CHAPTER 300 - AUDITING

(300)-30 [Responsibilities]{.underline}

30.1 [Management Responsibilities]{.underline}.

The responsibilities in this section are high-level expectations of the
various management positions in the Office of Audit (OA). Specific
responsibilities such as approval of audit plans, approval of audit
reports, assignment of audits, etc. are located in the appropriate
section of Chapter (300) dealing with that particular issue.

###  {#section .unnumbered}

### 30.1.1  [Deputy Inspector General for Audit (DIGA)]{.underline}. The DIGA reports to the Treasury Inspector General for Tax Administration (TIGTA) and is responsible for: {#deputy-inspector-general-for-audit-diga.-the-diga-reports-to-the-treasury-inspector-general-for-tax-administration-tigta-and-is-responsible-for .unnumbered}

###  {#section-1 .unnumbered}

### Planning and overseeing an audit program that provides for independent reviews and appraisals of the operations of the Internal Revenue Service (IRS) and related entities. 

###  {#section-2 .unnumbered}

-   Planning and executing a continuous quality assurance program.

-   Formulating and maintaining audit policies, procedures, and program
    guidelines; developing and maintaining the audit management
    information system; and producing management information reports for
    use by TIGTA managers.

-   Developing and maintaining the professional skills of audit
    personnel.

-   Supervising the Assistant Inspectors General for Audit (AIGA).

### 30.1.2 [AIGAs]{.underline}. The AIGAs report to the DIGA and are responsible for providing executive leadership and direction for evaluating the vulnerability of IRS and related entity activities and for conducting reviews that are sufficient in scope to provide a basis for constructive management action by responsible officials. They supervise Directors. The four AIGAs are responsible for reviews in the following IRS organizational program areas: {#aigas.-the-aigas-report-to-the-diga-and-are-responsible-for-providing-executive-leadership-and-direction-for-evaluating-the-vulnerability-of-irs-and-related-entity-activities-and-for-conducting-reviews-that-are-sufficient-in-scope-to-provide-a-basis-for-constructive-management-action-by-responsible-officials.-they-supervise-directors.-the-four-aigas-are-responsible-for-reviews-in-the-following-irs-organizational-program-areas .unnumbered}

-   **[Security and Information Technology Services.]{.underline}**

> Areas Covered: Systems Modernization and Operations, Systems Security,
> Cyber Security, Office of Privacy and Data Security, Disaster
> Recovery/Business Continuity, Applications Development, Enterprise
> Services and Enterprise Operations/ Networks, Business Systems
> Planning, and End User Equipment and Services.

-   [**Management Services and Exempt Organizations.**]{.underline}

> Areas Covered: Acquisitions and Procurement Fraud, Agency-Wide Shared
> Services, Tax Exempt and Government Entities, Employee Plans, Human
> Capital, Financial Management, Chief Financial Officer. Chief Counsel,
> Appeals, Taxpayer Advocate, Equal Employment Opportunity (EEO), and
> Research.

-   **[Returns Processing and Account Services.]{.underline}**

> Areas Covered: Submission Processing, Customer Service, Tax
> Practitioners for Customer Service (Electronic Return Originators
> (ERO), Regulation, Testing, and Filing Activities), Customer
> Assistance, Research and Education (CARE), Walk-in, Toll-Free, Returns
> Processing, Questionable Refund Program (QRP), Electronic Tax
> Administration (ETA), Frivolous Returns, Accounts Management, Taxpayer
> Bill of Rights, and Earned Income Tax Credit (EITC)/Health Coverage
> Tax Credit (HCTC).

-   **[Compliance and Enforcement Operations.]{.underline}**

> Areas Covered: Payment Compliance, Reporting Compliance, Enforcement,
> Compliance Support, Criminal Investigation (except QRP), Examination,
> International, Collection, Tax Gap, Automated Collection System
> (ACS)/Integrated Collection System (ICS)/Automated Underreporter
> Program (AUR), Campus Compliance, Offers in Compromise (OIC),
> Installment Agreements, Office of Professional Responsibility, and Tax
> Practitioners (Shelters and Schemes).

30.1.3 [Directors]{.underline}. Directors report to the AIGAs and are
responsible for planning and executing the audit program within the four
organizational program areas. They supervise Audit Managers.

### 30.1.4 [Audit Managers]{.underline}. Audit Managers report to the Directors and are the front-line managers responsible for the day-to-day supervision of individual audit assignments and the development of their subordinates. {#audit-managers.-audit-managers-report-to-the-directors-and-are-the-front-line-managers-responsible-for-the-day-to-day-supervision-of-individual-audit-assignments-and-the-development-of-their-subordinates. .unnumbered}

###  {#section-3 .unnumbered}

30.2 [Policy on Independence and Scope Impairments]{.underline}.

If the TIGTA is to be effective, it must be independent and its
opinions, conclusions, judgments, and recommendations must be viewed as
being impartial by knowledgeable third parties. This document sets forth
policies and procedures relative to independence and scope impairments.

