Solved Which statement best describes the SEC rules relating

In addition, under these amendments, audit clients and their affiliates may, in certain circumstances, employ family members of some audit firm employees without impairing the auditor’s independence. As discussed above, under Rule 2-01(c)(2)(iii), an accounting firm will not be considered independent of an audit client if a former employee of the firm has an “accounting role or financial reporting oversight role” at the audit client and the firm and the former employee have a financial arrangement that does not satisfy the requirements set forth by Rule 2-01(c)(2)(iii). Rule 2-01(e)(3) provides that, notwithstanding Rule 2-01(c)(2)(iii), an accounting firm will not lose its independence with respect to an audit client if the former employee with whom it maintains a financial arrangement inconsistent with Rule 2-01(c)(2)(iii) assumed an accounting or financial reporting oversight role at the audit client prior to the effective date of this rule. With respect to former firm employees who join an audit client in such a role after the effective date of this rule, however, the firm must ensure that the requirements of paragraph (c)(2)(iii) are met in order to maintain its independence with respect to the audit client.

Moreover, reliance solely on independence “in fact” would increase the imprecision beyond a “reasonable investor” test, because independence “in fact” is essentially an inquiry into the subjective workings of the accountant’s mind, whereas a “reasonable investor” test relies on observable circumstances and is thus better suited to uniform and consistent application. Recall that the accounting equation can be thought of from a “sources and claims” perspective; that is, the assets (items owned by the organization) were obtained by incurring liabilities or were provided by owners. Stated differently, everything a company owns must equal everything the company owes to creditors (lenders) and owners (individuals for sole proprietors or stockholders for companies or corporations). The cost principle, also known as the historical cost principle, states that virtually everything the company owns or controls (assets) must be recorded at its value at the date of acquisition. For most assets, this value is easy to determine as it is the price agreed to when buying the asset from the vendor.

Employee benefit plan

This approach will provide investors with pertinent information about the relationship between the fund’s auditor and other entities in the investment company complex. On the other hand, the staff will look closely to determine whether a fee labeled a “value added” fee is in fact a contingent fee, such as where there are side letters or other evidence that ties the fee to the success of the services rendered. For example, as discussed in the Proposing Release, an auditor might undertake a study of certain types of a client’s expenditures in order to identify greater amounts of qualifying expenses that would result in greater income tax credits. Fees for such services might be based on a percentage of the tax credits generated, a base fee plus a percentage of tax credits generated over a pre-determined base amount, or a base fee plus a “value added” amount to be added to the base fee. In that case, the accounting firm’s economic benefit will be greater if the tax credits are maximized. Because this interest (in the economic benefit) is inconsistent with acting independently in assessing the accuracy of the impact on the income tax accounts and financial statements of the tax credits, those kinds of fee arrangements are prohibited under the final rule.

Because there are numerous explanations as to why auditors’ professional liability premiums might or might not increase, we are not persuaded that insurance premiums are a useful measure of the effect of non-audit services on auditor independence. We emphasize that with respect to broker/dealers, the SEC’s rules regarding auditor independence take precedence over guidelines established by any other organization. Member firms are encouraged to read all or portions of the SEC’s Release if they encounter complex circumstances or fact patterns regarding an auditor’s involvement with the audit client. If you want to start your own business, you need to maintain detailed and accurate records of business performance in order for you, your investors, and your lenders, to make informed decisions about the future of your company. A set of financial statements includes the income statement, statement of owner’s equity, balance sheet, and statement of cash flows. These statements are discussed in detail in Introduction to Financial Statements.

What’s the best way to determine the permissibility of a financial arrangement?

Both versions of the term describe products or services sold to customers without receiving upfront payment. A liability (LIAB) occurs when an individual or business owes money to another person or organization. Bank loans and https://marketresearchtelecast.com/financial-planning-for-startups-how-accounting-services-can-help-new-ventures/292538/ credit card debts are common examples of liabilities. Single-entry systems account exclusively for revenues and expenses. Double-entry systems add assets, liabilities, and equity to the organization’s financial tracking.

(6) The audit client’s management does not rely on the accountant’s work as the primary basis for determining the adequacy of its internal controls. (ii) Commencing any audit, review, or attest procedures (including planning the audit of the client’s financial statements). While we understand that some small businesses may incur some costs as a result of the rule amendments, we believe that few small businesses will be affected, and that any effects will be minimal. The changes we have made in the rules as adopted should ameliorate any burden on small firms significantly. Moreover, while some small businesses may be required to engage a new firm to perform certain functions, there is no comparatively greater effect on small firms with respect to costs incurred to choose a new accounting firm. Such costs apply equally to larger registrants as to smaller registrants.

Tax Implications of Alternative Investments for Nonprofit Organizations

(ii) An investment company, for purposes of paragraph (f)(14) of this section, means any investment company or an entity that would be an investment company but for the exclusions provided by Section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)). (ii) Procedures and controls that allow for prompt identification of such services or relationships after initial notification of a potential merger or acquisition that may trigger independence violations, but before the effective date of the transaction. Which of the following activities would be most helpful to a CPA in deciding whether to accept a new audit client? Evaluating the most recent peer review of the client’s previous auditor. D. If matters required by US GAAS are communicated with a person with management responsibilities who also has governance responsibilities, the matters need not be communicated twice.

• For example, a decrease in the cost of capital as small as a single basis point (or one one-hundredth of one percent) would lead to an aggregate annual impact of approximately $2 billion.586 Although increased confidence should benefit the entire market, we provide an estimate that limits the benefit to those directly affected by the rule.
• It includes assets being held for sale, those in the process of being made, and the materials used to make them.
• Accordingly, the final rule amendments cover not only financial statements that are filed with us, but also financial statements that form the basis of financial statements that are filed with us.
• Bank loans and credit card debts are common examples of liabilities.
• The documentation should be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the audit evidence obtained; C.
• Investors will be able to determine quickly the amounts spent on non-audit services relative to the amount spent on audit services.

Management needs reliable financial information when making operational and investment decisions, and external auditors contribute to management’s assurance about financial information. Unexpected financial statement restatements result in large market capitalization drops. We make no separate estimate of benefits for the above noted items. The primary benefit of this rule is increased investor confidence in reported financial statements.