A CPA firm is performing an audit of a nonissuer in accordance with GAO Government Auditing Standards (the Yellow Book). The auditor has been asked to perform a non-audit service: preparing the entity's indirect cost proposal for a federal grant. The auditor has determined that this service creates a self-review threat. Which of the following statements BEST describes the auditor's responsibility regarding independence?

Answer options:

The auditor is strictly prohibited from performing any non-audit services for a Yellow Book audit client, regardless of safeguards.

The auditor may perform the service provided that management designates an individual with suitable skill, knowledge, or experience (SKE) to oversee the service and accepts responsibility for the results.

The auditor may perform the service without applying safeguards because preparing cost proposals is considered a routine administrative service.

The auditor is independent as long as the fees for the non-audit service do not exceed the audit fees.

How to approach this question

Identify the standard (GAO Yellow Book) and the specific threat (Self-Review/Management Participation). Recall the 'SKE' (Skill, Knowledge, Experience) requirement for management oversight of non-audit services.

Full Answer

B.The auditor may perform the service provided that management designates an individual with suitable skill, knowledge, or experience (SKE) to oversee the service and accepts responsibility for the results.✓ Correct

The auditor must determine if the threat is at an acceptable level; if not, safeguards must be applied to reduce the threat to an acceptable level. However, preparing an indirect cost proposal that involves significant management decision-making is generally prohibited if it relates to a material amount.

Under GAO Government Auditing Standards, when performing non-audit services, the auditor must ensure that management takes responsibility for the work. This includes designating an individual with suitable skill, knowledge, or experience (SKE) to oversee the service. If the auditor assumes management responsibilities, independence is impaired.

Common mistakes

Confusing AICPA independence rules with GAO rules (though similar, GAO has specific documentation requirements for SKE); assuming all non-audit services are prohibited.

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