The policies and procedures on independence and scope impairments are
based on the following standards:

-   The generally accepted *[**Government Auditing
    Standards**](http://www.gao.gov/cgi-bin/getrpt?GAO-07-731G)*
    (*GAGAS*), July 2007 Revision (the Yellow Book), paragraphs 3.02
    through 3.30 (See [**Exhibit
    (300)-30.1**](../chapter300-30.doc#exhibitGASexcerpts)).

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-   The **[*Quality Standards for
    Inspections*](http://www.ignet.gov/pande/standards/oeistds.pdf)**
    (*QSI*), January 2005, from the President's Council on Integrity and
    Efficiency (PCIE) and the Executive Counsel on Integrity and
    Efficiency. Section B (See [**Exhibit
    (300)-30.2**](#exhibitQSIexcerpts)).

30.2.1 [Policy on Independence]{.underline}. In accordance with the
*GAGAS* and *QSI*, all auditors, Audit Managers, Directors, AIGAs, and
the DIGA involved in performing or supervising any audit assignment
must:

-   Be free from personal, external, or organizational impairments to
    their independence.

-   Consistently maintain an independent attitude and appearance.

-   Strive to avoid situations that lead outsiders to doubt their
    independence. (See [**Exhibit (300)-30.1**](#exhibitGASexcerpts),
    GAGAS paragraphs 3.02 through 3.06, and\
    [**Exhibit (300)-30.2**](#exhibitQSIexcerpts), QSI Section
    B-Independence)

Three classes of impairments to independence are personal, external, and
organizational. These impairments must be considered by auditors in
deciding whether their ability to perform impartially is adversely
affected.

30.2.1.1 [Personal Impairments]{.underline}. Personal impairments to
independence are circumstances in which auditors may not be impartial or
may not be perceived to be impartial. TIGTA management personnel
responsible for scheduling audits must avoid the assignment of staff
members to audits where there is an indication that the individuals have
a personal impairment. Also, supervisors need to be alert to personal
impairments to independence of their staff members. (See [**Exhibit
(300)-30.1**](#exhibitGASexcerpts),\
GAGAS paragraphs 3.07 through 3.09, and [**Exhibit
(300)-30.2**](../chapter300-30.doc#exhibitQSIexcerpts), QSI section
B-Personal Impairments for examples of personal impairments.)

[Annually]{.underline}, each professional staff member, GM-15 and below,
must acknowledge understanding his or her obligation to be free from
personal impairment to his or her auditor independence. Each
professional staff member must document his or her acknowledgement to
report a current or future independence impediment by completing the
Auditor Personal Impairment Certification form (See the template located
in **File/New/Audit Forms/Auditor Personal Impairment
Certification.dot**). A new form is to be completed at the same time the
auditor signs his or her annual TIGTA Performance Appraisal-Auditor
(Form 430 Aud) acknowledgement form. The employee's supervisor will
ensure that the annual Auditor Personal Impairment Certification form is
placed in the auditor's Employee Personnel File (EPF). This form should
be maintained in the auditor's EPF for 3 fiscal years for documentation
and external peer review purposes.

For financial statement audits, the AIGA (Management Services and Exempt
Organizations) must also complete the Auditor Personal Impairment
Certification form.

Staff members are responsible for notifying their Audit Manager of any
personal impairment to independence that develops during the year. Audit
Managers are responsible for taking appropriate corrective action when
there is impairment to auditor independence on an audit. Appropriate
corrective action includes, but is not limited to, the following:

-   If the circumstances indicate that the impairment is of recent
    development and not foreseeable, the staff member should be
    reassigned.

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-   If the circumstances indicate that the impairment was preexisting
    and not revealed, or developed subsequent to the assignment and was
    not brought to the attention of the Audit Manager, the staff member
    should be reassigned and appropriate disciplinary action considered.

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-   In either case, any audit work completed by the staff member up to
    the time of the reassignment should be thoroughly reviewed for
    evidence of bias or other improprieties. If these are found, another
    staff member should repeat the audit work, if possible. If repeating
    the work is not possible, the impairment should be disclosed in the
    final report.

30.2.1.2 [External Impairments]{.underline}. External impairments to
independence are factors that may restrict the audit or limit a staff
member's ability to form independent and objective opinions and
conclusions. (Refer to [**Exhibit (300)-30.1**](#exhibitGASexcerpts),
GAGAS paragraph 3.10 through 3.11, and [**Exhibit
(300)-30.2**](../chapter300-30.doc#qsuextimpair), QSI Section B-External
Impairments, for examples of external impairments.) The DIGA should be
notified immediately by the respective AIGA of any external impairment.

30.2.1.3 [Organizational Impairments]{.underline}. Organizational
impairments to independence involve the location of the audit/function
within the organizational structure of the government entity.
Organizational independence, as described in [**Exhibit
(300)-30.1**](#exhibitGASexcerpts), GAGAS paragraph 3.12 though 3.30, is
provided for the TIGTA by the Inspector General Act of 1978, as amended
by the IRS Restructuring and Reform Act of 1998 (RRA 98).

