Whenever we perform non-attest services on audits and reviews, we've learned that management must assign a person with suitable skill, knowledge and experience to review, accept and take responsibility for our work. The question is: "Does the responsible client person review all the non-attest services performed by an accountant or auditor?"
Here are some examples of a few common non-attest services that are the primary responsibility of management:
1. Tax return preparation.
2. Accounting and bookkeeping services.
3. Internal control services.
4. Drafting financial statements and footnotes.
5. Determining allowances for doubtful accounts, sales returns and allowances and warranties.
6. Assigning fair values to assets and liabilities for the reporting entity, VIEs and acquired entities.
7. Testing for impairment of long-lived assets, goodwill and intangibles.
8. Present value calculations for long-term receivables and payables.
9. Determining the liability for compensated absences and other accruals.
10. Determining compliance with debt covenants.
11. Determining the under or over-funded status of pensions and post-retirement plans.
12. Calculating deferred income taxes and applying FIN 48.
13. Preparing plans to overcome going concern problems.
14. Proposing adjusting journal entries.
There are many more but you get the idea. Whenever an auditor performs tasks that are management's responsibility, the auditor has performed non-attest services that can impair independence!
With the issuance of the AICPA's Conceptual Framework for Independence Standards and its discussion of the self-review threat, the public, peer reviewers and plaintiffs’ attorneys are keenly aware of the possibility a CPA may be reviewing or auditing his/her own work! To protect ourselves from the consequences of independence impairment, I suggest the following:
1. Specifically identify all non-attest services in the engagement and representation letters.
2. Make sure management has assigned a person or persons with suitable skill, knowledge or experience to oversee all non-attest services.
3. Include the name or names of persons assigned in management's representation letter.
4. Identify and discuss all non-attest services at the engagement team's planning meeting.
5. Obtain copies of all documentation of non-attest services with the signature of responsible client persons under a statement like this: "I have reviewed, accept and take responsibility for the information hereon."
6. Attach a signoff sheet to a draft of the financial statements and obtain the signatures of the CEO, CFO, chairman of the board and, if possible, all board members.
7. Obtain the signature of the CEO, CFO and at least one board member on management's representation letter (all board members if possible!).
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