Accounting-Explain what Rule 103-1 is which is basically about Independence

Explain what Rule 103-1 is which is basically about Independence about Non-Attest Services. And just explain what the rule is and how to use it. Two page summary .05 101-3—Nonattest ServicesBefore a member or his or her firm ("member") performs nonattest services (for example, tax or consulting services)for an attest client, fn 14 the member should determine that the requirements described in this interpretation have beenmet. In cases where the requirements of this interpretation have not been met during the period of the professionalengagement or the period covered by the financial statements, the member’s independence would be impaired,except as noted in the following paragraph.A member’s independence would not be impaired if the member performed nonattest services that would haveimpaired independence during the period covered by the financial statements, provided thata.b.the nonattest services were provided prior to the period of the professional engagement,the nonattest services related to periods prior to the period covered by the financial statements,andc.the financial statements for the period to which the nonattest services relate were audited byanother firm (or in the case of a review engagement, reviewed or audited by another firm).Activities Related to Attest ServicesPerforming attest services often involves communication between the member and client management regarding (a)the client’s selection and application of accounting standards or policies and financial statement disclosurerequirements; (b) the appropriateness of the client’s methods used in determining the accounting and financialreporting; (c) adjusting journal entries that the member has prepared or proposed for client managementconsideration; and (d) the form or content of the financial statements. These communications are considered anormal part of the attest engagement and would not constitute performing a nonattest service subject to thisinterpretation.However, the member should exercise judgment in determining whether his or her involvement has become soextensive that it would constitute performing a separate service which would be subject to the interpretation’s GeneralRequirements for Performing Nonattest Services.Engagements Subject to Independence Rules of Certain Regulatory BodiesThis interpretation requires compliance with independence regulations of authoritative regulatory bodies (such as theSecurities and Exchange Commission [SEC], the Government Accountability Office [GAO], the Department of Labor[DOL], the Public Company Accounting Oversight Board [PCAOB], and state boards of accountancy) when a memberperforms nonattest services for an attest client and is required to be independent of the client under the regulations ofthe applicable regulatory body. Accordingly, failure to comply with the nonattest services provisions contained in theindependence rules of the applicable regulatory body that are more restrictive than the provisions of this interpretationwould constitute a violation of this interpretation.General Requirements for Performing Nonattest Services1.2.The member should not assume management responsibilities for the attest client.Before performing nonattest service, the member should determine that the client has agreed to:a.b.Assume all management responsibilities.c.d.Evaluate the adequacy and results of the services performed.Oversee the service, by designating an individual, preferably within senior managementwho possesses suitable skill, knowledge, and/or experience. The member should assess andbe satisfied that such individual understands the services to be performed sufficiently tooversee them. However, the individual is not required to possess the expertise to perform orreperform the services.Accept responsibility for the results of the servicesTo avoid assuming management responsibilities when providing nonattest services to the client, the member shouldbe satisfied that management will be able to meet all these criteria, make an informed judgment on the results of themember’s nonattest services, and be responsible for making the significant judgments and decisions that are theproper responsibility of management. In cases in which the client is unable or unwilling to assume theseresponsibilities (for example, the client cannot oversee the nonattest services provided or is unwilling to carry outsuch responsibilities due to lack of time or desire), the member’s provision of these services would impairindependence.3.Before performing nonattest services, the member should establish and document in writing fn 15 hisor her understanding with the client (board of directors, audit committee, or management, as appropriatein the circumstances) regarding the following:a.b.c.d.e.Objectives of the engagementServices to be performedClient’s acceptance of its responsibilitiesMember’s responsibilitiesAny limitations of the engagementThe documentation requirement does not apply to nonattest services performed prior to the client becoming an attestclient. fn 16The preceding general requirements 2 – 3, do not apply to certain routine activities performed by the member, such asproviding advice and responding to the client’s questions as part of the client-member relationship.Management ResponsibilitiesIf a member were to assume a management responsibility for an attest client, the management participation threatcreated would be so significant that no safeguards could reduce the threat to an acceptable level. It is not possible tospecify every activity that is a management responsibility. However, management responsibilities involve leading anddirecting an entity, including making significant decisions regarding the acquisition, deployment, and control ofhuman, financial, physical, and intangible resources.Whether an activity is a management responsibility depends on the circumstances and requires the exercise ofjudgment. Examples of activities that would be considered a management responsibility and would, therefore, impairindependence if performed for an attest client include•setting policies or strategic direction for the client.