30.2.2 [Policy on Scope Impairments]{.underline}. Scope impairments are
factors external to the organization that can restrict a staff member's
ability to render objective opinions and conclusions. (Refer to
[**Exhibit (300)-30.2**](../chapter300-30.doc#qsuextimpair), QSI Section
B, for examples of scope impairments.) When these factors are present,
staff members should attempt to remove the restrictions or, failing
that, report the limitation to the DIGA through the respective AIGA.

30.3 [Confidentiality]{.underline}.

The OA must also ensure privileged or confidential information gathered
by the TIGTA will be protected from disclosure, unless the TIGTA
determines that such disclosure is necessary to further the purpose of
an audit, investigation, or other inquiry as required by law. In
addition, confidential sources who make complaints or provide
information to the TIGTA will not have their identities disclosed
without their consent, unless the TIGTA determines that such disclosure
is unavoidable for the purposes of an investigation. The PCIE has
adopted the following general standard on confidentiality:

> *[Confidentiality]{.underline}* -- Each Inspector General shall
> establish and follow procedures for safeguarding the identity of
> confidential sources and for protecting privileged and confidential
> information.

Tax returns and tax return information must be kept on a need to know
basis. Such information should not be shared outside of the TIGTA or
with other TIGTA employees unless a need is present.

Many of the facts gathered by the TIGTA come from employees or other
individuals who may be harassed if it was known they were cooperating.
Much of the information may be personal or of a proprietary nature.
Therefore, it is essential that the identities of confidential sources
and all information gathered during an audit, investigation, or other
work be safeguarded from disclosure.

The Congress has provided specific authority for withholding the
identities of employees who make complaints to the TIGTA. Under the
Inspector General Act of 1978, the identities of such employees may not
be released without their consent, unless the TIGTA determines
disclosure is unavoidable during the course of an investigation. See
Chief Counsel's [**Chapter
(700)-40**](../../../chapter700-counsel/700-40/700-40.doc).

[Exhibit (300)-30.1]{.underline}

[]{#exhibitGASexcerpts .anchor}[*GAGAS* Excerpts]{.underline}

GENERAL STANDARD

[Independence]{.underline}

3.02 - In all matters relating to the audit work, the audit organization
and the individual auditor, whether government or public, must be free
from personal, external, and organizational impairments to independence,
and must avoid the appearance of such impairments of independence.

**3.03** - Auditors and audit organizations must maintain independence
so that their opinions, findings, conclusions, judgments, and
recommendations will be impartial and viewed as impartial by objective
third parties with knowledge of the relevant information. Auditors
should avoid situations that could lead objective third parties with
knowledge of the relevant information to conclude that the auditors are
not able to maintain independence and thus are not capable of exercising
objective and impartial judgment on all issues associated with
conducting the audit and reporting on the work.

**3.04** - When evaluating whether independence impairments exist either
in fact or appearance with respect to the entities for which audit
organizations perform audits or attestation engagements, auditors and
audit organizations must take into account the three general classes of
impairments to independence---personal, external, and organizational. If
one or more of these impairments affects or can be perceived to affect
independence, the audit organization (or auditor) should decline to
perform the work---except in those situations in which an audit
organization in a government entity, because of a legislative
requirement or for other reasons, cannot decline to perform the work, in
which case the government audit organization must disclose the
impairment(s) and modify the GAGAS compliance statement.

**3.05** - When auditors use the work of a specialist, auditors should
assess the specialist's ability to perform the work and report results
impartially as it relates to their relationship with the program or
entity under audit. If the specialist's independence is impaired,
auditors should not use the work of that specialist.

**3.06** - If an impairment to independence is identified after the
audit report is issued, the audit organization should assess the impact
on the audit. If the audit organization concludes that it did not comply
with GAGAS, it should determine the impact on the auditors' report and
notify entity management, those charged with governance, the requesters,
or regulatory agencies that have jurisdiction over the audited entity
and persons known to be using the audit report about the independence
impairment and the impact on the audit. The audit organization should
make such notifications in writing.

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

**[Personal Impairments]{.underline}**

**3.07** - Auditors participating on an audit assignment must be free
from personal impairments to independence. Personal impairments of
auditors result from relationships or beliefs that might cause auditors
to limit the extent of the inquiry, limit disclosure, or weaken or slant
audit findings in any way. Individual auditors should notify the
appropriate officials within their audit organizations if they have any
personal impairment to independence. Examples of personal impairments of
individual auditors include, but are not limited to, the following:

-   immediate family or close family member who is a director or officer
    of the audited entity, or, as an employee of the audited entity, is
    in a position to exert direct and significant influence over the
    entity or the program under audit;

-   financial interest that is direct, or is significant/material though
    indirect, in the audited entity or program;

-   responsibility for managing an entity or making decisions that could
    affect operations of the entity or program being audited; for
    example, serving as a director, officer, or other senior position of
    the entity or program being audited; for example, serving as a
    director, officer, or other senior position of the entity, activity,
    or program being audited, or as a member of management in any
    decision making, supervisory, or ongoing monitoring function for the
    entity, activity, or program under audit;

