AICPA Independence: Nonattest Services for Audit Clients

Answer B. Under the AICPA Code's nature-and-scope evaluation, legality, technical competence, and management acceptance of responsibility for a nonattest service are necessary but not sufficient; the firm must also assess whether the engagement creates independence or objectivity threats, including appearances of advocacy. Attending lender meetings could reasonably be perceived as promoting the client's position, so Lane must evaluate those threats and decline or modify the engagement if safeguards cannot reduce them to an acceptable level.

Why not A: This choice is tempting because management acceptance of responsibility and the firm not making management decisions are required conditions for nonattest services. It is wrong because those conditions alone do not address whether a public-facing role (attending lender meetings) creates appearance or advocacy threats that impair independence or objectivity.

Why not C: This is tempting if a candidate thinks only services that directly affect the audited statements threaten independence. It fails because independence and objectivity also depend on how third parties perceive the firm's role; preparing projections and participating in lender meetings can create advocacy or perception threats even if the work is outside the audit.

Why not D: This overstates the rules and is tempting for those who recall limits on prospective financial information. It is incorrect because preparing prospective information for an attest client is not categorically prohibited when management accepts responsibility and safeguards exist; the central issue here is the additional appearance/advocacy threat from attending lender meetings.

Answer B. Under the AICPA preconditions for providing nonattest services to an attest client, management must accept responsibility for the financial statements and must designate an individual with suitable skill, knowledge, and experience (SKE) to oversee and evaluate the services and results. Here, Bright's owner-manager lacks the necessary understanding of GAAP disclosures and the expected-credit-loss methodology and no qualified designee is present to evaluate Clay's judgment; therefore the SKE precondition is not met and independence is impaired.

Why not A: Tempting because management approval is a required element, but approval alone is insufficient when management cannot meaningfully oversee and evaluate the CPA's work. If management has not provided a qualified designee with the needed SKE to evaluate judgmental matters, independence is impaired despite final approval.

Why not C: Tempting because a written acceptance of responsibility is a necessary precondition, but such an acknowledgment does not replace the requirement that management designate an individual with sufficient skill, knowledge, and experience to oversee and evaluate the CPA's judgmental work. An engagement letter cannot cure the absence of a qualified client designee.

Why not D: This lures candidates who focus on posting entries as the decisive act. Actual posting can create an independence problem, but an impairment can arise earlier when management fails to provide a qualified designee to evaluate the CPA's judgment, even if the CPA only prepares proposed entries and does not record them.

Answer A. The AICPA Code's nature-and-scope principle requires a member in public practice to decide whether a proposed service is consistent with professional principles such as integrity, objectivity, and the public interest. Management oversight, acceptance of responsibility, and a fixed fee are relevant safeguards but do not automatically make the service acceptable. Because Loft would later audit amounts affected by the metric, it must evaluate whether providing the consulting service is compatible with its role as auditor.

Why not B: Tempting because management responsibility is an important safeguard, but the Code requires a broader judgment about compatibility with professional principles; those safeguards alone do not end the analysis.

Why not C: Using separate staff can reduce some threats, but it does not eliminate the need to assess whether providing the service at all is consistent with the firm's responsibilities as the auditor.

Why not D: This is too narrow: a service may impair objectivity or create a self-review threat even if it does not mechanically set a recorded amount, so the firm must judge broader compatibility issues.

Answer D. Under AICPA independence rules for a nonissuer attest client, a firm may draft proposed journal entries as a nonattest service if management has suitable skill, knowledge, and experience, accepts responsibility, and properly oversees the work. However, authorizing or approving entries for posting is a management responsibility; if the firm assumes that role independence is impaired.

Why not A: This choice overstates the rule. Drafting proposed entries can be permissible when management (with suitable SK&E) accepts responsibility and oversees the work. The prohibition applies when the firm performs management functions, such as authorizing entries for posting.

Why not B: Management oversight is necessary for permissibility, but this answer ignores that the firm is being asked to authorize entries for posting without client approval, an actual management function that would impair independence.

Why not C: Materiality is not the decisive factor here. The independence issue hinges on whether the firm performs a management function (authorizing/posting entries), which impairs independence regardless of dollar amount.

Answer A. Under AICPA nonissuer independence rules, many nonattest services (for example, drafting financial statements, preparing proposed journal entries, or performing analyses using management-selected assumptions) may be provided if management designates a competent individual, evaluates the results, and accepts responsibility. However, performing management functions, specifically implementing or operating internal control, places the firm in a management role and impairs independence. In this fact pattern, configuring the client's revenue-cycle control settings is the management-function issue that impairs independence.

Why not B: This is tempting because the AICPA framework does permit many nonattest services when management assumes responsibility and oversight. However, those safeguards do not allow the firm to perform management functions; configuring control settings is an implementation activity that places the firm in a management role and impairs independence.

Why not C: This distractor appeals to candidates who conflate nonissuer rules with stricter issuer/SEC prohibitions. For nonissuer audit clients under current AICPA guidance, drafting financial statements and proposing entries can be permissible if management retains responsibility and oversight, so these services alone are not the basis for impairment here.

Why not D: Valuation-related work can create self-review threats, but when management selects the assumptions and a competent client official oversees and accepts responsibility, such threats can often be mitigated. The clearly dispositive independence problem in this scenario is the firm's potential implementation of internal control by configuring system settings.