretation does not apply to an engagement performed under the Statements on Auditing Standards or Statements on Standards for Accounting and Review Services, or to an examination or review engagement performed under the Statements on Standards for Attestation Engagements.

[Replaces previous interpretation 101-eleven, Independence and Attest Engagements, Jan 1996, effective January 31, 1996. Revised, constructive November 30, 2001, by the Professional Ideals Executive Committee.]

.14

101-12—Independence and cooperative arrangements with clients. Independence will be considered to be impaired if, during the period of a professional engagement, a member or his or her house had any cooperative organization with the client that was fabric to the member'south firm or to the customer.

Cooperative Organization—A cooperative arrangement exists when a fellow member'southward firm and a customer jointly participate in a business organisation activeness. The following are examples, which are non all inclusive, of cooperative arrangements:

Prime/subcontractor arrangements to provide services or products to a third party
Articulation ventures to develop or market products or services
Arrangements to combine i or more services or products of the house with one or more services or products of the client and market place the parcel with references to both parties
Distribution or marketing arrangements under which the house acts every bit a distributor or marketer of the client's products or services, or the client acts as the distributor or marketer of the products or services of the firm

Nevertheless, joint participation with a client in a business activity does not commonly constitute a cooperative arrangement when all the following weather condition are present:

The participation of the firm and the participation of the client are governed by dissever agreements, arrangements, or understandings.
The business firm assumes no responsibility for the activities or results of the client, and vice versa.
Neither party has the authorisation to act as the representative or agent of the other political party.

In addition, the fellow member's firm should consider the requirements of rule 302 [ET section 302.01] and rule 503 [ET section 503.01].

[Effective November xxx, 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.fifteen

101-13—Extended audit services. A member or his or her firm ("member") may be asked by a customer, for which the member performs an attest date, to perform extended audit services. These services may include help in the performance of the customer'due south internal inspect activities and/or an extension of the member's audit service beyond the requirements of generally accepted auditing standards (hereinafter referred to as "extended inspect services").

A member's operation of extended audit services would non be considered to impair independence with respect to a client for which the member likewise performs an attest engagement, provided that the member or his or her firm is not an employee of the client or does non act or appear to act in a chapters equivalent to a member of client management .

The responsibilities of the customer, including its board of directors, inspect committee, and management, and the responsibilities of the fellow member, as described below, should be understood by both the member and the client. It is preferable that this agreement be documented in an appointment letter that indicates that the member may not perform direction functions or make management decisions.

A fellow member should be satisfied that the client understands its responsibility for establishing and maintaining internal control and directing the internal audit function, if whatever. Equally part of its responsibility to constitute and maintain internal control, management monitors internal control to assess the quality of its performance over time. Monitoring can be accomplished through ongoing activities, separate evaluations or a combination of both.

Ongoing monitoring activities are the procedures designed to assess the quality of internal control performance over time and that are congenital into the normal recurring activities of an entity and include regular management and supervisory activities, comparisons, reconciliations and other routine actions. Carve up evaluations focus on the continued effectiveness of a customer'due south internal control. A member's independence would non be impaired by the performance of separate evaluations of the effectiveness of a client'south internal control, including separate evaluations of the client'south ongoing monitoring activities.

The member should empathise that, with respect to the internal audit function, the client is responsible for—

Designating a competent individual or individuals, preferably within senior management, to exist responsible for the internal audit function
Determining the scope, risk and frequency of internal inspect activities, including those to be performed by the member providing extended audit services
Evaluating the findings and results arising from the internal audit activities, including those performed past the member providing extended audit services
Evaluating the capability of the inspect procedures performed and the findings resulting from the operation of those procedures by, among other things, obtaining reports from the member

The member should exist satisfied that the board of directors and/or audit committee is informed of roles and responsibilities of both client management and the member with respect to the engagement to provide extended audit services equally a footing for the board of directors and/or inspect committee to plant guidelines for both management and the member to follow in carrying out these responsibilities and monitoring how well the respective responsibilities have been met.

The member should be responsible for performing the inspect procedures in accordance with the terms of the engagement and reporting thereon. The day-to-twenty-four hours operation of the audit 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 capability of the inspect procedures performed and the findings resulting from the performance of those procedures. This written report may include recommendations for improvements in systems, processes, and procedures. The fellow member may assist the private 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 whatever responsibilities that are required, equally described above, to exist performed by the private responsible for the internal audit function.

Performing 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 fiscal statements, such every bit confirming of accounts receivable and analyzing fluctuations in account balances, would non impair the independence even if the extent of such testing exceeds that required by mostly accepted auditing standards.