-   concurrent or subsequent performance of an audit by the same
    individual who maintained the official accounting records when such
    services involved preparing source documents or originating data, in
    electronic or other form; posting transactions (whether coded by
    management or not coded); authorizing, executing, or consummating
    transactions (for example, approving invoices, payrolls, claims, or
    other payments of the entity or program being audited); maintaining
    an entity's bank account or otherwise having custody of the audited
    entity's funds; or otherwise exercising authority on behalf of the
    entity, or having authority to do so;

-   preconceived ideas toward individuals, groups, organizations, or
    objectives of a particular program that could bias the audit;

-   biases, including those resulting from political, ideological, or
    social convictions that result from membership or employment in, or
    loyalty to, a particular type of policy, group, organization, or
    level of government; and

-   seeking employment during the conduct of the audit with an audited
    organization.

[Exhibit (300)-30.1 (cont'd)]{.underline}

> [*GAGAS* Excerpts]{.underline}

**3.08** - Audit organizations and auditors may encounter many different
circumstances or combinations of circumstances that could create a
personal impairment. Therefore, it is impossible to identify every
situation that could result in a personal impairment. Accordingly, audit
organizations should include as part of their quality control system
procedures to identify personal impairments and help ensure compliance
with GAGAS independence requirements. At a minimum, audit organizations
should

-   establish policies and procedures to identify, report, and resolve
    personal impairments to independence,

-   communicate the audit organization's policies and procedures to all
    auditors in the organization and promote understanding of the
    policies and procedures,

-   establish internal policies and procedures to monitor compliance
    with the audit organization's policies and procedures,

-   establish a disciplinary mechanism to promote compliance with the
    audit organization's policies and procedures,

-   stress the importance of independence and the expectation that
    auditors will always act in the public interest, and

-   maintain documentation of the steps taken to identify potential
    personal independence impairments.

**3.09** - When the audit organization identifies a personal impairment
to independence prior to or during an audit, the audit organization
should take action to resolve the impairment in a timely manner. In
situations in which the personal impairment is applicable only to an
individual auditor or a specialist on a particular audit, the audit
organization may be able to eliminate the personal impairment. For
example, the audit organization could remove that auditor or specialist
from any work on that audit or require the auditor or specialist to
eliminate the cause of the personal impairment. If the personal
impairment cannot be eliminated, the audit organization should withdraw
from the audit. In situations in which auditors employed by government
entities cannot withdraw from the audit, they should follow paragraph
3.04.

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

[External Impairments]{.underline}

**3.10** - Audit organizations must be free from external impairments to
independence. Factors external to the audit organization may restrict
the work or interfere with auditors' ability to form independent and
objective opinions, findings, and conclusions. External impairments to
independence occur when auditors are deterred from acting objectively
and exercising professional skepticism by pressures, actual or
perceived, from management and employees of the audited entity or
oversight organizations. For example, under the following conditions,
auditors may not have complete freedom to make an independent and
objective judgment, thereby adversely affecting the audit:

-   external interference or influence that could improperly limit or
    modify the scope of an audit or threaten to do so, including
    exerting pressure to inappropriately reduce the extent of work
    performed in order to reduce costs or fees;

-   external interference with the selection or application of audit
    procedures or in the selection of transactions to be examined;

-   unreasonable restrictions on the time allowed to complete an audit
    or issue the report;

-   externally imposed restriction on access to records, government
    officials, or other individuals needed to conduct the audit;

-   external interference over the assignment, appointment,
    compensation, and promotion of audit personnel;

-   restrictions on funds or other resources provided to the audit
    organization that adversely affect the audit organization's ability
    to carry out its responsibilities;

-   authority to overrule or to inappropriately influence the auditors'
    judgment as to the appropriate content of the report;

-   threat of replacing the auditors over a disagreement with the
    contents of an audit report, the auditors' conclusions, or the
    application of an accounting principle or other criteria; and

-   influences that jeopardize the auditors' continued employment for
    reasons other than incompetence, misconduct, or the need for audits
    or attestation engagements.

**3.11** - Audit organizations should include policies and procedures
for identifying and resolving external impairments as part of their
quality control system for compliance with GAGAS independence
requirements.

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

[Organizational Independence]{.underline}

**3.12** - The ability of audit organizations in government entities to
perform work and report the results objectively can be affected by
placement within government, and the structure of the government entity
being audited. Whether reporting to third parties externally or to top
management within the audited entity internally, audit organizations
must be free from organizational impairments to independence with
respect to the entities they audit. Impairments to organizational
independence result when the audit function is organizationally located
within the reporting line of the areas under audit or when the auditor
is assigned or takes on responsibilities that affect operations of the
area under audit.