•directing or accepting responsibility for the actions of the client’s employees except to the extent permittedwhen using internal auditors to provide assistance for services performed under auditing or attestationstandards.•authorizing, executing, or consummating a transaction, or otherwise exercising authority on behalf of aclient or having the authority to do so.•preparing source documents, fn 17 in electronic or other form evidencing the occurrence of a transaction.•having custody of client assets.•deciding which recommendations of the member or other third parties to implement or prioritize.•reporting to those in charge of governance on behalf of management.•serving as a client’s stock transfer or escrow agent, registrar, general counsel, or its equivalent.•accepting responsibility for the management of a client’s project.•accepting responsibility for the preparation and fair presentation of the client’s financial statements inaccordance with the applicable financial reporting framework.•accepting responsibility for designing, implementing, or maintaining internal control. [fn18 ]•performing ongoing evaluations of the client’s internal control as part of its monitoring activities.Specific Examples of Nonattest ServicesThe examples in the following table identify the effect that performance of certain nonattest services for an attestclient can have on a member’s independence. These examples presume that the general requirements in theprevious section, "General Requirements for Performing Nonattest Services", have been met and are not intended tobe all-inclusive of the types of nonattest services performed by members.Impact on Independence of Performance of Nonattest ServicesType of NonattestServiceBookkeepingIndependence Would Not Be ImpairedIndependence Would Be ImpairedRecord transactions for which management hasdetermined or approved the appropriate accountclassification, or post coded transactions to a client’s generalledger.•Determine or changejournal entries, account codingsor classification for transactions,or other accounting recordswithout obtaining client approval.••Prepare financial statements based on information inthe trial balance.•Post client-approved entries to a client’s trial balance.•••Prepare a reconciliation (for example, bank,accounts receivable, and so forth) that identifies reconcilingitems for the client’s evaluation.••Using payroll time records provided and approved bythe client, generate unsigned checks, or process client’spayroll.•Transmit client-approved payroll or otherdisbursement information to a financial institution providedthe client has authorized the member to make thetransmission and has made arrangements for the financialinstitution to limit the corresponding individual payments as toamount and payee. In addition, once transmitted, the clientmust authorize the financial institution to process theinformation. [fn 19 ]•Accept responsibility toauthorize payment of clientfunds, electronically orotherwise, except as specificallyprovided for with respect toelectronic payroll tax payments.•Accept responsibility tosign or cosign client checks,even if only in emergencysituations.•Maintain a client’s bankaccount or otherwise havecustody of a client’s funds ormake credit or bankingdecisions for the client.•Benefit planadministration fn 20••Communicate summary plan data to plan trustee.Advise client management regarding the applicationor impact of provisions of the plan document.•Process transactions (e.g., investment/benefitelections or increase/decrease contributions to the plan; dataPrepare sourcedocuments.Make changes to sourcedocuments without clientapproval.•Propose standard, adjusting, or correcting journalentries or other changes affecting the financial statements tothe client provided the client reviews the entries and themember is satisfied that management understands thenature of the proposed entries and the impact the entrieshave on the financial statements.Non taxdisbursementAuthorize or approvetransactions.Approve vendorinvoices for payment•Make policy decisionson behalf of client management.•When dealing with planparticipants, interpret the plandocument on behalf ofentry; participant confirmations; and processing ofdistributions and loans) initiated by plan participants throughthe member’s electronic medium, such as an interactivevoice response system or Internet connection or other media.•Prepare account valuations for plan participantsusing data collected through the member’s electronic or othermedia.•Prepare and transmit participant statements to planparticipants based on data collected through the member’selectronic or other medium.Investment—advisory ormanagement•Recommend the allocation of funds that a clientshould invest in various asset classes, depending upon theclient’s desired rate of return, risk tolerance, etc.•Perform recordkeeping and reporting of client’sportfolio balances including providing a comparative analysisof the client’s investments to third-party benchmarks.•Review the manner in which a client’s portfolio isbeing managed by investment account managers, includingdetermining whether the managers are (1) following theguidelines of the client’s investment policy statement; (2)meeting the client’s investment objectives; and (3)conforming to the client’s stated investment styles.management without firstobtaining management’sconcurrence.•Make disbursements onbehalf of the plan.•Have custody of assetsof a plan.•Serve a plan as afiduciary as defined by ERISA.•Make investmentdecisions on behalf of clientmanagement or otherwise havediscretionary authority over aclient’s investments.•Execute a transaction tobuy or sell a client’s investment.•Have custody of clientassets, such as takingtemporary possession ofsecurities purchased by a client.•Transmit a client’s investment selection to a brokerdealer or equivalent provided the client has authorized thebroker-dealer or equivalent to execute the transaction.