Document ID: chunk:federal_register_of_legislation:F2023C01156:reg:14:p9
Version: federal_register_of_legislation:F2023C01156
Segment Type: reg
Provision Reference: reg 14 (pt 9/22)
Character Range: 30046–33026

certain transactions (for example, payment of payroll taxes) and maintenance of their accounting records, to the preparation of their financial report.  The use of such a service organisation for the preparation of its financial report does not relieve management of the smaller entity and, where appropriate, those charged with governance of their responsibilities for the financial report.[7]

Nature and Materiality of Transactions Processed by the Service Organisation (Ref: Para. 9(b))

A6.             A service organisation may establish policies and procedures that affect the user entity's internal control.  These policies and procedures are at least in part physically and operationally separate from the user entity.  The significance of the controls of the service organisation to those of the user entity depends on the nature of the services provided by the service organisation, including the nature and materiality of the transactions it processes for the user entity.  In certain situations, the transactions processed and the accounts affected by the service organisation may not appear to be material to the user entity's financial report, but the nature of the transactions processed may be significant and the user auditor may determine that an understanding of those controls is necessary in the circumstances.

The Degree of Interaction between the Activities of the Service Organisation and the User Entity (Ref: Para. 9(c))

A7.             The significance of the controls of the service organisation to those of the user entity also depends on the degree of interaction between its activities and those of the user entity.  The degree of interaction refers to the extent to which a user entity is able to and elects to implement effective controls over the processing performed by the service organisation.  For example, a high degree of interaction exists between the activities of the user entity and those at the service organisation when the user entity authorises transactions and the service organisation processes and does the accounting for those transactions.  In these circumstances, it may be practicable for the user entity to implement effective controls over those transactions.  On the other hand, when the service organisation initiates or initially records, processes, and does the accounting for the user entity's transactions, there is a lower degree of interaction between the two organisations.  In these circumstances, the user entity may be unable to, or may elect not to, implement effective controls over these transactions at the user entity and may rely on controls at the service organisation.

Nature of the Relationship between the User Entity and the Service Organisation (Ref: Para. 9(d))

A8.             The contract or service level agreement between the user entity and the service organisation may provide for matters such as:

           * The information to be provided to the user entity and responsibilities for