July 2002 GOVERNMENT 

AUDITING 

STANDARDS

Answers to Independen

Standard Questions

GAO-02-870G
Page i 

Questions 

Relating to 

Independence 

Standard 

Implementation and 

Transition

Questions 

Concerning 

Certain 

Independence 

Standard 

Underlying 

Concepts

Audit and Nonaudit Services 

Overarching Principles and Safeguards 

Significance/Materiality 

Management Functions 

Subject Matter of the Audit 

Personal Impairments 

Questions 

about Applying 

the 

Independence 

Standard in 

Specific 

Nonaudit 

Circumstances

Bookkeeping Services 

Financial Statement Review and Basic 

Accounting Assistance 

Internal Audit Services 

Information Technology Services 

Work of Specialists 

Tax Services 

Budget Work 

Human Resource Services 
Page ii 
of th

Page 1 

United States General Accounting Office

Washington, D.C. 20548

On January 25, 2002, we issued an amend

Government Auditing Standards (1994 r

Amendment No. 3, Independence, which s

changed the previous standard to better se

interest and to maintain a high degree of i

objectivity, and independence for audits o

entities. While the new amendment deals 

of auditor independence issues, the most 

change relates to the standards associated 

nonaudit, or consulting services.

Understandably, we have received many i

the new independence standard due to its 

effect on auditors in connection with aud

entities and funds and on those who have 

otherwise required to use Government Au

Standards. Indeed, when we issued the n

we indicated that we planned to subseque

further guidance in the form of questions a

assist in its implementation. Accordingly, 

responds to questions related to the indep

standard’s implementation time frame, un

concepts, and application in specific nona

circumstances.

In making judgments on independence un

Government Auditing Standards and app

independence standard’s principles and sa

audit organizations should take a “substan

approach and consider the nature and sig

the services provided to the audited entity

and circumstances. Before an audit organ

to perform nonaudit services, it should ca

consider the need to avoid situations that 

reasonable third parties with knowledge o

facts and circumstances to conclude that 

not able to maintain independence in cond

It is imperative that auditors always be vie

independent in fact and appearance.
Page 2 

Importantly, when the independence standar

issued, we called for its provisions to be appl

audits for periods beginning on or after Octo

Because of the breadth of changes in the am

and to allow additional time for the new inde

standard’s effective implementation, we are 

its effective date to be applicable to all audits 

beginning on or after January 1, 2003.

Also, when we issued the new independence 

on January 25, 2002, we intended for audit or

to begin their transition at that time. We hav

found that some audit organizations affected 

independence standard, particularly smaller 

organizations and those in remote locations, 

have become immediately aware of its issuan

many audit organizations have raised implem

questions. Accordingly, we are providing the 

guidance to audit organizations to use in tran

the new independence standard.

Nonaudit services that were completed prior 

25, 2002, are exempt, or grandfathered, from 

independence standard’s provisions. Also ex

nonaudit services that were performed unde

contract entered into, or that were initiated b

government audit organization, by June 30, 2

provided the work is completed before June 

Also with the next update of Government Au

Standards and based on the information this 

provides, we plan several modifications to th

independence standard. We will

• expand paragraph 3.13, footnote 1, to full

that auditors who are required to follow t

independence standard in conducting the

work must also be aware of and comply w

applicable government ethics laws and re
Page 3 

and any other ethics requirements (suc

state boards of accountancy) associate

activities; 

• clarify paragraph 3.14, footnote 2, to sp

independence standard’s provisions re

the work of specialists applies to exter

consultants and firms performing wor

organization; and

• establish a requirement, in a new footn

paragraph 3.26a, that an audit organiza

obtain from an audited entity’s manage

acknowledgement in its management r

letter, which is required by Governmen

Standards, of the role of an audit orga

drafting financial statements and note

converting cash-based financial statem

accrual-based financial statements, as 

management’s review, approval, and re

for the financial statements, related no

accrual adjustments.

This question and answer document was p

draft for input to the Comptroller General

Council on Government Auditing Standar

major concepts were discussed with othe

parties. The council includes 21 experts in 

performance auditing and reporting draw

levels of government, academia, private e

public accounting.
Page 4 

An electronic version of this document can b

at (http://www.gao.gov/govaud/ybk01.htm). 

any questions regarding this document or th

independence standard, please contact Jeffr

Steinhoff, Managing Director, Financial Man

and Assurance, at (202) 512-2600, or Marcia 

Buchanan, Assistant Director, Financial Man

and Assurance, at (202) 512-9321.

David M. Walker

Comptroller General

of the United States
Page 5 
Page 6 

p

Implementation and Transition

On January 25, 2002, we issued an amend

Government Auditing Standards (1994 r

Amendment No. 3, Independence. As pro

amendment, the Government Auditing S

second general standard is as follows:

In all matters relating to the audi

audit organization and the individ

whether government or public, sh

both in fact and appearance from 

external, and organizational impa

independence.

Regarding this standard, GAO recognizes 

organizations have the capability of perfo

of services for their clients. However, for 

required to be conducted under Governm

Standards, in certain circumstances it is n

for an audit organization to perform both 

selected nonaudit services for the same c

circumstances, an audit organization and/

entity will have to make a choice as to wh

services an audit organization will provid

When issued, the new independence stand

for audit organizations to implement its p

all audits for periods beginning on or afte

2002. Because of the breadth of changes 

independence standard, this time frame is 

extended. The independence standard’s p

applicable to all audits for periods beginn

January 1, 2003. 

Also, when we issued the new independen

on January 25, 2002, we intended for audit 

to begin their transition at that time. We h

found that some audit organizations affec

independence standard, particularly smal

organizations and those in remote locatio
Page 7 

have become immediately aware of its issu

many audit organizations have raised imp

questions. Accordingly, we are providing 

guidance to audit organizations to use in t

the new independence standard.

Nonaudit services that were completed pr

25, 2002, are exempt, or grandfathered, fr

independence standard’s provisions. Also 

nonaudit services that were performed un

contract entered into, or that were initiate

government audit organization, by June 3

provided the work is completed by June 3

These matters are discussed in response to 

questions. 

1. The new independence standard s

preexisting professional standard

which an audit organization could 

performed certain nonaudit servic

certain accounting entry and payr

processing activities, without imp

organization independence. Woul

such nonaudit services prior to th

standard’s release on January 25, 

an audit organization’s independe

No. If such services were performed 

new standard’s release and they were 

with the then existing professional sta

audit organization’s independence wo

impaired. Nonaudit services perform

January 25, 2002, are exempt, or gran

from the application of the new stand
Page 8 

2. On the date the independence stand

issued some audit organizations may 

under contract to provide both audit 

nonaudit services. In that case, how 

audit organization make the transiti

new standard? 

Contracts for nonaudit services that wer

prior to January 25, 2002, (the date that t

standard was issued) will also be exemp

grandfathered, provided the nonaudit wo

completed by June 30, 2003, and would n

violated preexisting professional standa

transition period for already established 

will provide an audit organization and an 

entity time to make other arrangements 

conducting either the nonaudit services o

if necessary.

3. How would this exemption apply to b

contracts for nonaudit services that 

been signed on or after January 25, 

Originally, our intent was that any nonau

contract awarded on or after January 25

would not be exempt, or grandfathered. 

some audit organizations may not have u

this or were not aware of the standard w

issued on January 25, 2002. To be fair to 

organizations, we will exempt, or grandf

nonaudit services that were initiated, ag

performed by June 30, 2002, provided th

completed by June 30, 2003.
Page 9 

4. Would a nonaudit service perform

initiated by a government audit or

on or after January 25, 2002, but 

2002, be similarly exempt, or gran

Yes, if the work is completed by June 

5. What about nonaudit services rela

contracts that may be signed, or in

government audit organization, fr

2002, through January 1, 2003? 

The new independence standard’s pro

apply to these nonaudit service engag

6. Regarding a contract for nonaudit 

is exempt, or grandfathered, woul

organization’s independence be af

contract was extended after June 

Yes. On these contracts, extensions a

orders would be considered new cont

viewed in light of the two overarching 

safeguards.