The following are examples of activities that, if performed as office of an extended audit service, would be considered to impair independence:

Performing ongoing monitoring activities or control activities (for example, reviewing loan originations every bit role of the customer's approving process or reviewing customer credit data as role of the client's sales authorization procedure) that affect the execution of transactions or ensure that transactions are properly executed, accounted for, or both, and performing routine activities in connectedness with the client'southward operating or product processes that are equivalent to those of an ongoing compliance or quality control office
Determining which, if whatsoever, 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
Authorizing, executing, or consummating transactions or otherwise exercising authority on behalf of the client
Preparing source documents on transactions
Having custody of assets
Approving or being responsible for the overall internal audit work plan including the determination of the internal inspect risk and telescopic, project priorities and frequency of operation of audit procedures
Being continued with the customer as an employee or in any capacity equivalent to a member of client management (for example, being listed as an employee in customer directories or other client publications, permitting himself or herself to exist referred to by title or description every bit supervising or being in charge of the customer's internal audit part, or using the client'due south letterhead or internal correspondence forms in communications)

The foregoing list in non intended to be all inclusive.

[Effective August 31, 1996. Revised, effective September 30, 1999, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.16

101-xiv—The consequence of alternative practice structures on the applicability of independence rules. Because of changes in the manner in which members ^{fn #} are structuring their practices, the AICPA's professional ideals executive committee (PEEC) studied diverse alternatives to "traditional structures" to determine whether boosted independence requirements are necessary to ensure the protection of the public involvement.

In many "nontraditional structures," a substantial (the nonattest) portion of a member'due south do is conducted under public or private buying, and the adjure portion of the do is conducted through a separate business firm endemic and controlled past the fellow member. All such structures must comply with applicative laws, regulations, and Rule 505, Course of Organization and Proper noun [ET section 505.01]. In complying with laws, regulations, and dominion 505 [ET section 505.01], many elements of quality control are required to ensure that the public interest is fairly protected. For instance, all services performed by members and persons over whom they have control must comply with standards promulgated by AICPA Council-designated bodies, and, for all other firms providing attest services, enrollment is required in an AICPA-approved practice-monitoring programme. Finally, and importantly, the members are responsible, financially and otherwise, for all the adjure work performed. Considering the extent of such measures, PEEC believes that the additional independence rules set forth in this interpretation are sufficient to ensure that attest services can exist performed with objectivity and, therefore, the boosted rules satisfactorily protect the public interest.

Rule 505 [ET section 505.01] and the post-obit independence rules for an alternative exercise structure (APS) are intended to be conceptual and applicative to all structures where the "traditional business firm" engaged in attest services is closely aligned with another organization, public or private, that performs other professional services. The following paragraph and the chart beneath provide an case of a structure in apply at the time this interpretation was developed. Many of the references in this interpretation are to the case. PEEC intends that the concepts expressed herein be applied, in spirit and in substance, to variations of the example construction as they develop.

The example APS in this interpretation is one where an existing CPA practice ("Oldfirm") is sold by its owners to another (mayhap public) entity ("PublicCo"). PublicCo has subsidiaries or divisions such as a banking company, insurance visitor or broker-dealer, and it besides has ane or more than professional service subsidiaries or divisions that offer to clients nonattest professional services (east.g., tax, personal financial planning, and management consulting). The owners and employees of Oldfirm become employees of 1 of PublicCo's subsidiaries or divisions and may provide those nonattest services. In add-on, the owners of Oldfirm form a new CPA firm ("Newfirm") to provide adjure services. CPAs, including the former owners of Oldfirm, own a majority of Newfirm (as to vote and financial interests). Attest services are performed by Newfirm and are supervised by its owners. The system between Newfirm and PublicCo (or one of its subsidiaries or divisions) includes the lease of employees, office space and equipment; the functioning of back-office functions such as billing and collections; and advertising. Newfirm pays a negotiated corporeality for these services.

APS Independence Rules for Covered Members

The term covered member in an APS includes both employed and leased individuals. The firm in such definition would be Newfirm in the example APS. All covered members, including the firm, are subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety. For example, no covered member may have, among other things, a direct fiscal interest in or a loan to or from an adjure client of Newfirm.

Partners of one Newfirm generally would not be considered partners of another Newfirm except in situations where those partners perform services for the other Newfirm or where there are pregnant shared economic interests between partners of more than than one Newfirm. If, for example, partners of Newfirm 1 perform services in Newfirm 2, such owners would be considered to be partners of both Newfirms for purposes of applying the independence rules.

