A CPA firm is subject to the independence rules of the Government Accountability Office (GAO) because it audits a government entity. Which of the following non-audit services would most likely impair independence under the GAO 'Yellow Book' standards?

Answer options:

Preparing payroll tax returns based on client-approved data.

Providing advice on routine tax matters.

Designing and implementing the entity's financial information system.

Assisting in the drafting of financial statement notes based on the trial balance.

How to approach this question

Apply the 'self-review threat'. If the auditor builds the system, they cannot objectively audit the output of that system.

Full Answer

C.Designing and implementing the entity's financial information system.✓ Correct

Designing and implementing the entity's financial information system.

Designing and implementing a financial information system creates a significant self-review threat. The auditor would be relying on the system they designed to generate the financial data they are auditing. This impairs independence under Yellow Book standards.

Common mistakes

Thinking tax services impair independence (they usually don't).

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