7. On June 25, 2002, an audit organi

engaged to design and implement 

system for an entity and the work 

by June 30, 2003. Would this impa

independence of an audit organiza

conduct the entity’s financial stat

for periods beginning after Janua

No. An audit organization’s independ

not be impaired for nonaudit services 

were agreed to, by June 30, 2002, and 

on or before June 30, 2003. However, 

organizations enter into new contract

requests for additional nonaudit servi
Page 10 

should consider the overarching princip

safeguards.

8. On June 25, 2002, an audit organizat

engaged to design and implement an 

accounting system, and the work is c

in November 2003. When would an a

organization be considered independ

perform the entity’s financial statem

In this case, an audit organization compl

nonaudit service engagement in Novemb

after the transition period ended on June 

Therefore, an audit organization’s indepe

perform the entity’s financial statement 

impaired for as long as the entity uses th

accounting system. The passage of time 

impact on the impairment unless the sys

subsequently upgraded or redesigned to 

extent that it would be considered a new 

that were to occur, the new standard’s o

principles would not be violated because 

organization would not be auditing its ow

9. In the above situation, would an aud

organization’s independence be impa

were engaged to perform the nonaud

after June 30, 2002, but before Janu

2003, and the nonaudit services wer

completed by June 30, 2003?

An audit organization’s independence w

impaired. For a nonaudit service to be e

grandfathered, an audit organization mu

been engaged to perform the nonaudit s

June 30, 2002, and the related nonaudit w

be completed by June 30, 2003.
Page 11 

p

Underlying Concepts

Before an audit organization agrees to per

services, it should consider the need to av

that could lead reasonable third parties w

of the relevant facts and circumstances to 

the auditor is not able to maintain indepen

conducting audits. The standard for nonau

based on two overarching principles:

• Auditors should not perform managem

or make management decisions.

• Auditors should not audit their own w

nonaudit services in situations where t

services involved are significant/mater

subject matter of the audit.

For nonaudit services that do not violate t

principles, certain supplemental safeguar

to be met. For example, (1) personnel wh

nonaudit services would be precluded fro

any related audit work, (2) an audit organ

could not be reduced beyond the level tha

appropriate if the nonaudit work was perf

another unrelated party, and (3) certain d

and quality assurance requirements must 

We have received inquiries related to som

concepts underlying the two overarching 

the safeguards. We have been asked, for e

further guidance regarding what constitut

management function, significance/mater

subject matter of the audit. This section p

information on a range of areas such as th
Page 12 

Audit and Nonaudit 

Services

10. Because of the significant and differ

audit and nonaudit services can have 

organization independence, how can 

organization distinguish between th

GAGAS define audit services as financia

attestation engagements, and performan

In nonaudit services, audit organizations 

tasks requested by management that dir

support the entity’s operations. Nonaud

(1) are generally performed for the sole 

benefit of the entity requesting the work 

provide information or data to a request

without providing verification, analysis, 

evaluation of the information or data and

the work does not usually provide a basi

conclusions, recommendations, or opini

information or data. The nature and sco

nonaudit service is generally determined 

agreement between an audit organizatio

audited entity or by the requesting party

contrast, the nature and scope of an aud

determined by an audit organization in o

satisfy the audit objectives.

11. The independence standard, paragra

gives examples of nonaudit services 

typically would not create an impairm

audit organization’s independence. 

provision of these services a safe ha

No. The examples in paragraph 3.26 are 

in nature. The facts and circumstances 

nonaudit service always need to be cons

light of the two overarching principles a

substance over form doctrine. If either o

principles would be violated, an audit or

and/or the audited entity need to decide 
Page 13 

audit organization will provide the no

or perform the audit. 

12. May staff members of an audit org

who provide nonaudit services con

audit organization’s audit engagem

information based on the knowled

about an audited entity and its op

Yes. The independence standard perm

knowledge sharing. The nonaudit ser

have specific understanding of an aud

internal controls that, for example, co

to the audit engagement team in plann

Since the audit engagement team is re

obtain a sufficient understanding of in

controls to plan the audit and to deter

nature, timing, and extent of tests to b

the understanding that the nonaudit a

team may have of an audited entity’s o

significantly assist in fulfilling this req

This information can be conveyed to 

engagement team and documentation 

nonaudit team can be transferred for 

audit engagement team; but the nonau

team cannot otherwise participate in 

However, the audit engagement team 

mindful that knowledge shared by the 

service team cannot be used to reduc

work beyond the level that would be 

the nonaudit work was performed by 

unrelated party.

13. What circumstances can give rise 

impairments to independence and 

audit organization detect and prev

The independence standard, in paragr

presents examples of personal impair
Page 14 

independence, including factors such as 

direct or a significant/material indirect f

interest in an audited entity or program. 

organization and its staff members, inclu

internal experts and specialists, need to 

possible impairments to staff member 

independence. To assist in this regard, a

organization should have an internal qua

system (see paragraph 3.15) to help dete

auditors and internal experts and specia

any personal impairment to independen

could affect their impartiality or the app

impartiality on a given assignment.

14. If an audit organization is asked to e

program’s efficiency, can it perform t

as a performance audit (instead of a

consulting engagement) without imp

independence to do further audits fo

requesting entity?

This work could be done as either a perf

audit or as a consulting engagement. If t

performed in accordance with the GAGA

performance auditing standards, includi

general, fieldwork, and reporting standa

provisions of the independence standard 

paragraphs 3.18 through 3.26 do not app

audit organization’s independence would 

impaired. If performed as a consulting s

work would be considered a nonaudit se

that case, the independence standard’s o

principles must not be violated and the s

must be applied.
Page 15 

Overarching 

Principles and 

Safeguards

15. As indicated previously, the new i

standard is principles-based. Is th

practical, impartial way for audit o

to apply the overarching principle

new standard being construed as r

Yes. Making decisions involving poss

independence impairment related to a

nonaudit services for the same audite

require reasonable judgment by audit 

and auditors. In each case, the decisi

independence is impaired is likely to 

different factors, considering the natu

nonaudit service and its significance/m

the subject matter of the audit. In oth

facts and circumstances of the nonau

drive the judgment.

In addition, the audit organization sho

the totality of services provided to the 

in making reasonable judgments on in

Overall, an audit organization should 

“substance over form” approach in ap

principles and safeguards. For examp

substance, the audit organization is ef

maintaining the official accounting re

audit organization has violated the ov

principles and the express prohibition 

3.26a.

16. What is the potential impact on an 

organization’s independence if it p

nonaudit services?

Audit organizations that provide nona

should consider whether providing th

creates an impairment, either in fact o

that adversely affects its independenc

conducting audits. If an audit organiz
Page 16 

a nonaudit service that would cause it to 

or both of the overarching principles, an 

organization would not be considered in

in performing any related audit services 

audited entity. When a potential indepen

impairment may arise in subsequent aud

audit organization and/or an audited ent

decide which of the services (either aud

nonaudit) the audit organization will pro

becomes a matter of choice.

17. If one office or unit of an audit orga

performs a nonaudit service that wo

either of the two overarching princip

particular audited entity with respec

subsequent audit work, could anothe

audit organization’s offices or units 

the subsequent audit without being 

No. When any one office or unit of an au

organization performs nonaudit services 

audited entity, it affects the entire audit 

organization’s independence as it relates 

entity.

We consider an audit organization to be 

federal, state, or local government organ

performs financial, attestation, and perfo

audits or (2) a form of organization perm

state law or regulation that is engaged in 

practice of public accounting. One offic

an audit organization is not differentiate

another. Consequently, each office or un

considered to be part of the same audit o

rather than separate audit organizations. 

it is of utmost importance for an audit or

to always be aware of nonaudit services 

across its offices or units.
Page 17 

18. An audit organization has put a fi

between its consulting and auditin

Could the work of the consulting 

the audit organization’s independ

perform audits?

Yes. In this case, both units are still pa

organization. Therefore, the indepen

standard’s overarching principles and 

would apply.