APS Independence Rules for Persons and Entities Other Than Covered Members

As stated higher up, the independence rules normally extend only to those persons and entities included in the definition of covered member. This usually would include only the "traditional firm" (Newfirm in the instance APS), those covered members who own or are employed or leased by Newfirm, and entities controlled by i or more of such persons. Considering of the shut alignment in many APSs betwixt persons and entities included in covered member and other persons and entities, to ensure the protection of the public interest, PEEC believes information technology advisable to require restrictions in addition to those required in a traditional firm structure. Those restrictions are divided into ii groups:

1.Direct Superiors. Direct Superiors are divers to include those persons so closely associated with a partner or director who is a covered member, that such persons can directly control the activities of such partner or manager. For this purpose, a person who can straight command is the immediate superior of the partner or managing director who has the power to direct the activities of that person and then as to be able to direct or indirectly (e.g. through another entity over which the Straight Superior can exercise meaning influence^fn 16) derive a benefit from that person'south activities. Examples would be the person who has mean solar day-to-twenty-four hours responsibleness for the activities of the partner or director and is in a position to recommend promotions and compensation levels. This grouping of persons is, in the view of PEEC, so closely aligned through direct reporting relationships with such persons that their interests would seem to exist inseparable. Consequently, persons considered Straight Superiors, and entities within the APS over which such persons can practise significant influence ^fn 17 are subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

2.Indirect Superiors and Other PublicCo Entities. Indirect Superiors are those persons who are one or more levels higher up persons included in Direct Superior. Generally, this would start with persons in an organization structure to whom Direct Superiors report and get up the line from there. PEEC believes that certain restrictions must be placed on Indirect Superiors, just likewise believes that such persons are sufficiently removed from partners and managers who are covered persons to permit a somewhat less restrictive standard. Indirect Superiors are non connected with partners and managers who are covered members through direct reporting relationships; at that place always is a level in between. The PEEC also believes that, for purposes of the following, the definition of Indirect Superior also includes the immediate family unit of the Indirect Superior.

PEEC carefully considered the risk that an Indirect Superior, through a Direct Superior, might endeavour to influence the decisions made during the engagement for a Newfirm attest client. PEEC believes that this take chances is reduced to a sufficiently low level by prohibiting certain relationships between Indirect Superiors and Newfirm attest clients and by applying a materiality concept with respect to financial relationships. If the fiscal relationship is not material to the Indirect Superior, PEEC believes that he or she would non be sufficiently financially motivated to attempt such influence particularly with sufficient endeavor to overcome the presumed integrity, objectivity and force of character of individuals involved in the engagement.

Similar standards besides are advisable for Other PublicCo Entities. These entities are divers to include PublicCo and all entities consolidated in the PublicCo financial statements that are not subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

The rules for Indirect Superiors and Other PublicCo Entities are as follows:

Indirect Superiors and Other PublicCo Entities may not have a relationship contemplated past interpretation 101-i.A [ET section 101.02] (eastward.g., investments, loans, etc.) with an attest client of Newfirm that is material. In making the examination for materiality for financial relationships of an Indirect Superior, all the fiscal relationships with an attest customer held by such person should exist aggregated and, to make up one's mind materiality, assessed in relation to the person's net worth. In making the materiality test for financial relationships of Other PublicCo Entities, all the financial relationships with an attest client held by such entities should be aggregated and, to determine materiality, assessed in relation to the consolidated fiscal statements of PublicCo. In addition, any Other PublicCo Entity over which an Indirect Superior has straight responsibility cannot have a financial human relationship with an attest client that is material in relation to the Other PublicCo Entity's financial statements.
Further, fiscal relationships of Indirect Superiors or Other PublicCo Entities should not allow such persons or entities to exercise pregnant influence^fn 18 over the attest client. In making the exam for pregnant influence, financial relationships of all Indirect Superiors and Other PublicCo Entities should be aggregated.
Neither Other PublicCo Entities nor any of their employees may exist connected with an attest client of Newfirm as a promoter, underwriter, voting trustee, director or officeholder.
Except every bit noted in C above, Indirect Superiors and Other PublicCo Entities may provide services to an attest customer of Newfirm that would impair independence if performed by Newfirm. For example, trustee and nugget custodial services in the ordinary grade of business organisation by a bank subsidiary of PublicCo would be acceptable as long as the bank was not subject field to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

Other Matters

1. An case, using the chart below, of the application of the concept of Direct and Indirect Superiors would exist as follows: The master executive of the local role of the Professional Services Subsidiary (PSS), where the partners of Newfirm are employed, would be a Direct Superior. The main executive of PSS itself would be an Indirect Superior, and there may exist Indirect Superiors in between such as a regional chief executive of all PSS offices within a geographic area.

two. PEEC has concluded that Newfirm (and its partners and employees) may not perform an attest date for PublicCo or whatsoever of its subsidiaries or divisions.

3. PEEC has concluded that independence would be considered to be impaired with respect to an adjure client of Newfirm if such attest client holds an investment in PublicCo that is material to the adjure customer or allows the attest client to do significant influence^fn xix over PublicCo.

three. When making referrals of services between Newfirm and any of the entities inside PublicCo, a member should consider the provisions of Interpretation 102-two, Conflicts of Involvement [ET section 102.03].

Culling Do Structure (APS) Model

[Effective February 28, 1999; Revised, November 2002, to reverberate befitting changes necessary due to the revision of interpretation 101-1.]