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AUDITING

Before discussing whether an investment is or is

not an affiliate, it’s essential to keep in mind what

types of investments are not included.

and the interactive SLG affiliate matrix to be for this revised interpretation is for years begin-
of great assistance in identifying affiliates and ning after Dec. 15, 2021. Don’t risk a breach of
providing documentation to support their as- independence by failing to address your client’s
sessment. As a final reminder, the effective date affiliates. ■

How pandemic funding could impact affiliate determinations

This fictional example illustrates how complex it can be to it has more than minimal influence over UC’s accounting or
determine affiliate status and how that status can change over financial reporting process.
time. For instance, an entity that is not material can become so if In this scenario, UC would be considered a Type II affiliate of
it receives a large amount of funding, as this example shows. Public University. Firm B should apply the “Independence Rule”
University HealthCenter (UC) is a discretely presented and related interpretations to UC. In addition, since UC is a Type
component unit of Public University. UC received $12 II affiliate, Firm B does not need to evaluate the investments
million in Provider Relief Funds (PRF), all of which are to be held by UC for independence purposes and may use the
reported at June 30, 2021, triggering UC’s first single audit. nonattest services exception.
Firm A audits UC, and Firm B audits Public University. Firm However, if UC was not material to Public University as a whole,
B references Firm A’s audit report in the auditor’s report on then UC would not be an affiliate of Public University as defined
Public University’s financial statements. While in prior years in paragraph .03aii of the state and local government client
UC was not material to Public University, UC’s receipt of the affiliates interpretation. Similarly, if Public University did not
PRF changed that, and for the year ending June 30, 2021, have more than minimal influence over UC’s accounting or
UC was material to Public University. Public University also financial reporting process, UC would not be considered an
provides accounting back-office services to UC; therefore, affiliate of Public University. IMAGE BY NAQIEWEI/ISTOCK

18 | Journal of Accountancy July 2022