Page 282 - JoFA_2022

AUDITING

which is highlighted later in this article. 4. Type IV: An investment held by an investor
PEEC’s revised ethics interpretation: (your FSAC or your FSAC’s Type I affiliate)
■ Provides examples of SLG entities in the context where either one of the following condi-
of the standard; tions exists:
■ Changes the language in the standard to refer y The investor controls the affiliated entity
to “financial statement attest client” rather than unless the investment in the entity is trivial
“state or local government entity”; and clearly inconsequential to your FSAC’s
■ Defines the terms “investor” and “investment” as financial statements; or
they are used in the interpretation; y The investor has significant influence over
■ Clarifies the circumstances or relationships that the affiliated entity, and the investment
may create threats to independence; and in the entity is material to your FSAC’s
■ Highlights the importance of materiality, financial statements.
control, and influence as decision points when The revised interpretation specifies that there
evaluating potential affiliates. is a rebuttable presumption that an FSAC has
more than minimal influence over the accounting
THE FUNDAMENTALS or financial reporting process of the FSAC’s funds
In the revised interpretation, the Code defines the and blended component units.
following four types of affiliates of SLG FSACs that Another important element of the revised
require auditor independence: interpretation is the nonattest services exception.
1. Type I: The entity is included in the financial This exception allows the auditor of the FSAC to
statements of your FSAC, and you don’t refer provide nonattest services for Type II and Type
to another auditor in your audit report. III affiliates if the results of the nonattest service
2. Type II: The entity is included in the financial will not be subject to financial statement attest
statements of your FSAC, and you do refer procedures and any other threats can be eliminated
to another auditor’s report. Additionally, that or reduced to an acceptable level by the applica-
entity is material to your FSAC as a whole, and tion of safeguards.
your client has more than minimal influence
over the entity’s accounting or financial report- MATERIALITY, CONTROL, AND INFLUENCE
ing process. While you should follow the guidance in the
3. Type III: The applicable financial reporting interpretation, keep in mind that the thresholds of
framework (such as GAAP) requires your materiality, control, and influence will mean many
client to include an entity in its financial state- entities and investments will not be considered
ments. However, your client has chosen not to affiliates of the FSAC. There are two affiliate deci-
include that entity. Even though that entity is sion trees in the implementation guide that take
excluded, if it is material to your client’s finan- the auditor through the necessary considerations
cial statements as a whole and your client has to conclude whether an entity or investment is
more than minimal influence over the entity’s considered an affiliate of the FSAC. Each of these
accounting or financial reporting process, it is a decision trees has two inflection points — the first
Type III affiliate. addressing the size, or materiality, of the entity/

IN BRIEF

■ The effective date for the revised members apply the revised one exception for certain affiliates
interpretation addressing state and interpretation. relating to nonattest services.
local government client affiliates is ■ Auditors must apply the ■ The AICPA provides support,
for years beginning after Dec. 15, “Independence Rule” of the AICPA Code including the Ethics Hotline, to help
2021. of Professional Conduct and related auditors evaluate relationships and
■ In 2020, PEEC issued an interpretations to affiliates of their circumstances that could result in the
implementation guide to help financial statement attest client, with identification of affiliates.
To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com.

14 | Journal of Accountancy July 2022