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Carla, a managing director on the Archerton

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engagement team, is discussing quarterly Sentinel family tree

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updates with Anthony, a manager on the team. Archerton LLC,

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an SEC audit client, is controlled by The Redstone Group.

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Prior to their meeting, Redstone had notified the team that

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their acquisition of Sandstead Inc. is about to close.

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Let’s listen in as Carla and Anthony discuss the situation.

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Anthony: Because of Redstone’s upcoming acquisition, I’ll

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add Sandstead as a sister affiliate on Archerton’s Sentinel

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family tree upon closing.

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Carla: Before we update the tree though, we need to

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determine if Sandstead is an affiliate.  The SEC released

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guidance amending the definition of an affiliate of an audit

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client, which may impact how we add the entity to Archerton’s

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Sentinel family tree.

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Anthony: How so?

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Carla: Well, the amended rules revised the considerations in

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determining whether Sandstead is an affiliate of Archerton.

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Anthony: Hm, what kind of considerations?

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Carla: We would now need to calculate the materiality of

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Archerton and Sandstead to Redstone. Sandstead will only be

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an affiliate of Archerton if they both are individually

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material to Redstone. 

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Anthony: Okay, I’ll confirm the materiality of these

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entities and get back to you. 

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Anthony determines that Archerton is material to Redstone,

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but Sandstead isn’t. So based on prior knowledge of

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maintaining Sentinel family trees, he will not add Sandstead

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to Archerton’s tree. However, he recognizes that since the

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definition of an affiliate has changed, there may be

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additional considerations. 

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There may be independence implications if the appropriate

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steps aren’t taken. Let’s see what he decides to do.

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Independence: Thanks for sending your inquiry to

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Independence! I’ve reviewed the information you provided, and

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you’re correct. Sandstead isn’t an affiliate-- at least not

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right now. However, you’ll need to include it on Archerton’s

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Sentinel family tree.

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Anthony: Really? But wouldn’t that suggest that Sandstead is

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an affiliate of Archerton, even though that’s not the case?

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Independence: That’s a good question. Although they’re

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linked, you would add Sandstead to the tree using the “non-affiliate”

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entity type. This is signified by the letters NA,

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to indicate it’s a non-affiliate entity.

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Anthony: But why would non-affiliate sister entities need to be

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on the tree? 

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Independence: This is so your team can monitor these

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entities, especially if they’re close to the materiality

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threshold. We also want to be aware of new service requests

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because they’ll have to be reviewed against the SEC's

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general standard. 

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Anthony: How do we do that?

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Independence: Well we’ll need to take a step back—is it

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reasonably possible that a proposed service could directly

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or indirectly impact our ability to be objective and

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impartial in performing our audit? 

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Anthony: Do we need to ask this question of all

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relationships and service requests even though they aren’t an affiliate?

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Independence: Oh yes, we do. Understanding these

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considerations is important in reviewing services and

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relationships against the SEC’s general standard.

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Anthony: Oh, okay so that’s why we need to keep these

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entities linked in our client’s Sentinel family tree. I’m glad

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I reached out because based on my experience, I was under

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the impression that they should be left off.

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Independence: That’s correct, it’s critical to accurately

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maintain Sentinel family trees to evaluate independence

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limitations. Incorrectly omitting entities may have serious

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ramifications down the road, especially because our

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professionals rely on the accuracy of these trees when

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analyzing a service for permissibility.

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Anthony: I hadn’t thought about the implications for other

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engagement teams. This was definitely a learning experience

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to ask for help when I’m not 100% sure.

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Independence: Absolutely, you can always contact us for

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guidance. Because entities are constantly changing, you need

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to continuously monitor Sandstead for changes to materiality.

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When assessing the completeness and accuracy of

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the Sentinel family tree in connection with each interim review, 

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you should consider whether there have been changes

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to materiality that may impact your affiliate conclusions.

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After consulting with Independence, Anthony adds Sandstead

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Inc. as a sister entity with the appropriate NA

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entity type within the Sentinel family tree. This action

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allows the team to continue to monitor service requests and

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any changes to materiality, remaining independent of the

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audit client.

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