19. If an audit organization sells its c

unit to another firm or the consul

spun off as an independent entity, 

be the affect on the audit organiza

independence to perform audits?

In addressing independence matters u

independence standard, an audit orga

cannot do indirectly what it cannot do 

audit organization has totally divested 

consulting unit—that is, it does not ha

financial interest in the consulting un

control over its work—an audit organ

independence to perform audits woul

impaired by subsequent nonaudit serv

by its former consulting unit.

However, if the audit organization ret

financial interest in its former consult

audit organization’s independence wo

impaired by any work done by the co

that would violate an overarching prin

audit organization done the nonaudit 

Likewise, if an audit organization has 

financial interest in any other entity th

consulting services, an audit organiza

independence would be impaired by w

this other entity in the same manner a
Page 18 

for a consulting unit that it sold or spun 

situations exemplify the application of th

substance over form doctrine and why it 

important for an audit organization to th

work in that context.

20. In the above circumstance, what abo

audit organization’s independence w

to nonaudit services its former cons

performed before it was sold or spun 

For these prior services, unless the nona

provided by the audit organization’s form

consulting unit was exempt, or grandfath

the independence standard, the audit or

independence would be affected in the s

would have been affected if the consultin

still under the ownership and control of 

organization. 

21. Is an audit organization’s independe

affected by an affiliation with a team

consortium, or partnering arrangem

other organizations?

Affiliations such as these would not, in a

themselves, cause an impairment to inde

Any impairment to the audit organizatio

independence would depend on the spec

and circumstances of its involvement as 

to the overarching principles. Specifical

organization would need to consider its 

work, role, and financial interest in orde

that it does not impair its independence 

the overarching principles and it compli

safeguards, as applicable.
Page 19 

22. The senior leadership or partners 

organization establish a new entit

and apart from the audit organiza

provides nonaudit or consulting s

senior leadership or partners of th

organization own and/or control t

entity. Since the audit organizatio

not have a direct financial interes

control of the new entity, what wo

effect on the audit organization’s 

independence to perform audits?

As stated previously, under the new in

standards, an audit organization cann

indirectly what it cannot do directly. 

arrangement described in the question

substance over form doctrine, the aud

would be impaired by any work done 

entity that would have violated an ove

principle had the audit organization d

itself.

In this case, the senior leadership or p

audit organization would clearly have 

vested interest in the work of the new 

success. In substance, the audit organ

be attempting to do through the new 

could not do itself and still maintain i

independence. An audit organization 

be careful to ensure that it is indepen

fact and appearance. A reasonable th

would most certainly question this re

being one of form over substance to t

new entity was doing work that woul

independence if done by an audit orga
Page 20 

23. If an audit organization performs a n

service that results in an impairmen

independence at one federal agency, 

impairment extend to other federal a

well? 

No. However, there is a caveat. Genera

audit organization has an impairment to 

independence related to one particular 

governmental agency—whether at the fe

or local level—an audit organization’s ind

is not impaired with respect to other gov

agencies, as long as the two agencies are 

entities.

At the federal level, for example, the Dep

Health and Human Services (HHS) and t

Security Administration (SSA) are separa

Therefore, if an audit organization provi

nonaudit services, it would not affect an 

organization’s independence as it related 

SSA. 

An exception to this example would be c

the subject matter of the audit involved 

where the work of HHS and SSA may ov

where one of these organizations may be 

services to the other. These situations c

in the nonaudit service being material to 

objectives and an audit organization aud

own work, which would violate an overa

principle. Accordingly, the audit organiz

to be alert for such situations and, apply

substance over form doctrine, ensure th

not violate the overarching principles an

the safeguards.
Page 21 

24. If an audit organization does cons

involving the valuation of a mater

for the financial statements of a p

bureau within a major department

organization independent to cond

bureau’s financial statement audit

No. The audit organization would not 

independent to conduct the bureau’s 

statement audit because the nonaudit 

be significant/material to the subject m

which would violate the overarching p

audit organizations should not audit th

25. In the above situation, would the 

organization be independent to co

department’s financial statement 

It would depend on the materiality of 

level line item at the department level

valuation were significant/material to 

department’s financial statements, the 

organization’s independence would b

connection with the department as w

other hand, if the valuation is not 

material/significant to the department

statements, the audit organization’s in

not impaired and it could perform the 

department, provided it complies with 

safeguards. 
Page 22 

26. How would an audit organization’s 

independence be affected if it provid

nonaudit services to an entity that p

central service, such as payroll proc

support each of a department’s entit

other departments as well?

An audit organization would apply the 

independence standard’s overarching pri

safeguards as discussed in the previous 

In the example cited in this question, the 

organization’s independence could be im

perform audits for the department and it

components, as well as other federal age

personnel costs or payroll operations ar

significant/material to the subject matter 

audit. At the federal level, for example, 

Department of Agriculture’s (USDA) Nat

Finance Center provides payroll services 

components and for many other departm

agencies.

27. What routine activities can an audit 

organization provide without impair

independence and requiring it to app

safeguards?

The independence standard, paragraph 3

several routine activities that are always 

not significant/material to the subject m

audit and that an audit organization can 

without impairing independence provide

organization does not make managemen

or perform management functions. For e

audit organization can provide routine a

audited entity and its management to as

activities such as establishing internal co

implementing audit recommendations, c

technical questions, and/or provide train
Page 23 

examples of activities that the audit o

can be involved with that are conside

include providing tools and methodol

best practice guides, benchmarking st

internal control assessment methodo

collaborating with others to strengthe

standards; developing audit methodol

providing legal/accounting opinions o

assistance to a legislative body. The d

follow the audit organization’s advice 

management of the audited entity. 

28. A federal government office of ins

general has as its mission both au

investigative functions and is requ

follow Government Auditing Stan

audits. When a federal inspector 

undertakes an investigation, is it 

an audit or a nonaudit service for 

applying the independence standa

When a federal office of inspector gen

undertakes an investigation, it is cons

neither an audit nor a nonaudit servic

does not apply.

29. Would the previous answer apply 

inspector general performed an in

using the President’s Council on I

Efficiency standards?

Yes.
Page 24 

30. Would the safeguards apply if an aud

organization provides a nonaudit ser

may not be a routine activity, but inv

a de minimis amount of time to perfo

An audit organization always must ensur

nonaudit service does not violate the ov

principles. If the overarching principles 

violated, then the safeguards must be co

In applying the safeguards and for reaso

efficiency and practicality, if the nonaud

involves a total of 40 hours or fewer as 

a specific audit engagement, the safegu

associated with precluding personnel wh

the nonaudit service from performing re

work would not be required. The other 

in paragraph 3.25, though, would apply. 

Auditors and audit organizations need to 

related services that may have been perf

under separate contracts or separate eng

in applying the de minimis criteria, and t

not inadvertently or purposely perform r

services under separate contracts or eng

a manner that would circumvent the saf

Related nonaudit services need to be con

together in determining the overall time 

performing the services.

In applying the safeguards, audit organiz

to be able to articulate why the nonaudit 

should be considered as a separate, unre

service to other nonaudit services being 

Substance over form is paramount, and 

“unbundling” of services should not be u

means to circumvent an impairment to 

independence. This situation would be c

serious violation of the GAGAS indepen
Page 25 

standard and could cast doubt on the 

audit organization. 

31. If an audit organization provides 

service that has no relationship w

any ongoing or planned future aud

would all of the safeguards apply?

No. If the nonaudit service has no rel

whatsoever to either ongoing or plann

under GAGAS, then the safeguards co

(1) precluding personnel who provide

service from performing related audit 

(paragraph 3.25c), and (2) reducing th

related audit work (paragraph 3.25d) 

applicable.