•Corporate finance—consulting oradvisory•Assist in developing corporate strategies.Assist in identifying or introducing the client topossible sources of capital that meet the client’sspecifications or criteria.•Assist in analyzing the effects of proposedtransactions including providing advice to a client duringnegotiations with potential buyers, sellers, or capital sources.•Assist in drafting an offering document ormemorandum.•Executive oremployee searchCommit the client to theterms of a transaction orconsummate a transaction onbehalf of the client.•Act as a promoter,underwriter, broker-dealer, orguarantor of client securities, ordistributor of private placementmemoranda or offeringdocuments.•Participate in transaction negotiations in an advisorycapacity.••Maintain custody ofclient securities.Be named as a financial adviser in a client’s privateplacement memoranda or offering documents.••Solicit and perform screening of candidates andrecommend qualified candidates to a client based on theclient-approved criteria (e.g., required skills and experience).••Recommend a position description or candidatespecifications.Participate in employee hiring or compensationCommit the client toemployee compensation orbenefit arrangements.•Hire or terminate clientemployees.discussions in an advisory capacity.Business riskconsulting••Recommend a plan for making improvements to aclient’s control processes and assist in implementing theseimprovements.Informationsystems—design,installation orintegration•Provide assistance in assessing the client’s businessrisks and control processes.Make or approvebusiness risk decisions.•Present business riskconsiderations to the board orothers on behalf ofmanagement.•Install or integrate a client’s financial informationsystem that was not designed or developed by the member(for example, an off-the-shelf accounting package).•Assist in setting up the client’s chart of accounts andfinancial statement format with respect to the client’s financialinformation system.•Design, develop, install, or integrate a client’sinformation system that is unrelated to the client’s financialstatements or accounting records.•Provide training and instruction to client employeeson an information and control system.•Perform network maintenance, such as updatingvirus protection, applying routine updates and patches, orconfiguring user settings, consistent with management’srequest.•Design or develop aclient’s financial informationsystem.•Make other thaninsignificant modifications tosource code underlying a client’sexisting financial informationsystem.•Supervise clientpersonnel in the daily operationof a client’s information system.•Operate a client’s localarea network (LAN) system.Tax Compliance ServicesTax compliance services addressed by this interpretation are preparation of a tax return, fn 21 transmittal of a tax returnand transmittal of any related tax payment to the taxing authority, signing and filing a tax return, and authorizedrepresentation of clients in administrative proceedings before a taxing authority.Preparing a tax return and transmitting the tax return and related tax payment to a taxing authority, in paper orelectronic form, would not impair a member’s independence provided the member does not have custody or control fn22over the client’s funds and the individual designated by the client to oversee the tax services:•Reviews and approves the tax return and related tax payment; and,•If required for filing, signs the tax return prior to the member transmitting the return to the taxing authority.However, signing and filing a tax return on behalf of client management would impair independence, unless themember has the legal authority to do so and:a.The taxing authority has prescribed procedures in place for a client to permit a member to sign andfile a tax return on behalf of the client (for example, Form 8879 or 8453), and such procedures meet, atthe minimum, standards for electronic return originators and officers outlined in I.R.S. Form 8879; orb.An individual in client management who is authorized to sign and file the client’s tax return providesthe member with a signed statement that clearly identifies the return being filed and represents that:1.2.Such individual is authorized to sign and file the tax return;Such individual has reviewed the tax return, including accompanying schedules andstatements, and it is true, correct and complete to the best of his or her knowledge and belief;and3.Such individual authorizes the member or another named individual in the member’s firmto sign and file the tax return on behalf of the client.Authorized representation of a client in administrative proceedings before a taxing authority would not impair amember’s independence provided the member obtains client agreement prior to committing the client to a specificresolution with the taxing authority. However, representing a client in a court fn 23 to resolve a tax dispute would impaira member’s independence.TransitionIndependence would not be impaired as a result of the more restrictive requirements of the tax compliance servicesprovisions provided such services are pursuant to engagements commenced prior to February 28, 2007, andcompleted prior to January 1, 2008, and the member complied with all applicable independence interpretations andrulings in effect on February 28, 2007.Appraisal, Valuation, and Actuarial ServicesIndependence would be impaired if a member performs an appraisal, valuation, or actuarial service for an attest clientwhere the results of the service, individually or in the aggregate, would be material to the financial statements and theappraisal, valuation, or actuarial service involves a significant degree of subjectivity.Valuations performed in connection with, for example, employee stock ownership plans, business combinations, orappraisals of assets or liabilities generally involve a significant degree of subjectivity. Accordingly, if these servicesproduce results that are material to the financial statements, independence would be impaired.An actuarial valuation of a client’s pension or postemployment benefit liabilities generally