Posted: April 24th, 2025

Ethics Test

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 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?

Notes:

I have attached an example of the assignment so you can have a guide for the responses and also an idea of what I need. I also attached a source you must use for the assignment. 

 

Ethics Test

1. Yes, the sole practitioner can perform the nonattest services and maintain compliance with Interpretation 101-3. As stated in the Interpretation 101-3 “a practitioner could prepare monthly bank reconciliations for an audit client without impairing independence provided the general requirements are met, such as ensuring that the client reviews and approves the bank reconciliations and sufficiently understands the services performed to oversee them”. One of the main concepts in accounting is maintaining independence. Once independence is gone, then it does not remain in compliance with Interpretation 101-3 of issuing nonattest services. Although, the two partners and the office manager have neither any CPA certification nor accounting experience, they must make significant judgements and decisions from the engagement and assigning an individual who “has the skill, knowledge, and/or experience to oversee the services” to evaluate the results of the services. A change in the language of implementing the phrase “accepting responsibility for” provided more clarity that yes practitioners are able to assist their clients by “performing services to design, implement, or maintain certain aspects of internal control when management accepts responsibility for such services”.

2. In this scenario, the practitioner’s independence would not be impaired, even if they are hired for future services completing the deferred tax asset. As stated in my readings from the Journal of Accountancy, “the interpretation does not apply to member who are performing only nonattest services such as tax, for which independence is unnecessary.” Although it is not necessary for the partner nor the office manager to understand how to perform the deferred tax asset calculations, they must be aware of the effect the deferred tax asset done by the practitioner has on its companies financial statements.

3. In this scenario, the CPA can provide advice to the owners of the company without being subject to nonattest services as per Interpretation 101-3. Providing advice is a relatively normal procedure during audits with respect to CPA-client relationships. As stated in
AICPA Plain English Guide to Independence, “You and your firm are not required to be independent to perform services that are not attest services (for example, financial statement preparation, tax preparation or advice or consulting services” as well as “Routine activities such as providing advice and responding to questions as part of the normal client-member relationship are exempt”. Given the fact that it is only advice being provided the CPA, they do not lose any sort of independence or conflicting any rules of the Interpretation 101-3.

4. In accordance to Interpretation 101-3 the proposal of the journal entries would not be considered a nonattaest service. As the proposing journal entries is normal practice in auditing. Since it is only a proposition by the CPA, it is still subject to the managements review and approval. In readings of
AICPA Plain English Guide to Independence, “Proposing adjusting entries to an attest client’s financial statements as part of the member’s audit, review, or compilation services is considered a normal part of those engagements and would not be considered performance of a nonattest services” as per the review and approval of the client.

5. With respect to this situation, this not considered determining or changing journal entries, account codings or classifications prohibited by Interpretation 101-3. Since the client is able to identify each of the cash disbursement, invoice and purchase orders the CPA is able to make the journal entries accordingly and assign the general ledger account for each type of expense, while maintaining their independence.

6. The CPA preparing the client’s bank reconciliation would not be considered maintaining controls nor impairing of independence with respect to Interpretation 101-3. As stated in my readings, “a practitioner could prepare monthly bank reconciliations for an audit client without impairing independence provided the general requirements of the interpretation are met, such as ensuring that the client reviews and approves the bank reconciliations and sufficiently understands the services performed to oversee them”. However, it must be clarified that prior to the revisions made it was considered maintaining internal controls if the CPA prepared the bank reconciliations for clients. It wasn’t until the Professional Ethics Executive Committee (PEEC) decided to make a revision. The revision states “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”. Therefore, the CPA is indeed allowed to prepare bank reconciliations for the client without it being considered maintaining of internal controls as long as the client reviews and approves the reconciliations completed.

7. The CPA is not required to document the client’s reviews and approval. Before the services can even begin there must be a formal agreement on the understanding of the nonattaest services engagement by the CPA. As per readings of
AICPA Plain English Guide to Independence, “prior to agreeing to perform any nonattest services for the attest client, the member must obtain the attest client’s agreement that the attest client will: assume all management responsibilities, oversee the service by designating an individual, preferably within senior management, who possesses suitable skill, knowledge, and experience, evaluate the adequacy and results of the services performed and accept responsibility for the results of the services”. It is crucial that the responsibilities of both parties are laid out in detail in order to avoid any kind of violation of independence for the CPA.

8. If the two owners of the company ask the CPA to perform financial activities on a personal basis, then these services would not be subject to Interpretation 101-3. As stated in the
AICPA Plain English Guide to Independence, “you and your firm are not required to be independent to perform services that are not attest services (for example, financial statement preparation, tax preparation or advice or consulting services, such as personal financial planning),” this clearly states the language of the CPA being able to perform personal activities.

 

9. With respect to the scenario being presented, the service of the CPA having access to client funds is not permitted under Interpretation 101-3. As stated in
AICPA Plain English Guide to Independence, “the AICPA rules also indicate that you and your firm may not do the following: Take custody of an attest client’s assets”. Even if the transfers are approved and requested by the client, the CPA firm is not allowed to have access to the client funds as per AICPA rules.

10. In this scenario there would be no independence impaired by the CPA in preparing a fixed asset schedule for the client under the Interpretation 101-3. As stated in answers above the key factor would be the client’s “subject to review and approval” of such documentation. An aspect in remaining independent here is that the client is fully aware and transparent with the work being done and taking on full responsibility and understanding the information of the work of the CPA. In my readings it states that “Under the new rules, members may not perform appraisal, valuation or actuarial services if they will have a material effect on the client’s financial statements 
and the service involves considerable subjectivity”, meaning that if the CPA starts to tinker with the schedule in any way that can cause significant effect, they would lose their independence. But in terms of the scenario stated, there is not independence being impaired.

References

· AICPA Plain English Guide to Independence

· AICPA Issues Nonattest Service Independence Rules

· Ethics Interpretation No. 101-3, Performance of Nonattest Services Proposed Revisions Clarify Independence Requirements

 

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American Institute of Certified Public Accountants, Inc.

New York, NY 10036-8775

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Ethics Interpretation No. 101-3, Performance of Nonattest Services

Proposed Revisions Clarify Independence Requirements

On February 28, 2011, the AICPA Professional Ethics Executive Committee (PEEC) issued an

omnibus exposure draft containing proposed revisions to Interpretation No. 101-3, “Performance

of nonattest services,” under Rule 101, Independence (AICPA, 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,

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

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 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 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

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.

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 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/Resources/Tools/DownloadableDocuments/NonattestServicesFAQs

http://www.aicpa.org/InterestAreas/ProfessionalEthics/Resources/Tools/DownloadableDocuments/NonattestServicesFAQs

http://www.aicpa.org/InterestAreas/ProfessionalEthics/Community/ExposureDrafts/DownloadableDocuments/2011February28OmnibusProposalExpDraft