**Organizational Independence for External Audit Organizations**

**3.13** - External audit organizations can be presumed to be free from
organizational impairments to independence when the audit function is
organizationally placed outside the reporting line of the entity under
audit and the auditor is not responsible for entity operations. Audit
organizations in government entities can meet the requirement for
organizational independence in a number of ways and may be presumed to
be free from organizational impairments to independence from the audited
entity if the audit organization is

-   at a level of government other than the one to which the audited
    entity is assigned (federal, state, or local); for example, federal
    auditors auditing a state government program; or

-   in a different branch of government within the same level of
    government as the audited entity; for example, legislative auditors
    auditing an executive branch program.

**3.14** - Audit organizations in government entities may also be
presumed to be free from organizational impairments if the head of the
audit organization meets any of the following criteria:

-   directly elected by voters of the jurisdiction being audited;

-   elected or appointed by a legislative body, subject to removal by a
    legislative body, and reports the results of audits to and is
    accountable to a legislative body;

-   appointed by someone other than a legislative body, so long as the
    appointment is confirmed by a legislative body and removal from the
    position is subject to oversight or approval by a legislative body,
    and reports the results of audits to and is accountable to a
    legislative body; or

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

-   appointed by, accountable to, reports to, and can only be removed by
    a statutorily created governing body, the majority of whose members
    are independently elected or appointed and come from outside the
    organization being audited.

**3.15** - In addition to the presumptive criteria in paragraphs 3.13
and 3.14, GAGAS recognize that there may be other organizational
structures under which audit organizations in government entities could
be considered to be free from organizational impairments and thereby be
considered organizationally independent for reporting externally. These
structures provide safeguards to prevent the audited entity from
interfering with the audit organization's ability to perform the work
and report the results impartially. For an external audit organization
to be considered free from organizational impairments under a structure
different from the ones listed in paragraphs 3.13 and 3.14, the audit
organization should have all of the following safeguards. In such
situations, the audit organization should document how each of the
following safeguards were satisfied and provide the documentation to
those performing quality control monitoring and to the external peer
reviewers to determine whether all the necessary safeguards have been
met.

-   statutory protections that prevent the audited entity from
    abolishing the audit organization;

-   statutory protections that require that if the head of the audit
    organization is removed from office, the head of the agency report
    this fact and the reasons for the removal to the legislative body;

-   statutory protections that prevent the audited entity from
    interfering with the initiation, scope, timing, and completion of
    any audit;

-   statutory protections that prevent the audited entity from
    interfering with audit reporting, including the findings and
    conclusions or the manner, means, or timing of the audit
    organization's reports;

-   statutory protections that require the audit organization to report
    to a legislative body or other independent governing body on a
    recurring basis;

-   statutory protections that give the audit organization sole
    authority over the selection, retention, advancement, and dismissal
    of its staff; and

-   statutory access to records and documents related to the agency,
    program, or function being audited and access to government
    officials or other individuals as needed to conduct the audit.

> **Exhibit (300)-30.1 (cont'd)**

[*GAGAS* Excerpts]{.underline}

**[Organizational Independence for Internal Audit
Functions]{.underline}**

**3.16** - Certain federal, state, or local government entities employ
auditors to work for management of the audited entities. These auditors
may be subject to administrative direction from persons involved in the
entity management process. Such audit organizations are internal audit
functions and are encouraged to use the Institute of Internal Auditors
(IIA) *International Standards for the Professional Practice of Internal
Auditing* in conjunction with GAGAS. Under GAGAS, a government internal
audit function can be presumed to be free from organizational
impairments to independence for reporting internally if the head of the
audit organization meets all of the following criteria:

-   is accountable to the head or deputy head of the government entity
    or to those charged with governance;

-   reports the audit results both to the head or deputy head of the
    government entity and to those charged with governance;

-   is located organizationally outside the staff or line- management
    function of the unit under audit;

-   has access to those charged with governance; and

-   is sufficiently removed from political pressures to conduct audits
    and report findings, opinions, and conclusions objectively without
    fear of political reprisal.

**3.17** - The internal audit organization should report regularly to
those charged with governance.

**3.18** - When internal audit organizations that are free of
organizational impairments perform audits of external parties such as
auditing contractors or outside party agreements, and no personal or
external impairments exist, they may be considered independent of the
audited entities and free to report objectively to the heads or deputy
heads of the government entities to which they are assigned, to those
charged with governance, and to parties outside the organizations in
accordance with applicable law, rule, regulation, or policy.

**3.19** - The internal audit organization should document the
conditions that allow it to be considered free of organizational
impairments to independence for internal reporting and provide the
documentation to those performing quality control monitoring and to the
external peer reviewers to determine whether all the necessary
safeguards have been met.

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

**[Organizational Independence When Performing Nonaudit
Services]{.underline}**

**3.20** - Audit organizations at times may perform other professional
services (nonaudit services) that are not performed in accordance with
GAGAS. Audit organizations that provide nonaudit services must evaluate
whether providing the services creates an independence impairment either
in fact or appearance with respect to entities they audit. Based on the
facts and circumstances, professional judgment is used in determining
whether a nonaudit service would impair an audit organization's
independence with respect to entities it audits.