At the same time, in deciding whether 

nonaudit service, government audit o

should consider their broad audit resp

and any legislative or other requireme

limit their ability to decline to provide 

work, as discussed in paragraph 3.24. 

nonaudit service may have no relation

current or planned audits, it could aff

independence of the audit organizatio

future audit work. For this reason, th

safeguards in paragraph 3.25 would a

nongovernment audit organization als

consider its future commitments for a

as discussed in paragraph 3.24, it may 

position to decline to perform a futur

government audit organization. 
Page 26 

Significance/

Materiality

32. The independence standard uses the 

“significant” and “material.” Are th

synonymous? 

Yes. Government Auditing Standards c

financial statement audits, where “mater

typically used, and performance audits, 

term “significant” is typically used. Impo

both terms involve the consideration of 

quantitative and qualitative elements.

33. In determining significance/material

an audit organization consider the c

nature of related nonaudit services?

Yes. Each nonaudit service should be co

light of other previous or current nonaud

When considered in isolation, each nona

may not be deemed significant/material; 

such services are considered cumulative

could be deemed significant/material and

impair auditor independence. This is on

why it is important for an audit organiza

document its nonaudit services and have 

to track these services.

Management 

Functions

34. As related to nonaudit services, wha

constitute a management function?

This question can best be responded to b

illustrating several types of situations th

typically constitute management functio

include

• serving as a member of an entity’s ma

decision-making committee or on its b

directors (although participating as an 
Page 27 

or nonvoting ex-officio member is p

under paragraph 3.23),

• making policy decisions affecting t

and operations of entity programs,

• supervising entity employees,

• developing entity programmatic po

• authorizing entity transactions, or

• maintaining custody of entity asset

assets are in the custody of an inve

and, under its statutory authority, a

as evidence in a investigation).

It would be important that audit organ

ensure that the audited entity underst

responsibility for the substantive outc

is in a position to make an informed j

the results of an audit organization’s n

service. Audit organizations should c

consider the evidence required by par

that, in fact, the management-level ind

designated to oversee the nonaudit se

necessary qualifications to conduct th

needed.

35. If an individual auditor has a man

responsibility related to an audite

responsible for making decisions t

affect the audited entity’s operati

programs, can the audit organizat

independence to audit the entity?

No. Making management decisions o

responsibility for managing the entity 

one of the overarching principles. We
Page 28 

individual auditor to perform manageme

or make a management decision, the ind

of the entire audit organization would be 

Subject Matter of 

the Audit

36. For a performance audit, what does 

“subject matter of the audit” mean? 

does this phrase mean for a financial 

audit?

For performance audits, the subject mat

audit is defined by the audit objectives, a

generally limited to the program, activity

operation under review. For financial st

audits, the subject matter of the audit is 

by the audit objectives as well, and can v

audits. If the financial statement audit o

to express an opinion on the financial st

taken as a whole, then the subject matte

audit is the financial statements taken as 

the financial statement audit objective is 

an opinion on each material unit within 

local government, the subject matter of 

each material unit.

Personal 

Impairments

Paragraph 3.13 states that auditors need to c

three general classes of impairments to inde

personal, external, and organizational—and 

footnote indicating the need to also follow o

of professional conduct. With the next Gove

Auditing Standards update, we will expand 

as follows: 

Auditors who are required to follow the 

independence standard in conducting t

work must also be aware of and comply 

applicable government ethics laws and 

and any other ethics requirements (suc
Page 29 

of state boards of accountancy) asso

their activities. For example, federa

need to be aware of and comply with 

requirements associated with the Off

Government Ethics. Also, governme

nongovernment auditors who are cer

accountants should follow the code of 

conduct of the state board with juris

the practice of the public accountant 

organization, as applicable, and if a 

American Institute of Certified Publi

(AICPA), the AICPA code of professio

37. Paragraph 3.13, footnote 1, covers 

nongovernment auditors to also fo

codes of professional conduct. Wh

government auditors?

As noted above, we plan to expand pa

footnote 1, to cover government audit

Also, we reiterate that all auditors wh

to follow the new independence stand

conducting their audit work must also 

and comply with any applicable gover

laws and regulations and other requir

as those of state boards of accountan

with their activities.
Page 30 

38. Under paragraph 3.25c of the indepe

standard, an audit organization’s per

who provide nonaudit services are p

from planning, conducting, or review

work related to the nonaudit service

work is covered in planning, conduct

reviewing audit work?

As discussed in GAGAS: 

• Planning includes determining audit 

scope, and methodology; establishing 

evaluate matters subject to audit; and 

coordinating the work of other audit 

organizations. This excludes individu

roles are limited to gathering informat

planning the audit. (In this regard and 

previously discussed, a nonaudit servi

convey knowledge to an audit engage

• Conducting includes performing audi

procedures necessary to accomplish t

objectives in accordance with GAGAS

• Reviewing includes examining the au

and/or the report contents and substa

determine whether the audit objective

accomplished and the evidence suppo

report’s technical content and substan

issuance.
Page 31 

39. If an individual audit staff membe

involvement in the nonaudit servi

and appearance, was insignificant

paragraph 3.25c preclude the audi

planning, conducting, or reviewing 

work related to the nonaudit serv

No. In applying the substance over fo

the facts and circumstances presente

staff member’s independence would n

impaired.

40. If a staff member of an audit orga

participated in an audited entity’s 

making responsibilities through p

employment with an audited entit

work on audits of the entity?

It would depend on the subject matte

and time that has lapsed since the sta

participated in the policy-making. If t

described involves policies—such as t

an audited entity’s financial reporting

relate and are significant/material to t

matter of the audit—such as a financi

audit—it would constitute a personal 

the individual staff member’s indepen

auditor needs to be free from this per

impairment for “a cooling-off” period 

allowed to work on audits involving t

matter. Footnote 5 (at paragraph 3.15

the auditor needs to be free from this 

for the period covered by the activity 

including any financial statements be

and for the period in which the audit 

performed and reported. In most cas

that individual staff members should 

themselves of involvement with the a

years. However, this situation would 
Page 32 

audit organization’s independence to per

financial statement audit for an audited 

41. Does the engagement-team concept a

financial, business, and employment 

relationships of an audit organizatio

Yes. The independence standard, in foot

paragraph 3.17, provides that “auditors p

in the audit assignment, including those 

perform review of the report, and all oth

an audit organization who can directly in

outcome of the audit, need to be free fro

impairments.” Although this footnote sp

applies to paragraph 3.17, the engageme

concept applies to all financial, business

employment relationships discussed in p

3.15. 

42. As set out in paragraph 3.15g, perso

impairment includes “seeking emplo

with an audited organization during 

conduct of the audit.” Can this perso

impairment be mitigated through rem

individual from the engagement?

Yes. See paragraph 3.17.

43. What elements are needed in an inte

quality control system over audit or

independence? If an audit organizat

small, does the internal quality cont

need to be as elaborate as that descr

paragraph 3.16? 

As discussed in paragraph 3.32 of Gover

Auditing Standards, the nature and ext

audit organization’s internal quality cont

depends on a number of factors, such as 
Page 33 

organization’s size, the degree of oper

autonomy allowed its personnel and i

the nature of its work, its organization

and appropriate cost-benefit consider

the systems established by individual 

will vary as will the need for, and the e

documentation of the systems. Howe

organization should prepare appropri

documentation to demonstrate compl

policies and procedures to identify pe

impairments to independence. For a 

organization, this need not be elabora

substance over form doctrine is para

applying all key elements of this indep

standard.

44. If the head of, or other individual 

a government audit organization i

statute as a member of an oversig

such as one that is responsible for 

administering a governmental ent

system, can the audit organization 

the program?

