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AUDITING

general partner, or trustee (item l). affiliates. That said, the rule provides several
Examples: exceptions, which are summarized below. Most of
■ A financial institution (AF) is the trustee for the exceptions do not apply to FSAC affiliates that
your trust account audit client (AC), which AF are included in the FSAC’s consolidated financial
controls, or statements (that is, they exclude items a and b in
■ A general partner (AF) owns 40% of a private- the Affiliate definition; the “downstream” affiliates).
equity fund (AC) that is material to AF. Exceptions applicable only to items c–l in the Af-
filiate definition are indicated for each item below:
HOW DO THE INDEPENDENCE RULES APPLY TO
AFFILIATES? Nonattest service performed for (item c–l)
Once you’ve identified the affiliates of an FSAC, affiliate of FSAC
the “Affiliates, Including State and Local Govern- A firm may be permitted to provide otherwise
ment Affiliates” subtopic (ET §1.224) of the “In- prohibited nonattest services to an item c–l affiliate
dependence Rule” dictates how the independence of an FSAC if two conditions are met: (1) it is rea-
rules apply to those entities. If the FSAC is a state sonable to conclude that the services do not create a
or local government entity, the “State and Local self-review threat with respect to the FSAC because
Government Client Affiliates” interpretation (ET the results of the nonattest services will not be
§1.224.020) applies (but due to space constraints, subject to financial statement attest procedures; and
will not be addressed in this article). The “Client (2) for any other threats that are not at an accept-
Affiliates” interpretation (ET §1.224.010) applies to able level, the firm applies safeguards to eliminate
all other FSACs and is described next. or reduce the threats to an acceptable level (ET
§1.224.010.02(b)).
CLIENT AFFILIATES Illustration: Your firm provides temporary CFO
The “Client Affiliates” interpretation notes that services to an affiliate (AF) that is a sister company
interests in and relationships with affiliates of an of your audit client (AC). AF and AC are com-
FSAC may create threats to independence. So, pletely separate companies that are separately man-
the general rule is that the same independence aged and share no systems or other resources. Based
rules that apply to an FSAC apply to the FSAC’s on these facts, your firm concludes that performing
these otherwise prohibited services to AF would
not create self-review, management participation,
or other threats to independence (either in fact or
AICPA RESOURCES appearance) when performing the audit of AC.
Article
Subsequent employment of former firm
“Ethics Quiz: Affiliates, Confidentiality, and More,” JofA, May 1, 2019
employee in key position at (item c–l) affiliate of
Online resources FSAC
Frequently Asked Questions: General Ethics A firm would not be required to apply the safe-
guards described in the “Subsequent Employment
Plain English Guide to Independence
or Association With an Attest Client” interpreta-
tion (ET §1.279.020) if a former employee of the

IN BRIEF to an FSAC apply to the FSAC’s requires firms to employ “best
affiliates. efforts” to obtain the information
■ The AICPA Code of Professional ■ Most exceptions to this rule do not needed to identify client
Conduct requires the firm to apply to FSAC affiliates that are affiliates.
identify all of a financial statement included in the FSAC’s consolidated ■ After identifying an FSAC’s
attest client’s (FSAC’s) affiliates. financial statements. affiliates, the audit team should
■ A general rule is that the same ■ Identifying affiliates of an FSAC monitor the information carefully to
independence rules that apply can be challenging, so the Code avoid independence impairments.

To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com.

10 | Journal of Accountancy August 2022