**3.21** - Audit organizations in government entities generally have
broad audit responsibilities and, therefore, should establish policies
and procedures for accepting engagements to perform nonaudit services so
that independence is not impaired with respect to entities they audit.
Independent public accountants may provide audit and nonaudit services
(commonly referred to as consulting) under contractual commitments to an
entity and should consider whether nonaudit services they have provided
or are committed to provide have a significant or material effect on the
subject matter of the audits.

**Overarching Independence Principles**

**3.22** - The following two overarching principles apply to auditor
independence when assessing the impact of performing a nonaudit service
for an audited program or entity:

-   audit organizations must not provide nonaudit services that involve
    performing management functions or making management decisions, and

-   audit organizations must not audit their own work or provide
    nonaudit services in situations in which the nonaudit services are
    significant or material to the subject matter of the audits.

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

**3.23** - In considering whether audits performed by the audit
organization could be significantly or materially affected by the
nonaudit service, audit organizations should evaluate

-   ongoing audits;

-   planned audits;

-   requirements and commitments for providing audits, which includes
    laws, regulations, rules, contracts, and other agreements; and

-   policies placing responsibilities on the audit organization for
    providing audit services.

**3.24** - If requested to perform nonaudit services that would impair
the audit organization's ability to meet either or both of the
overarching independence principles for certain types of audit work, the
audit organization should inform the requestor and the audited entity
that performing the nonaudit service would impair the auditors'
independence with regard to subsequent audit or attestation engagements.

**Types of Nonaudit Services**

**3.25** - Nonaudit services generally fall into one of the following
categories:

-   Nonaudit services that do not impair the audit organization's
    independence with respect to the entities it audits and, therefore,
    do not require compliance with the supplemental safeguards in
    paragraph 3.30.

-   Nonaudit services that would not impair the audit organization's
    independence with respect to the entities it audits as long as the
    audit organization complies with supplemental safeguards in
    paragraph 3.30.

-   Nonaudit services that do impair the audit organization's
    independence. Compliance with the supplemental safeguards will not
    overcome this impairment.

**Nonaudit Services That Do Not Impair Auditor Independence**

**3.26** - Nonaudit services in which auditors provide technical advice
based on their technical knowledge and expertise do not impair auditor
independence with respect to entities they audit and do not require the
audit organization to apply the supplemental safeguards. However,
auditor independence would be impaired if the extent or nature of the
advice resulted in the auditors' making management decisions or
performing management functions.

**Exhibit (300)-30.1 (cont'd)**

[*GAGAS* Excerpts]{.underline}

**3.27** - Examples of the types of services considered as providing
technical advice include the following:

-   participating in activities such as commissions, committees, task
    forces, panels, and focus groups as an expert in a purely advisory,
    nonvoting capacity to

    -   advise entity management on issues based on the auditors'
        knowledge or

    -   address urgent problems;

-   providing tools and methodologies, such as guidance and good
    business practices, benchmarking studies, and internal control
    assessment methodologies that can be used by management; and

-   providing targeted and limited technical advice to the audited
    entity and management to assist them in activities such as

    -   answering technical questions or providing training,

    -   implementing audit recommendations,

    -   implementing internal controls, and

    -   providing information on good business practices.

**Nonaudit Services That Would Not Impair Independence if Supplemental
Safeguards Are Implemented**

**3.28** - Services that do not impair the audit organization's
independence with respect to the entities they audit so long as they
comply with supplemental safeguards include the following:

-   providing basic accounting assistance limited to services such as
    preparing draft financial statements that are based on management's
    chart of accounts and trial balance and any adjusting, correcting,
    and closing entries that have been approved by management; preparing
    draft notes to the financial statements based on information
    determined and approved by management; preparing a trial balance
    based on management's chart of accounts; maintaining depreciation
    schedules for which management has determined the method of
    depreciation, rate of depreciation, and salvage value of the asset
    (If the audit organization has prepared draft financial statements
    and notes and performed the financial statement audit, the auditor
    should obtain documentation from management in which management
    acknowledges the audit organization's role in preparing the
    financial statements and related notes and management's review,
    approval, and responsibility for the financial statements and
    related notes in the management representation letter. The
    management representation letter that is obtained as part of the
    audit may be used for this type of documentation.);

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

-   providing payroll services when payroll is not material to the
    subject matter of the audit or to the audit objectives. Such
    services are limited to using records and data that have been
    approved by entity management;

-   providing appraisal or valuation services limited to services such
    as reviewing the work of the entity or a specialist employed by the
    entity where the entity or specialist provides the primary evidence
    for the balances recorded in financial statements or other
    information that will be audited; valuing an entity's pension, other
    post-employment benefits, or similar liabilities provided management
    has determined and taken responsibility for all significant
    assumptions and data;

-   preparing an entity's indirect cost proposal or cost allocation plan
    provided that the amounts are not material to the financial
    statements and management assumes responsibility for all significant
    assumptions and data;