In paragraph 3.13, the standard states 

situations in which a government aud

of a legislative requirement or for oth

cannot decline to perform the work, t

still perform and report on the audit. 

impairment should be reported in the 

of the audit report. In the disclosure, 

consider addressing the following issu

cause of the impairment, (2) the mand

audit, and (3) any compensating actio

minimize the impairment.
Page 34 

45. Would the previous answer be differ

government auditor were required b

to provide any nonaudit services tha

otherwise violate the overarching pr

No. The answer would be the same, as p

3.13 covers all situations of this nature. I

where a government audit organization i

by law to perform a nonaudit service and 

decline to perform the work, it must ens

related audit report clearly makes the ne

disclosures, to ensure the situation is tra

the reader of the audit report. However, 

statutorily required nonaudit service is a 

activity, as delineated in paragraph 3.23, 

not violate an overarching principle, app

substance over form concept, disclosure 

report would not be necessary.
Page 35 

p

Specific Nonaudit Circumstances

The independence standard recognizes th

organizations may encounter many differe

circumstances or combinations of circum

could result in an impairment to independ

same time, the standard in paragraph 3.23 

that audit organizations can provide routi

answer technical questions without violat

overarching principles or having to compl

supplemental safeguards. The standard a

examples of how certain nonaudit service

treated in determining audit independenc

The answers to the following questions pr

guidance to assist in implementing the ind

standard in certain specific nonaudit circu

Bookkeeping 

Services

Several questions have been raised regard

organization’s development of draft financ

and notes and other bookkeeping services

responding to those questions, in the next 

Auditing Standards update, we plan to a

following requirement as a footnote after 

sentence in paragraph 3.26a.

If an audit organization has prepare

financial statements and notes and p

financial statement audit, it should 

the audited entity’s management an 

acknowledgement in its managemen

representation letter, required by Go

Auditing Standards, the audit organ

in this regard and entity manageme

approval, and responsibility for the f

statements and related notes. Likew

audit organization converts cash-ba

statements to accrual-based financia

it should obtain from the audited en

management an acknowledgement in 
Page 36 

management representation letter the a

organization’s role in reflecting accrua

entity management’s review, approval, 

responsibility for the accrual adjustme

46. Can an audit organization be involve

preparing a trial balance and draft fi

statements and notes without impair

independence to audit the financial 

statements? Can audit engagement 

members perform these activities? 

Maintaining the audited entity’s books an

is the responsibility of its management. 

Accordingly, management is responsible 

ensuring that these books and records a

support the preparation of financial stat

accordance with generally accepted acc

principles and that records are current a

balance.

If an audit organization were asked to pr

balance, the audit organization would no

audit independence if the preparation of 

balance was purely technical in nature. 

balance should be based on managemen

accounts, and the audited entity’s manag

take responsibility for the trial balance. 

words, the preparation of the trial balan

matter of formatting the chart of accoun

trial balance. Work involving more than 

technical formatting of the trial balance 

impair independence because the audit o

would be performing a management func

would violate an overarching principle. 

The audit organization’s preparation of d

financial statements and note disclosure

trial balance provided by entity managem
Page 37 

prepared by the audit organization as 

above), which the management of the 

then reviews and approves, would no

auditor’s independence (see paragrap

3.26a). This work is considered techn

and as part of the audit. The audit org

must be careful not to make managem

and management of the audited entity 

knowledge to evaluate and approve th

financial statements and notes and ta

responsibility for them.

Further, the audit engagement team th

the trial balance and draft financial st

notes could also perform the financia

audit. The audit organization must co

other safeguards in paragraph 3.25. A

management representation letter, req

auditing standards, should acknowled

organization’s role in preparing the tri

draft financial statements and related 

management’s review, approval, and r

for the financial statements and relate

Likewise, auditors can convert cash-b

statements to accrual-based financial 

long as management is in the position 

informed judgments to review, approv

responsibility for the appropriateness 

conversion. In providing this service, 

that proposed the accruals could also 

financial statement audit since this se

substance the same as proposing adju

correcting entries as long as managem

decision on accepting the entries. Sim

stated above, the management repres

should also acknowledge the audit or

role in reflecting accruals and manage

approval, and responsibility for the ac

adjustments. 
Page 38 

It is important to reiterate that the answ

question is conditioned on the audit orga

starting with appropriate books and reco

balance and the audited entity having 

knowledgeable management. Where thi

case, the audit organization must be car

cross the line of making management’s d

performing management functions and f

a position where reasonable third partie

knowledge of the relevant facts and circ

could conclude that the auditor has, in e

maintained the audited entity’s books or 

and, therefore, has impaired its independ

conduct the financial statement audit. 

47. The AICPA defines the compilation o

statements as presenting in the form 

financial statements information tha

representation of management witho

undertaking to express any assuranc

statements. This definition acknowl

the audit organization might find it n

to perform other accounting service

compile the financial statements, su

adjusting the books of accounts or c

on accounting matters. Can an audi

organization provide a compilation s

without impairing independence to a

subsequent period financial stateme

Yes. Compilations are generally perform

periodically supply financial information 

understandable format, such as quarterl

statements. Similar in substance to draf

financial statements and notes, the comp

financial information would not impair t

organization’s independence as long as i

make management decisions and manag

the audited entity has the knowledge to e

approve the compilation and to take resp
Page 39 

for it. Also, the team that performed 

compilation could perform the financ

audit as long as the audit organization 

the other safeguards in paragraph 3.2

Similar to our answer to the previous 

regarding the preparation of draft fina

statements and notes, we reiterate tha

is conditioned on the audit organizati

with appropriate books and records a

entity having knowledgeable managem

Therefore, the audit organization was 

perform the compilation without havi

reconstruct the books and records, an

entity’s management was in a position 

responsibility for the compilation.

48. Paragraph 3.26a of the independe

states that independence is impai

audit organization maintains or pr

audited entity’s basic accounting r

maintains or takes responsibility 

financial or other records that an 

organization will audit. What is c

be an entity’s basic accounting rec

basic financial or other records?

Basic accounting and financial record

considered to be source documents o

data evidencing transactions have occ

example, purchase orders, payroll tim

customer orders). Such records wou

an audited entity’s general ledger and 

records, or equivalent. Supporting sc

not considered to be basic accounting 

records, as long as management has m

decisions in key areas regarding these 

schedules. An example of a supportin
Page 40 

depreciation schedule, which the next qu

discusses further.

49. Can an audit organization assist an a

entity’s management in preparing de

schedules without impairing its inde

to perform the financial statement a

Yes, as long as the audited entity’s mana

determined such key factors as the meth

of depreciation and the salvage value of 

If the audit organization makes these de

has violated an overarching principle. To 

its independence, the audit organization

must be limited to calculating the deprec

the audited entity’s management must ta

responsibility for the depreciation sched

audit organization must take care that th

its work does not cross the line and plac

position where reasonable third parties 

knowledge of the relevant facts and circ

could conclude that the auditor’s indepe

impaired. Also, given the nature of this 

service, the audit organization would no

apply the safeguard precluding personne

provided the nonaudit services from aud

own work. However, the remaining safe

paragraph 3.25 would apply.

50. If the audit organization posts trans

coded by the audited entity’s manage

would the audit organization’s indep

be impaired to perform the financial 

audit?

Yes. Paragraph 3.26a specifically addres

posting of transactions, whether coded b

management or not, to an entity’s financ

or to other records that subsequently pr
Page 41 

to an entity’s financial records. An au

organization cannot provide this serv

impairing its independence to perform 

statement audit. 

51. An audit organization arrives at a

entity for the first day of fieldwor

that the last quarter’s cash receip

disbursements and other transacti

been recorded. To assist the audi

updating its financial records, the 

organization agrees to prepare an

transactions to the general ledger 

audit organization’s professional j

Would the audit organization’s ind

be impaired to perform the financi

audit?

