Independence Requirements
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CPA Auditing and Attestation (AUD) › Independence Requirements
A firm is engaged to perform a GAO audit of a state agency. The agency asks the auditor to determine which adjusting entries should be recorded and to post them directly into the general ledger before year-end close, because the accounting staff is short-handed. What is the most appropriate safeguard for this independence threat?
Post the entries and then have the auditor perform a second review to mitigate self-review.
Post the entries only after the audit report is issued to avoid affecting the audit period.
Have management, not the auditor, determine and post entries; the auditor may propose entries but must ensure management reviews, approves, and records them.
Allow the auditor to post entries if they are supported by audit evidence and are reviewed by the engagement partner.
Explanation
The question tests the independence requirements under Government Auditing Standards (GAGAS), specifically the self-review threat arising from auditors performing non-audit services such as determining and posting adjusting journal entries, which are management responsibilities. The key facts are that the state agency is requesting the auditor to directly determine and post entries due to staffing shortages in a GAO audit context, creating a potential impairment to independence in both mind and appearance. Choice B aligns with GAGAS by ensuring that management retains responsibility for determining, reviewing, approving, and recording entries, while the auditor may only propose them, thereby mitigating the self-review threat without assuming management's role. Choice A is incorrect because allowing the auditor to post entries, even with partner review, still constitutes performing a management function and does not adequately address the self-review threat under GAGAS independence standards. Choices C and D are incorrect as posting entries followed by a second review or delaying until after the audit report issuance fails to prevent the auditor from undertaking management's responsibilities, violating GAGAS prohibitions on non-audit services that impair independence. A transferable professional judgment framework is to always evaluate non-audit services for threats to independence and implement safeguards that ensure management retains ultimate responsibility. When in doubt, auditors should consult GAGAS paragraphs on independence to determine if a service creates a significant threat that cannot be mitigated.
A CPA is performing a GAO audit of a county health department that receives federal grant funding. The audit manager’s spouse was hired midyear as the department’s controller and will oversee the preparation of the financial statements and respond to audit inquiries. Which factor indicates a threat to independence under GAO standards?
Independence is addressed by informing the federal grantor; no changes to the engagement team are needed.
Independence is only affected if the audit is an integrated audit under Public Company Accounting Oversight Board standards.
Independence is not affected because the spouse is not an elected official and does not sign the financial statements.
The spouse’s role is a key position with the audited entity, creating a familiarity threat that must be evaluated and likely impairs independence for the manager.
Explanation
The independence requirement tested is GAO's rule on close family members in key positions at the audited entity, which can create familiarity threats. The key facts are the audit manager's spouse being hired as controller midyear, overseeing financial statements and audit responses, directly impacting the audit. Choice A aligns with GAO standards by recognizing this as a familiarity threat requiring evaluation and potential safeguards like team changes. Choice B is incorrect because GAO considers spouses in key positions a threat even if not elected or signing statements, and Choice C is wrong as GAO applies to governmental audits, not just PCAOB integrated audits. Choice D is incorrect because informing the grantor does not address the threat under GAO's conceptual framework. A professional judgment framework is to identify relationships with audited entities and assess threats using GAO categories, applying safeguards or withdrawing if threats cannot be reduced to acceptable levels. This rule ensures independence in appearance and protects audit objectivity.
A firm is conducting a GAO audit of a county. During the engagement, the firm identifies a nonaudit service provided last year (cash-to-accrual conversion entries) but did not document its independence evaluation at that time. The current year audit is underway and the same service may be needed again. Based on the GAO guidelines, which response is required?
Document the independence evaluation and safeguards for the prior and current nonaudit services in the engagement documentation and address any impairment before continuing.
No documentation is required as long as the auditor is independent in fact.
Wait until report release to document independence so the file reflects the final conclusion.
Document the issue only in the management letter because it relates to internal controls.
Explanation
The independence requirement tested is GAO's documentation of independence evaluations for nonaudit services, including retroactive for prior periods. The key facts involve undocumented prior-year cash-to-accrual services, with potential repeat in the current year. Choice B aligns with GAO standards by requiring documentation of evaluations and safeguards for both periods before continuing. Choice A is incorrect because independence in fact requires documentation, and Choice C is wrong as it relates to independence, not controls. Choice D is incorrect since documentation must be timely. A decision rule is to document all nonaudit threats and resolutions contemporaneously. This framework ensures compliance and audit quality.