produces reasonablyconsistent results because the valuation does not require a significant degree of subjectivity. Therefore, such serviceswould not impair independence. In addition, appraisal, valuation, and actuarial services performed for nonfinancialstatement purposes would not impair independence. fn 24 However, in performing such services, all other requirementsof this interpretation should be met, including that all significant assumptions and matters of judgment are determinedor approved by the client and the client is in a position to have an informed judgment on, and accepts responsibilityfor, the results of the service.Forensic Accounting ServicesFor purposes of this interpretation, forensic accounting services fn 25 are nonattest services that involve the applicationof special skills in accounting, auditing, finance, quantitative methods and certain areas of the law, and research, andinvestigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings andconsist of:•Litigation services; and•Investigative services.Litigation services recognize the role of the member as an expert or consultant and consist of providing assistance foractual or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputesbetween parties. Litigation services consist of the following services:a.Expert witness services fn 26 are those litigation services where a member is engaged to render anopinion before a trier of fact as to the matter(s) in dispute based on the member’s expertise, rather thanhis or her direct knowledge of the disputed facts or events.Expert witness services create the appearance that a member is advocating or promoting a client’sposition. fn 27 Accordingly, if a member conditionally or unconditionally agrees to provide expert witnesstestimony for a client, fn 28 independence would be considered to be impaired.However, independence would not be considered impaired if a member provides expert witness servicesfor a large group of plaintiffs or defendants that includes one or more attest clients of the firm providedthat at the outset of the engagement: 1) the member’s attest clients constitute less than 20 percent of (i)the members of the group (ii) the voting interests of the group, and (iii) the claim; (2) no attest clientwithin the group is designated as the "lead" plaintiff or defendant of the group; and (3) no attest clienthas the sole decision-making power to select or approve the expert witness.While testifying as a fact witness, fn 29 a member may be questioned by the trier of fact or counsel as tohis or her opinions pertaining to matters within the member’s area of expertise. Answering suchquestions would not impair the member’s independence.b.Litigation consulting services are those litigation services where a member provides advice aboutthe facts, issues, and strategy of a matter. The consultant does not testify as an expert witness before atrier of fact.The performance of litigation consulting services would not impair independence provided the membercomplies with the general requirements set forth under this interpretation. fn 30 However, if the membersubsequently agrees to serve as an expert witness, independence would be considered to be impaired.c.Other services are those litigation services where a member serves as a trier of fact, specialmaster, court-appointed expert, or arbitrator (including serving on an arbitration panel), in a matterinvolving a client. These other services create the appearance that the member is not independent.Accordingly, if a member serves in such a role, independence would be considered to be impaired.However, independence would not be considered impaired if a member serves as a mediator or anysimilar role in a matter involving a client provided the member is not making any decisions on behalf ofthe parties, but rather is acting as a facilitator by assisting the parties in reaching their own agreement. fn31Investigative services include all forensic services not involving actual or threatened litigation such asperforming analyses or investigations that may require the same skills as used in litigation services.Such services would not impair independence provided the member complies with the generalrequirements set forth under this interpretation.TransitionIndependence would not be impaired as a result of the more restrictive requirements of the forensicaccounting services provisions, provided such services are pursuant to engagements commenced priorto February 28, 2007, and the member complied with all applicable independence interpretations andrulings in existence on February 28, 2007.Internal Audit Assistance ServicesInternal audit services involve assisting the client in the performance of its internal audit activities, sometimes referredto as "internal audit outsourcing." In evaluating whether independence would be impaired with respect to an attestclient, the nature of the service needs to be considered.Assisting the client in performing financial and operational fn 32 internal audit activities would impair independenceunless the member takes appropriate steps to ensure that the client understands its responsibility for [fn 33]directing theinternal audit function, including the management thereof. Accordingly, any outsourcing of the internal audit functionto the member whereby the member in effect manages the internal audit activities of the client would impairindependence.In addition to the general requirements of this interpretation, the member should ensure that client management:•Designates an[fn 34] individual or individuals, who possess suitable skill, knowledge, and/or experience,preferably within senior management, to be responsible for the internal audit function;•Determines the scope, risk, and frequency of internal audit activities, including those to be performed by themember providing internal audit assistance services;•Evaluates the findings and results arising from the internal audit activities, including those performed by themember providing internal audit assistance services; and•E…

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