Yes. The audit organization would be 

transactions to the audited entity’s ge

which impairs its independence as dis

paragraph 3.26a.
Page 42 

52. An audited entity provides an audit 

organization with a record of all cas

and cash disbursements made during 

period. The audit organization (1) d

the appropriate classification of eac

transaction based on the available in

(such as payee and description), (2) 

current-year transactions to the prio

adjusted balance sheet and then det

necessary adjustments to convert th

information to the accrual basis of a

and (3) uses this adjusted informatio

financial statements, which are revie

and approved by an audited entity. I

case, would an audit organization’s 

independence be considered impaire

perform the financial statement aud

Yes. Determining the appropriate classif

receipts and disbursements, in substanc

the same as maintaining/preparing an au

entity’s basic accounting records. Likew

current year transactions to the prior ye

sheet has the same affect as posting tran

the audited entity’s financial records. As 

in paragraph 3.26a, activities such as the

impair an audit organization’s independe

perform the financial statement audit.
Page 43 

53. An audited entity provides its cas

and disbursements journals to the 

organization, which, as part of its 

statement audit, proposes adjusti

convert from a cash basis to an acc

accounting. The audited entity’s m

which has requested the conversio

approves, and posts the entries an

sufficient knowledge and ability t

responsibility for them. Would th

organization’s independence be co

impaired for the financial stateme

No. An audit organization could perfo

activities as part of a financial statem

without impairing its independence, p

management of the audited entity is in 

evaluate and take responsibility for re

conversion. As with the answers to th

question related to converting financi

from a cash to an accrual basis, this an

that the cash receipts and disburseme

only have to be converted and do not 

reconstructed to such an extent that t

organization, in substance, would be m

preparing the audit entity’s basic acco

records. Also, similarly to previous a

management representation letter sho

acknowledge the audit organization’s 

conversion and management’s review

responsibility for the conversion.
Page 44 

54. A small audited entity’s sole account

suddenly leaves due to an emergency 

and it asks an audit organization to 

temporary staff person until a new a

is hired. If the staff person that the 

organization assigns to provide this 

is not part of the audit engagement t

the audit organization complies with 

required safeguards, would its indep

be considered impaired on a financia

statement audit?

First, an emergency situation should be 

cataclysmic event that is unexpected an

severe adverse impact on the audited en

Second, the audit organization would ha

document that, under the circumstances

audited entity had no other viable option 

the emergency, such as hiring temporary 

carry them over. The audit organization 

ensure that the audited entity understan

to exhaust all other viable options and th

organization should be viewed as the las

Considering the caveats included in the 

and assuming that this represents the ra

where there is no other viable option, an 

organization could provide this emergen

for a short time (no longer than 1 month

impairing its independence, as long as it 

its audit report the circumstances relate

emergency situation and makes clear its 

safeguards taken. 
Page 45 

55. An audited entity asks an audit or

assist with implementing GASB St

No. 34, Basic Financial Statemen

Management’s Discussion and An

State and Local Governments. W

organization’s independence be im

It would depend on the nature of the 

provided. GASB Statement No. 34 sig

changed the state and local governme

reporting model by redefining the gen

external financial statements and by r

section on Management’s Discussion 

and that all capital assets, including in

assets, be reported in the financial sta

audit organization could provide the ty

covered under the independence stan

paragraph 3.23—such as providing ro

explaining technical requirements, an

training—without impairing its indep

Generally, such assistance relating to 

organization’s knowledge and skills w

considered routine and not impair au

independence.

However, if an audit organization is a

perform work that goes beyond routin

work needs to be considered in light o

overarching principles and the safegu

would be the case, for example, if an 

organization were asked to perform e

valuation services (such as may be re

audited entity’s infrastructure assets o

an audited entity’s Management’s Disc

Analysis.
Page 46 

56. If an audit organization arrives at an 

entity to perform a financial stateme

and finds that bank account reconcil

were not performed during the year, 

audit organization perform this serv

without impairing independence?

It would depend on the facts and circum

Reconciling cash balances to bank state

related records is an internal control tha

responsibility of entity management. In 

whether to provide this nonaudit service

organization must consider the overarch

principles and the safeguards, applying t

substance over form doctrine. If the ext

audit organization’s efforts in assisting th

entity is extensive, which would seem to 

in this situation, an audit organization ne

consider whether its efforts, in fact, con

performing a management function. Als

organization needs to consider the mate

cash to the financial statements and whe

management has the knowledge to evalu

approve the auditor’s work.
Page 47 

57. Over the last few years, the U.S. D

Housing and Urban Development 

introduced a number of electronic 

requirements for financial inform

public housing authorities and mu

housing projects. HUD will soon in

electronic filing requirements for 

community. Would independence 

considered impaired if an audit or

assists an entity in making the ele

submission? What if the transmit

was material to the financial state

No. This would be considered a routi

of the audit and is permissible irrespe

materiality of the transmitted amount 

applying the safeguards. 

Financial Statement 

Review and Basic 

Accounting 

Assistance

58. Can an audit organization perform 

services without impairing its inde

audit the financial statements?

The AICPA defines review of financial 

performing inquiry and analytical pro

provide the auditor with a reasonable 

expressing limited assurance that the

material modifications that should be 

financial statements for them to be in 

with the generally accepted accountin

(GAAP) or, if applicable, with an othe

comprehensive basis of accounting. I

review, the auditor performs limited a

procedures to provide a basis for prov

assurance on the presentation of finan

statements in accordance with GAAP.

The AICPA has separate standards fo

services and does not consider them a
Page 48 

Consistent with the AICPA standards, th

independence standard does not conside

services as an audit. However, under GA

review does have characteristics similar 

scope audit; for example, (1) the auditor 

professional judgment in determining th

procedures to apply in order to provide 

assurance on the presentation of the fina

statements in accordance with GAAP, (2

of the review are for parties in addition t

management of the audited entity, and

(3) management is responsible for the b

financial records and the financial statem

the audit organization will review.

Considering the above similarities and a

substance over form doctrine, a review w

treated as if it is an audit for the purpose 

determining audit independence. There

audit organization could conduct both a 

the entity’s financial statements for a giv

such as a calendar quarter, and then sub

audit the entity’s year-end financial state

without having an impairment to its inde

as long as the audit organization ensures 

review services do not involve a level of 

extensive that it gives an appearance tha

organization, in substance, is maintainin

books. In other words, the audited entity 

adequately maintained books and record

support its financial statements and man

that has the knowledge to evaluate and a

adjustments or corrections that the audi

proposes in order to provide the limited 

on the financial statements.

Conversely, if the audit organization enc

situation where the entity does not have 

maintained books and records, and the a

organization is expected to, in effect, rec
Page 49 

the existing books and records and de

financial statements to review, the ind

the audit organization would be impai

the year-end financial statement audit

it would be auditing its own work, wh

overarching principle. Further, it cou

that the audit organization was perfor

management function or making man

decision in order to produce the finan

statements which would violate an ov

principle as well.

59. What if an audited entity’s record

disarray and require hundreds of 

correcting/adjusting entries? Wou

organization be impaired at a cert

proposes so many correcting/adjus

that it is taking heroic efforts to b

express an opinion?

Footnote 11 in paragraph 3.26a does n

limit on the number or dollar value of 

correcting entries that an audit organ

propose as a result of its audit as long 

management makes the decision on a

entries. Nonetheless, this question de

situation where applying sound judgm

substance over form doctrine are crit

extent of an audit organization’s effort

correcting/adjusting entries is extraor

audit organization needs to consider w

efforts, in fact, constitute substantiall

the records that are being audited. It 

for the audit organization to avoid any 

could lead reasonable third parties w

of the relevant facts and circumstanc

that the auditor is substantially maint

reconstructing the records to be audit
Page 50 

Audit organizations and audited entities 

several options to consider when they en

situation in which the magnitude of adjus

corrections that need to be made, in sub

constitute maintaining the records to be 

The audit organization can suggest the a

entity engage a different audit organizati

bookkeeping service, or temporary assis

clean up the accounting records before t

begins or the audit organization could el

up the entity’s records and decline to do 

60. Regarding footnote 11 in paragraph 

other nonaudit services, such as dra

disclosures for bond offering statem

considered to be routine byproducts 

from the performance of the audit an

covered by the footnote?

No. Footnote 11 does not extend to any 

beyond proposing adjusting and correcti

Other nonaudit services need to be cons

light of the overarching principles and th

safeguards. 

61. Is an audit organization’s independe

perform a financial statement audit i

it assists a client in converting its fi

statements to address new accountin

principles?

It would depend on the nature of the ass

audit organization’s independence to per

financial statement audits for the entity 

be impaired, if it provided routine advice 

described in paragraph 3.23. However, b

routine advice, an audit organization wo

consider the two overarching principles 
Page 51 

safeguards before agreeing to perform 

service.