A CPA firm is performing a Government Auditing Standards (GAO) financial statement audit of a city’s annual financial report that will be submitted to a state oversight agency. During planning, the engagement partner learns the firm also provides ongoing bookkeeping assistance to the city, including posting journal entries and preparing trial balances that management routinely approves without review. Which action should the auditor take to maintain independence under GAO standards?
Continue both services because management’s approval of the entries is sufficient to eliminate any independence threat under GAO.
Discontinue the bookkeeping services (or modify them to a permissible level) and ensure management accepts responsibility and performs meaningful oversight before continuing the audit.
Resign from the audit engagement because providing bookkeeping services creates a self-review threat that is not permitted for an auditor under GAO.
Obtain the city council’s written consent to the nonattest services and proceed with both services because GAO allows nonaudit services with consent.
Explanation
The independence requirement tested here is the prohibition against auditors performing nonaudit services that create significant self-review threats, such as bookkeeping, under GAO standards. The key facts are that the firm provides ongoing bookkeeping, including posting journal entries and preparing trial balances, which management approves without review, potentially impairing independence for the financial statement audit. Choice C aligns with GAO standards by requiring discontinuation or modification of the bookkeeping services and ensuring management accepts responsibility with meaningful oversight to mitigate the self-review threat. Choice A is incorrect because management's mere approval without review does not eliminate the threat under GAO's conceptual framework, and Choice B is wrong as bookkeeping is permissible if safeguards like oversight are applied. Choice D is incorrect because GAO requires more than just consent; it mandates evaluation of threats and safeguards, including management's capability. A transferable framework is to always assess nonaudit services using GAO's threat categories—self-review, management participation—and apply safeguards like client oversight before proceeding. Professionals should document this evaluation to demonstrate compliance with independence in both fact and appearance.
A CPA is conducting a GAO audit of a small township. The township clerk asks the auditor to reconcile the bank accounts each month and investigate discrepancies because no one on staff has time. The clerk will sign off but does not understand the reconciliations. Which factor indicates a threat to independence under GAO standards?
Independence is only affected if the auditor also prepares the tax return.
The auditor would be performing a management function because management lacks the skill to oversee the service and accept responsibility.
The auditor would be performing a routine audit procedure earlier in the year, which is always permitted.
Independence is not affected because bank reconciliations are not part of the financial statements.
Explanation
The independence concept tested is GAO's requirement for management to have skills to oversee nonaudit services like bank reconciliations. The key facts are the clerk requesting monthly reconciliations with sign-off but lacking understanding, indicating insufficient oversight. Choice B aligns with GAO standards by identifying this as a management function threat due to inadequate skills. Choice A is incorrect because reconciliations are nonaudit services, not routine procedures, and Choice C is wrong as they relate to financial statements. Choice D is incorrect since tax preparation is separate from this threat. A professional judgment framework is to assess management's oversight capability before nonaudit tasks. Auditors should decline if skills are lacking to preserve independence.
A CPA firm audits an ERISA plan under Department of Labor requirements. The plan sponsor asks the auditor to represent the plan during a Department of Labor investigation related to late remittance of employee contributions, including drafting responses and negotiating with investigators. Under DOL requirements, which situation would impair auditor independence?
Providing factual information from the audit workpapers when requested by the regulator.
Explaining the plan’s remittance process to management so they can respond.
Advocating for the plan in an adversarial regulatory matter, creating an advocacy threat that can impair independence.
Communicating a significant deficiency to those charged with governance.
Explanation
The independence concept tested is DOL's rule against advocacy in adversarial proceedings for ERISA plans, creating advocacy threats. The key facts involve representing the plan in a DOL investigation, drafting responses, and negotiating. Choice A aligns with DOL standards by identifying this as impairing independence. Choice B is incorrect because providing factual information is permissible, and Choices C and D are wrong as explanations and communications are advisory. A decision rule is to limit assistance to non-advocacy roles in regulatory matters. This framework preserves auditor neutrality.
A CPA firm is engaged for a GAO audit of a city’s financial statements. During the audit, the city asks the auditor to approve vendor invoices and release payments while the finance director is on leave, stating it is only for two weeks. Which action should the auditor take to maintain independence under GAO standards?
Accept the request after obtaining preapproval from the state oversight agency.
Agree to approve invoices as long as the amounts are below a threshold set by the city council.
