I just received the June 2016 AICPA Reviewer Alert (a monthly newsletter for peer reviewers). It provides the following Yellow Book independence documentation guidance:
Yellow Book contains specific requirements for documentation related to independence which may be in addition to the documentation that auditors have previously maintained. The 2011 Yellow Book Chapter 3 emphasizes that documentation is required for the evaluation of each of the elements of independence, which consists of:
- Management’s ability to oversee the nonaudit services, including whether management has skills, knowledge, and experience
- Significant threats that require the application of safeguards along with the safeguards applied
- Understanding established with the audited entity regarding the nonaudit services to be performed
Failure to document one or more of these elements is considered a departure from professional standards that causes the engagement to be deemed nonconforming. The reviewed firm and reviewer should be aware that verbal explanation and vague completion of a checklist does not provide for a thoughtful evaluation and documentation of management’s abilities related to each nonaudit service and will be unlikely sufficient to comply with the standards.
Yellow Book Independence Forms
All firms that perform Yellow Book engagements need to make sure their system of quality control provides guidance for documentation of the three items listed above. Consider using the AICPA’s 2011 Yellow Book Independence form. The electronically fill-able version is $28 for AICPA members and can be found here. The free PDF version can be found here.
For information about determining if your client’s skill, knowledge, and experience are sufficient, click here.
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