62. Following up on the previous ques

extent can an audit organization a

client in redesigning its financial 

system to implement new account

principles?

The answer is the same as above. Ag

advice, as described in paragraph 3.23

impair the audit organization’s indepe

However, beyond routine advice, whi

probably be the case in this situation, 

organization would need to consider t

overarching principles and the safegu

the substance over form doctrine.

For example, if the nonaudit service i

an accounting system, independence 

impaired if the changes were materia

financial statements. If the changes w

material, an audit organization must c

the safeguards and the additional requ

paragraph 3.26e concerning informati

advisory services.
Page 52 

63. A local government contacts an audi

organization to perform an agreed-u

procedures engagement involving a g

course’s revenues, of which the local 

government receives 25 percent und

revenue sharing arrangement. Can t

organization perform this engageme

impairing its independence to perfor

financial statement audits of the gol

and of the local government?

Yes. This engagement can be performed 

impairing an audit organization’s indepe

perform financial statement audits, or an

audits, of either the golf course or the lo

government because, under GAGAS, an a

procedures engagement is an audit.

64. Regarding indirect cost proposals or 

allocation plans, how the new indepe

standard compare to provisions of U

of Management and Budget (OMB) C

A-133, Audits of State, Local Govern

and Non-Profit Organizations?

The underlying concepts are different. O

specific dollar threshold above which an 

organization would be precluded from p

the financial statement audit, while the n

independence standard applies a princip

approach to establishing audit organizat

independence to perform the audit. 

OMB Circular A-133, section 305(b), pro

audit organization that prepares an indir

proposal or a cost allocation plan from b

selected to perform the audit that is requ

the indirect costs recovered by the audit

the prior year exceeded $1 million. Und
Page 53 

Circular A-133, this prohibition applie

year used in preparing indirect cost p

cost allocation plans and any subsequ

which the resulting indirect cost agree

allocation plans are used to recover c

$1 million threshold applies regardles

materiality.

The new auditor independence standa

audit organization independence to pr

cost proposals or cost allocation plan

the two overarching principles: Is thi

material to the financial statements a

organization performing a manageme

making a management decision?

65. Following up on the prior questio

amount over $1 million was not 

significant/material to the subject 

the audit?

Preparing indirect cost proposals ove

that are not material to the financial s

for which the audit organization is no

management function or making a ma

decision would not impair the audit o

independence to perform the financia

audit under GAGAS. OMB Circular A

though, prohibit the audit organizatio

so. Conversely, if an indirect cost pro

$1 million or less is material to the fin

statements, the audit organization’s in

would be impaired under GAGAS bec

be in violation of an overarching princ
Page 54 

Internal Audit 

Services

66. If an audited entity does not have an 

audit operation and engages an audi

organization to perform internal aud

services, would the audit organizatio

independence be impaired to also se

external auditor? 

Yes. Internal audit is considered a mana

function and, for external audit organiza

would impair independence by violating 

overarching principle. This would impa

independence of external audit organiza

perform not only the entity’s financial st

audit but also performance audits.

67. Why, then, are an entity’s internal au

organization and internal audit func

considered to have an impairment to 

independence?

Under paragraphs 3.30.5 and 3.30.6, inter

organizations and the internal audit func

presumed to be free from organizational 

impairments to independence when repo

internally to management if the head of 

audit organization is (1) accountable to t

deputy head of the entity, (2) required to 

results of an audit organization’s work to 

deputy head of the entity, and (3) located 

organizationally outside the staff or line 

management function of the unit under a

internal audit organization meets these c

care is taken to avoid personal or extern

impairments to independence, it is indep

under GAGAS to report objectively to th

management.
Page 55 

Information 

Technology 

Services

68. An audited entity purchases a com

accounting package and asks an a

organization to provide advice on 

the chart of accounts and the fina

statement format. Would the aud

organization’s independence be co

impaired? 

No. Under paragraph 3.23, advice rela

organization’s knowledge and skills w

be considered routine and is permitte

the decision to follow an audit organi

must remain with an audited entity’s m

Likewise, an audit organization needs 

involvement to providing advice. If an 

organization becomes responsible for 

development, or installation of the ac

system, or for its operation, an audit o

independence would be impaired for 

subsequent financial statement audit 

audit where the accounting system w

significant/material to the audit objec

level of involvement would clearly vio

overarching principles that audit orga

should not audit their own work and 

provide nonaudit services that involve 

management functions or making ma

decisions.
Page 56 

69. A not-for-profit audited entity purch

software for a nonaccounting membe

database, which it asks an audit orga

to install. The audit organization is 

to provide assistance in customizing 

membership reports the system gene

to conduct initial training. Would th

organization's independence be cons

impaired?

The impact on an audit organization’s ind

depends on an audited entity’s use of the 

and the audit organization’s audit object

example, if the membership database is 

members for dues and dues revenue is m

the entity’s financial statements, the aud

organization’s independence would be im

Also, if the audit objectives focused on th

of membership information, or on the re

system, independence would be impaire

nonaudit service would be significant/m

the audit objectives. 

In contrast, independence would not be 

for a financial statement audit if, in this e

membership system is used only for pur

are not relevant or material to the prepar

financial statements and assuming the a

organization has not performed any man

functions or had not made any managem

decisions. Also, the safeguard on preclu

personnel who provided the nonaudit se

performing related audit work (paragrap

would not apply in this case because the 

service would have no relationship to th

of the financial statement audit.

Under provisions of paragraph 3.23, an a

organization could provide the training a
Page 57 

with the new system without impairin

independence to perform either audit 

the safeguards. However, if asked to 

performance audit to evaluate the ade

training, the audit organization’s indep

would be impaired.

70. If an audit organization does all t

associated with installing an off-th

accounting system except for “pu

button,” is the audit organization

independence impaired for the fin

statement audit? 

Yes. An audit organization’s independ

impaired in connection with a financi

audit. Because the accounting system 

significant/material to the subject ma

audit, applying the substance over for

this service would violate the overarc

that an audit organization should not 

work. 

71. To follow up on the previous ques

an audit organization was auditin

effectiveness of a particular progr

performance audit?

In that case, the audit organization’s i

would not be impaired if data from th

system were not significant/material t

objectives of the performance audit. 

audit organization should comply with 

to document its rationale that the ove

principles have not been violated.

If the data from the accounting system 

significant to the subject matter of a p

audit, which might well be the case fo
Page 58 

information, independence would be im

the performance audit as well.

72. A firm provides training on certain o

shelf accounting packages. Does ins

include training?

No. As defined by paragraph 3.23, traini

separate category and will not impair au

organization independence. Paragraph 3

an audit organization to provide training 

impairing its independence or triggering 

of the safeguards. 

73. If an audit organization develops or 

accounting or other financial system

software, can the audit organization 

software to audit clients without imp

audit organization’s independence to 

client’s financial statements? What 

organization significantly modifies c

software that the audit client has pu

from another firm or off the shelf?

In both cases, the answer would be no. 

financial systems described in these que

significant/material to the subject matter 

audit, an audit organization would not b

independent to perform the financial sta

audit because it would violate the princi

auditing its own work.
Page 59 

74. An audit organization has been as

entity for advice on a particular n 

software package. Would providin

advice impair the audit organizati

independence to audit the entity’s 

statements?

No. If an audit organization is asked t

advice regarding particular software p

is considered routine advice under pa

An audit organization may provide the 

its opinion on various software packa

its experience with and knowledge of 

effectiveness of these packages at oth

organizations and based on its knowl

audited entity’s needs. 

Further, if the audit organization is as

recommend a package based on its kn

the audited entity’s needs, it should at

out two or more packages that could 

Recommending only one package cou

appearance of an independence impa

Finally, if the audit organization is ask

a particular accounting software pack

the work is performed as a performan

GAGAS, the audit organization’s indep

would not be impaired to audit the fin

statements.