Decline the request because approving payments is a management responsibility that creates a management participation threat.
Agree to approve invoices but document the service as a routine administrative task.
Explanation
The independence requirement tested is GAO's prohibition on auditors performing management responsibilities like approving payments. The key facts involve the city requesting invoice approval and payment release during the finance director's leave, even if temporary. Choice C aligns with GAO standards by declining due to the management participation threat. Choice A is incorrect because thresholds do not permit management functions under GAO, and Choice B is wrong as approving payments is not routine. Choice D is incorrect since oversight agency approval does not eliminate threats. A decision rule is to identify services as management functions and decline them to avoid impairment. This framework maintains clear boundaries between audit and management roles.
A firm is auditing an ERISA health and welfare benefit plan under Department of Labor requirements. The plan sponsor requests that the auditor prepare and file the plan’s Form 5500 and sign as the preparer, because the sponsor lacks staff. Under DOL requirements, which situation would impair auditor independence?
Providing a list of common Form 5500 errors to management.
Preparing and filing the Form 5500 on behalf of the plan, including signing as the plan administrator or otherwise assuming responsibility for the filing.
Reading the draft Form 5500 for consistency with the audited financial statements.
Preparing the Form 5500 using information provided by management, with management reviewing and signing the filing.
Explanation
The independence requirement tested is DOL's prohibition on auditors assuming responsibility for ERISA plan filings like Form 5500, which constitutes a management function. The key facts involve preparing, filing, and signing the Form 5500 as the preparer due to sponsor staffing issues. Choice B aligns with DOL standards by recognizing this as impairing independence through management participation. Choice A is incorrect because preparation with management review is permissible, but Choices C and D are wrong as providing error lists or reading for consistency are advisory and do not impair. A decision rule is to limit Form 5500 assistance to non-decision-making tasks, ensuring management signs and accepts responsibility. This framework prevents auditors from crossing into management roles in ERISA audits.
A firm is performing a GAO audit of a county that receives federal awards. The firm also performs internal audit outsourcing for the county and plans to rely on that work in the GAO audit. What is the most appropriate safeguard for this independence threat?
Ensure the county has qualified personnel to oversee internal audit activities, separate the internal audit and external audit teams, and evaluate and document threats and safeguards before relying on the work.
Rely on the internal audit work without additional procedures because the work was performed by the same firm.
Treat the internal audit outsourcing as permissible because GAO follows public company rules that allow it with audit committee preapproval.
Have the county’s legal counsel approve the internal audit plan, which eliminates the threat.
Explanation
The independence requirement tested is GAO's safeguards for using internal audit work when the firm provides outsourcing, to mitigate self-review threats. The key facts involve the firm performing internal audit outsourcing and planning to rely on it in the GAO audit. Choice B aligns with GAO standards by requiring qualified oversight, team separation, and documentation of threats and safeguards. Choice A is incorrect because same-firm work creates self-review threats under GAO, needing safeguards. Choice C is wrong as legal approval does not address threats, and Choice D is incorrect since GAO has stricter rules than PCAOB for governmental entities. A transferable framework is to evaluate internal audit reliance using GAO's criteria for objectivity and competence. This decision rule ensures reliable audit evidence without impairment.
A CPA firm audits an ERISA plan under Department of Labor requirements. The plan sponsor requests that the auditor also provide ongoing payroll processing for the sponsor, including calculating employee deferrals and transmitting deferral files to the plan recordkeeper. Under DOL requirements, which situation would impair auditor independence?
Providing payroll processing is permissible if approved by the plan’s investment committee.
Providing payroll processing for the sponsor is always permissible because it is not a service to the plan.
Providing payroll processing that directly affects plan contributions and participant data, creating a self-review and management participation threat.
Providing payroll processing is permissible if the auditor increases sample sizes in contribution testing.
Explanation
The independence concept tested is DOL's prohibition on nonaudit services like payroll processing that affect ERISA plan data, creating threats. The key facts involve calculating deferrals and transmitting files to the recordkeeper. Choice A aligns with DOL standards by identifying self-review and management participation threats impairing independence. Choice B is incorrect because services to the sponsor affecting the plan can impair, and Choice C is wrong as increased testing does not mitigate. Choice D is incorrect since committee approval is insufficient. A transferable framework is to assess if nonaudit services impact audited areas. Auditors should decline such services to maintain objectivity.