-   providing advisory services on information technology limited to
    services such as advising on system design, system installation, and
    system security if management, in addition to the safeguards in
    paragraph 3.30, acknowledges responsibility for the design,
    installation, and internal control over the entity's system and does
    not rely on the auditors' work as the primary basis for determining

    -   whether to implement a new system,

    -   the adequacy of the new system design,

    -   the adequacy of major design changes to an existing system, and

    -   the adequacy of the system to comply with regulatory or other
        requirements;

-   providing human resource services to assist management in its
    evaluation of potential candidates when the services are limited to
    activities such as serving on an evaluation panel of at least three
    individuals to review applications or interviewing candidates to
    provide input to management in arriving at a listing of best
    qualified applicants to be provided to management; and

-   preparing routine tax filings based on information provided by the
    audited entity**.**

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

**Nonaudit Services That Impair Independence**

**3.29** - Compliance with supplemental safeguards will not overcome
independence impairments in this category. By their nature, certain
nonaudit services directly support the entity's operations and impair
the audit organization's ability to meet either or both of the
overarching independence principles in paragraph 3.22 for certain types
of audit work. Examples of the types of services under this category
include the following:

-   maintaining or preparing the audited entity's basic accounting
    records or maintaining or taking responsibility for basic financial
    or other records that the audit organization will audit;

-   posting transactions (whether coded or not coded) to the entity's
    financial records or to other records that subsequently provide
    input to the entity's financial records**;**

-   determining account balances or determining capitalization criteria;

-   designing, developing, installing, or operating the entity's
    accounting system or other information systems that are material or
    significant to the subject matter of the audit;

-   providing payroll services that

    -   are material to the subject matter of the audit or the audit
        objectives, and/or

    -   involve making management decisions;

-   providing appraisal or valuation services that exceed the scope
    described in paragraph 3.28 c;

-   recommending a single individual for a specific position that is key
    to the entity or program under audit, otherwise ranking or
    influencing management's selection of the candidate, or conducting
    an executive search or a recruiting program for the audited entity;

-   developing an entity's performance measurement system when that
    system is material or significant to the subject matter of the
    audit;

-   developing an entity's policies, procedures, and internal controls;

-   performing management's assessment of internal controls when those
    controls are significant to the subject matter of the audit;

-   providing services that are intended to be used as management's
    primary basis for making decisions that are significant to the
    subject matter under audit;

-   carrying out internal audit functions, when performed by external
    auditors; and

-   serving as voting members of an entity's management committee or
    board of directors, making policy decisions that affect future
    direction and operation of an entity's programs, supervising entity
    employees, developing programmatic policy, authorizing an entity's
    transactions, or maintaining custody of an entity's assets.

[Exhibit (300)-30.1 (cont'd)]{.underline}

[*GAGAS* Excerpts]{.underline}

**Supplemental Safeguards for Maintaining Auditor Independence When
Performing Nonaudit Services**

**3.30** - Performing nonaudit services described in paragraph 3.28 will
not impair independence if the overarching independence principles
stated in paragraph 3.22 are not violated. For these nonaudit services,
the audit organization should comply with each of the following
safeguards:

-   document its consideration of the nonaudit services, including its
    conclusions about the impact on independence;

-   establish in writing an understanding with the audited entity
    regarding the objectives, scope of work, and product or deliverables
    of the nonaudit service; and management's responsibility for

    -   the subject matter of the nonaudit services,

    -   the substantive outcomes of the work, and

    -   making any decisions that involve management functions related
        to the nonaudit service and accepting full responsibility for
        such decisions;

-   exclude personnel who provided the nonaudit services from planning,
    conducting, or reviewing audit work in the subject matter of the
    nonaudit service, and

-   do not reduce the scope and extent of the audit work below the level
    that would be appropriate if the nonaudit service were performed by
    an unrelated party.

**[Exhibit (300)-30.2]{.underline}**

[]{#exhibitQSIexcerpts .anchor}[*QSI* Excerpts]{.underline}

**[SECTION B\--INDEPENDENCE]{.underline}**

The independence standard for inspection work is:

> *In all matters relating to inspection work, the inspection
> organization and each individual inspector should be free both in fact
> and appearance from personal, external, and organizational impairments
> to independence.*

Inspectors and inspection organizations have a responsibility to
maintain independence so that opinions, conclusions, judgments, and
recommendations will be impartial and will be viewed as impartial by
knowledgeable third parties. The independence standard should be applied
to anyone in the organization who may directly influence the outcome of
an inspection and includes both Government and private persons
performing inspection work for an OIG.

Inspection organizations and inspectors should be alert to possible
impairments to independence and should avoid situations that could lead
reasonable third parties with knowledge of the relevant facts and
circumstances to conclude that the inspection organization or inspectors
are not independent and, thus, are not capable of exercising objective
and impartial judgment in conducting and reporting on an inspection.
Impairments to independence, either in fact or appearance, need to be
resolved in a timely manner. The actions of OIG staff should adhere to
the "Standards for Ethical Conduct for Employees of the Executive
Branch" and Federal conflict of interest laws. Inspection organizations
should have internal policies and procedures for reporting and resolving
real or perceived impairments to independence.