Work of Specialists Paragraph 3.14 of the new independence s

presents requirements related to using the 

specialists and footnote 2 elaborates on th

specialists and organizations to which the 

apply. Several questions have been raised 

footnote information. With the next Gove

Auditing Standards update, we will clarif

follows:
Page 60 

This section applies to external consult

firms performing work for the audit or

and includes, but is not limited to, actu

appraisers, attorneys, engineers, envir

consultants, medical professionals, sta

and geologists.

75. Would paragraph 3.14 apply when us

work of specialists who perform wor

contract with the audited entity?

No, because the specialists are under con

audited entity and not to the audit organ

While paragraph 3.14 would not directly 

these specialists, if the audit organizatio

work, it generally would need to assess t

specialists’ capability to perform the wo

reliability of their data. In doing so, an a

organization would need to assure itself 

qualifications and independence of the f

contract with the audited entity and then 

the specialists who actually performed th

qualified and independent. An audit org

would consider any professional standar

specialists followed in conducting their 

especially whether they followed standa

requiring independence.

76. What if the specialists are employed 

audited entity?

In this case, paragraph 3.14 would not di

to these specialists. The work of these s

would be considered in the same way as 

gathered from an audited entity’s manag
Page 61 

77. What if the specialists are under c

the audit organization?

The requirements of paragraph 3.14 a

specialists. An audit organization mu

that the firm under contract is indepe

audited entity and then assess the spe

capability to perform the work and re

impartially. In conducting this assess

organization should provide the speci

GAGAS independence requirements a

representations from the specialists r

independence from the activity or pro

audit. Further, an audit organization 

assure itself of the validity of these sp

work, as presented above.

78. What if the specialists are employ

audit organization?

Audit organizations employ specialist

attorneys, actuaries, and statisticians

individual engagements. The indepen

requirements for specialists are the sa

auditors. Specialists employed by the 

organization are required to consider 

general classes of impairments to ind

personal, external, and organizational

any audit staff member. They are also 

consider the independence standard’s 

safeguards as an auditor would in per

nonaudit service.

As described in paragraph 3.16, an au

organization should have internal qua

system requirements to identify perso

impairments and determine complian

GAGAS independence requirements. 
Page 62 

requirements should extend to the speci

employs.

79. If pension expense or liability is mat

audited entity’s financial statements

audit organization perform the valua

plan and be independent to audit the 

financial statements? 

No. An audit organization would be audi

work, which is also material to the subje

the audit, and thus, would violate an ove

principle.

80. Following up on the previous questio

audit organization provide advice to 

entity on methodologies it can use in 

developing the valuation of the plan 

impairing its independence?

Yes. This would be allowed under parag

Tax Services 81. An entity asks an audit organization 

tax returns or for advice on deposits 

taxing authority. Would these types 

services impair an audit organization

independence to perform the entity’

statement audits?

No. These types of tax services generall

considered routine advice under paragra

The overarching principles would not be 

and an audit organization would not be r

apply the safeguards.
Page 63 

82. Would tax structuring also be con

routine advice under paragraph 3.

No. An audit organization would have 

providing these tax services would no

independence by violating one of the 

principles and must apply the safegua

applicable.

83. Can an audit organization assist i

preparing Internal Revenue Servic

990, “Return of Organization Exe

Income Tax,” without impairing it

independence to audit the entities

engagement team members perfor

activity?

Yes. This type of activity would be co

routine advice under paragraph 3.23. 

overarching principles would not be v

audit organization would not be requi

the safeguards. This means that the a

engagement team could prepare such 

the audited entity.

84. Under 5 U.S.C. 500, certified publi

accountants (CPA) have a statuto

represent taxpayers before IRS as 

CPAs meet certain conduct standa

an audit organization’s independe

performing financial statement au

considered impaired if it represen

entity in IRS matters, such as in a

or in obtaining IRS rulings or othe

agreements?

No. These services, which are prescr

would not impair independence for a 

statement audit. However, if an audit 
Page 64 

were engaged to perform a performance 

compliance, its work to represent the au

before IRS would impair the audit organ

independence since it would be auditing 

work.

Budget Work 85. An audit organization provides assis

small municipal government that is p

its annual operating budget by analy

budget proposals or to a legislative b

analyzing budget requests submitted 

the budget process. Would an audit 

organization’s independence be cons

impaired? 

No, as long as the work is done under th

performance audit standards in GAGAS. 

services are limited to analyzing budget 

this work could be considered a type of 

performance audit consistent with parag

GAGAS.

86. If an audit organization were asked t

audited entity in preparing its annua

would the independence standard be 

The audited entity’s board has the p

accept or reject the budget.

It would depend on the type or nature an

assistance an audit organization is asked 

and the nature of any subsequent audit w

asked to perform. Preparing an annual b

management function and involves maki

management decisions, which an audit o

must avoid to remain independent. How

assistance involves assessing the budget 

as a baseline for preparing the current b

work would qualify as a performance au
Page 65 

GAGAS as long as the work is done in 

with the performance audit standards

87. An audit organization is engaged t

governmental entity in assessing p

policy alternatives, such as foreca

program outcomes under various 

or analyzing various opportunitie

privatizing certain of its functions

audit organization’s independence 

considered impaired?

No. As long as the work is done unde

performance audit standards, the aud

organization’s independence would no

In performing engagements of this na

organization would always need to ex

that it does not perform any managem

or make any management decisions. 

services are limited to assessing prog

alternatives, it could be considered a 

audit consistent with paragraph 2.7 of 

Under a performance audit, an audit o

can make recommendations, but man

the responsibility for determining acti

based on an audit organization’s work

88. What if the audit organization wis

perform the work described in the 

questions under the AICPA’s cons

standards and to not follow the pe

audit standards in GAGAS?

The audit organization would have to 

overarching principles and safeguard

elected to do this work as a nonaudit 

is not a matter of form over substance

performance audit standards in GAGA

different purpose and are considerabl
Page 66 

rigorous than the AICPA’s consulting sta

Performing audit services under GAGAS 

impair an audit organization’s independe

whereas performing nonaudit services c

independence if either of the overarchin

is violated or if the safeguards are not ad

89. An audit organization is engaged to 

ways that an audited entity can impr

services and cut costs. The audit org

studies the entity, interviews person

various departments, and ultimately 

recommendations for management to 

Would the audit organization’s indep

be considered impaired?

Under GAGAS, such work would qualify 

performance audit. If done under the pe

audit standards, this service would not i

independence. However, if such service

performed as a nonaudit service (for exa

consulting service that does not follow G

services would be subject to the overarc

principles and required safeguards. 

90. Can audit organizations assist client

strategic planning without impairing 

organization independence?

It would depend on the nature of the ass

audit organization may provide routine a

paragraph 3.23 in assisting the audited e

management in using strategic planning 

methodologies, providing training, and a

technical questions without impairing au

independence.

However, preparing an audited entity’s s

plan would normally involve performing 
Page 67 

management function that requires m

management decisions. Thus, if an au

organization were to prepare or subst

prepare the strategic plan, it would vi

overarching principles and impair its 

to perform audits of the audited entity

Human Resource 

Services

91. Is auditor independence impaired 

organization is asked for its opini

qualifications of a specific individ

particular key position at an audit

No. This would qualify as routine adv

paragraph 3.23. If an audited entity a

qualifications of a particular individua

position, an audit organization can re

impairing its independence or having 

safeguards. 

92. What if the audit organization ins

to recommend individuals for a pa

position?

The audit organization can suggest in

the audited entity to contact for consi

without impairing the audit organizat

independence as long as it provides m

name for a particular position. Howe

discussed in paragraph 3.26f, if an aud

recommends a single individual for a 

position or conducts an executive sea

recruiting program for an audited ent

organization’s independence would b

Therefore, audit organizations should 

clients to also consider other sources 

about potential candidates for financi

management executive positions or a
Page 68 

other positions that may have a key ro

substantially influence matters that m

subject matter of an audit. In this reg

organizations should be aware of the 

future independence impairments ari

human resource services they may pr

audited entities.

(193042)
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