Compliance audits:
Navigating independence
Financial events in recent years, such as pandemic relief funding, have led to a sharp increase of compliance audits.
Generally, a compliance audit reports on whether your client is following applicable rules, regulations, and laws. This type of audit will help your clients identify and address potential risks, ensure legal and regulatory compliance, and uphold their reputations and credibility. The AICPA Code of Professional Conduct specifies that a compliance audit is an attest engagement performed under AU-C section 935. See the resources listed at the end of this navigator for more information.
Compliance audits: Navigating independence
If you’re performing a compliance audit, you need to be sure you’re applying relevant independence requirements appropriately and that’s what this navigator will help you with.
Keep in mind, that if you are performing other engagements for the same client, such as a financial statement audit or engagements under the Statements on Standards for Attestation Engagements, you need to apply independence requirements applicable to those engagements. This navigator does not address those independence requirements.
Learn more
Specifically, the navigator will help you:
Keep in mind that if you are performing other engagements for the same client, such as a financial statement audit or engagements under the Statements on Standards for Attestation Engagements you need to apply independence requirements applicable to those engagements. This navigator does not address those independence requirements.
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Determine whether independence requirements for compliance audits apply.
Identify the entities that you need to be independent of in a compliance audit.
Recognize which independence independent requirements apply to those entities.
Step
Determine whether independence requirements for compliance audits apply
Are you performing this engagement under AU-C section 935?
Q:
Yes
No
Compliance audit engagements may include the audit of a schedule or statement. If so, you’ll also have separate reporting as outlined in AU-C sections 725 and 805. It's still a compliance audit, though, even with reporting required by AU-C sections 725 and 805.
This is a compliance audit.
This is not a compliance audit.
Compliance audit engagements may include the audit of a schedule orstatement. If so, you'll also have separate reporting as outlined in AU-C sections 725 and 805. It's still a compliance audit, though, even with reporting required by AU-C sections 725 and 805.
Identify the compliance audit clients
Does the compliance audit include a schedule or statement?
The entity you’re reporting on is the compliance audit client.
Do any of the entities include amounts that are trivial and clearly inconsequential to the schedule or statement as a whole?
For more guidance on “trivial and clearly inconsequential” go to paragraph .03 of Q&A section 10. You can find a link on the resources screen at the end of this navigator.
When there are no amounts that are trivial and clearly inconsequential, then every entity that includes amounts on the schedule or statement is a compliance audit client.
Is the entity that includes amounts that are trivial and clearly inconsequential subject to compliance audit procedures?
The entity is a compliance audit client.
The entity is not a compliance audit client.
If other attest engagements are performed for the same client, members should consider whether independence requirements apply with respect to the entity as it relates to the other attest engagements.
Apply independence requirements
Step 3
1. Apply the independence requirements applicable to an attest client to each compliance audit client.
Remember that a compliance audit client is not a financial statement attest client and, therefore, the “Client Affiliates” interpretation and the “State and Local Government Client Affiliates” interpretation do not apply.
2. If you encounter other relationships and circumstances that create threats to independence, you should use the conceptual framework approach to evaluate them and determine whether those threats are at an acceptable level.
The Conceptual framework toolkit for independence is a helpful tool included next on the Resources screen.
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Working papers aid for compliance audits with multiple entities New and revised definitions for compliance audits Q&A section 10 (paragraphs .01–.06) AU-C section 935, Compliance Audits Independence rules comparison: AICPA and Government Auditing Standards Practice aid: Conceptual framework toolkit for independence
Helpful resources