Inspection organizations that provide other professional services should
consider whether providing these services creates an independence
impairment either in fact or appearance that adversely affects their
independence for conducting inspections. Inspection organizations should
not (1) provide noninspection services that involve performing
management functions or making management decisions and (2) inspect
their own work or provide noninspection services in situations where the
noninspection services are significant/material to the subject matter of
inspections. Inspection organizations that provide other professional
services should refer to "Government Auditing Standards" issued by the
United Statement Government Accountability Office, which, although
specific to audit, provides detailed guidance relevant to handling the
provision of such services.

**[Exhibit (300)-30.2]{.underline}**

[*QSI* Excerpts]{.underline}

Inspection organizations and inspectors need to consider three general
types of impairments to independence-personal, external, and
organizational. If one or more of these impairments affect an inspection
organization's or an inspector's capability to perform work and report
results impartially, that organization or inspector should either
decline to perform the work or, if the situation necessitates that the
work cannot be declined, the impairment(s) should be reported in the
scope section of the inspection report.

**[Personal Impairments]{.underline}**

Personal impairments of staff members result from relationships and
beliefs that might cause inspectors to limit the extent of an inquiry,
limit disclosure, or weaken or slant inspection findings in any way.
Inspectors are responsible for notifying the appropriate officials
within their respective inspection organizations if they have any
personal impairment to independence. It is impossible to identify every
situation that could result in a personal impairment, but the following
are examples of personal impairments:

-   Having an immediate or close family member who is a director or
    officer of the entity being inspected or is in a position with the
    entity to exert direct and significant influence over the entity or
    the program being inspected. Immediate or close family members
    include spouses, spouse equivalents, dependents (whether or not
    related), parents, siblings, and nondependent children.

-   Having direct or significant/material indirect financial interest in
    the entity or program being inspected.

-   Having responsibility for managing an entity or decisionmaking that
    could affect operations of the entity or program being inspected;
    for example, as a director, officer, or other senior member of the
    entity, activity, or program being inspected or as a member of
    management in any decisionmaking supervisory, or ongoing monitoring
    function for the entity, activity, or program under inspection.

-   Having involvement with the preparation, maintenance, or
    authorization of official records/documents associated with the
    entity, activity, or program under inspection.

-   Having preconceived ideas toward individuals, groups, organizations,
    or objectives of a particular program that could bias the
    inspection.

-   Having biases, including those induced by political, ideological, or
    social convictions, that result from employment in or loyalty to a
    particular type of policy, group, organization, or level of
    government.

-   Seeing employment with an inspected organization during the conduct
    of the inspection.

**[Exhibit (300)-30.2]{.underline}**

[*QSI* Excerpts]{.underline}

**[External Impairments]{.underline}**

Factors external to the OIG can restrict work or interfere with the
inspector's ability to form independent and objective opinions and
conclusions. External impairments to independence occur when inspectors
are deterred from acting objectively and exercising professional
skepticism by pressures, actual or perceived, from management or
employees of the inspected entity or oversight organizations. For
example, if any of the following conditions exist, the OIG would not
have complete freedom to make an independent and objective judgment
which could adversely affect the work:

-   External interference or influence that could improperly or
    imprudently limit or modify the scope an inspection or threaten to
    do so, including pressure to reduce inappropriately the extent of
    work performed in order to reduce costs or fees.

-   External interference with the selection or application of
    inspection procedures or in the selection of transactions to be
    examined.

-   Unreasonable restrictions on the time allowed to complete an
    inspection or issue a report.

-   External interference in the assignment, appointment, or promotion
    of inspection personnel.

-   Restrictions on funds or other resources provided to the inspection
    organization that adversely affect the inspection organization's
    ability to carry out its responsibility.

-   Authority to inappropriately overrule or influence an inspector's
    judgment as to the appropriate content of the report.

-   Threat of replacement over a disagreement with the contents of an
    inspection report, an inspector's conclusions, or the application of
    criteria.

-   Influences that jeopardize an inspector's continued employment for
    reasons other than incompetence, misconduct, or the need for
    inspection services.

> When external factors restrict an inspection or interfere with an
> inspector's ability to form objective opinions and conclusions and the
> inspector cannot remove the limitation, the inspector should report
> the limitation in accordance with the respective OIG's internal
> policies and procedures.

**[Exhibit (300)-30.2]{.underline}**

[*QSI* Excerpts]{.underline}

**[Organizational Impairments]{.underline}**

Inspection organizations need to be free from organizational impairments
to independence. An organization's ability to perform work and report
the results impartially can be affected by its place within a
Department/Agency and the structure of the Department/Agency. Inspection
organizations within OIGs established by the Inspector General Act of
1978, as amended, derive organizational independence from the statutory
safeguards to independence established by the Act.

However, if an inspector believes there is an organizational impairment
that could affect his/her inspection, he/she should report the matter in
accordance with the respective OIG's internal policies and procedures.