Question 1

The IFAC Code of Conduct classifies a certain challenge to independence as the intimidation threat. What name does the AICPA's Independence Rule use to refer to this threat?

Accepted Answer

The AICPA's Independence Rule refers to the challenge to independence known as the "intimidation threat" in the IFAC Code of Conduct as the "undue influence threat." This term is used to describe a situation where a member may be coerced into acting or refraining from acting due to actual or perceived pressures, including attempts to exercise excessive influence over the member's judgment or decision-making process. This can compromise the member's objectivity and independence in their professional conduct.

Question 2

A CPA was raised by his grandmother. Can his grandmother's stock ownership in one of the CPA's audit clients impair his independence?

Accepted Answer

Yes, a CPA's independence can be impaired if his grandmother owns stock in one of the CPA's audit clients. According to the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct and other regulatory bodies such as the Securities and Exchange Commission (SEC), independence is both a state of mind and an appearance issue. It requires that the auditor be independent in fact and appearance from the entity they are auditing.

Independence rules are designed to ensure that auditors are not influenced by any relationships or interests that could compromise their objectivity and impartiality. These rules typically extend to cover immediate family members and close relatives, which often include grandparents.

If the CPA's grandmother holds a material financial interest in the audit client, it could be perceived that the CPA might be biased in conducting the audit due to the familial relationship and the potential impact of the audit results on the grandmother's financial position. This could impair the CPA's ability to perform the audit with the necessary professional skepticism.

To maintain independence, the CPA would need to evaluate the significance of the grandmother's stock ownership in relation to the total assets or revenues of the audit client, as well as the significance of the investment to the grandmother's total wealth. If the stock ownership is material, the CPA would likely need to either:

1. Ask the grandmother to divest the stock,
2. Decline the audit engagement, or
3. If possible within the firm, reassign the audit engagement to another CPA who does not have a similar independence impairment.

It is important for the CPA to consult the relevant professional standards and possibly discuss the situation with the firm's ethics or compliance officer to determine the appropriate course of action to maintain independence in both fact and appearance.

Question 3

In the business world, sellers often sell goods on credit. In the auditing world, due to the independence requirement, CPAs:

Accepted Answer

A)   Are required to collect payment in full for an audit no later than the submission date of the CPA's audit report
B)   May not give their clients more than 60 days in which to pay the full outstanding invoice owing for audit services
C)   Remain independent as long as audit fees do not remain unpaid for more than one year
D)   Never may require clients to pay interest on unpaid fee balances C

Question 4

A CPA recently was presented with the opportunity to bid to become the auditor for a corporation. This CPA's husband owns stock in that company. Does this CPA satisfy the independence requirement to audit this company?

Accepted Answer

A)   No, if the stock is held in a joint brokerage account
B)   No, even if the stock is held in an individual brokerage account and was purchased solely with funds earned by her husband
C)   Yes, if her husband owns a small number of shares and the corporation is publicly-traded
D)   Yes, as long as she maintains objectivity and professional skepticism in performing the audit

Question 5

A junior CPA at Horwatharama, CPAs currently is working as an audit team member on the audit of General Molecular. This CPA is about to search for a different position of employment.
a. If this individual is thinking about applying for employment at General Molecular, what are his professional duties and when do they commence?
b. You are a friend of this junior CPA and you know that he is about to apply for employment at General Molecular. You also know that he does not intend to inform Horwatharama, CPAs until "the last minute, if at all." What duties do you have under the AICPA's Code of Professional Conduct? What actions, if any, would you take?
c. Once a CPA firm learns that an audit team member is pursuing employment with an audit client, what duties, if any, does it have?
d. If a junior CPA decides to pursue work at an audit client during the course of an audit, what kinds of costs will his decision impose on his CPA firm? Should he reimburse the firm for those costs?

Accepted Answer

The answer of A junior CPA at Horwatharama, CPAs currently...

Question 6

The undue influence threat exists when:

Accepted Answer

A)   A client threatens to terminate a CPA firm during the course of performing an audit of the client's books
B)   An auditor provides a 10% fee reduction to a client who complained about the auditor's staff being inadequately trained
C)   An auditor pays the entire restaurant bill for a client business lunch at which interpersonal conflicts between one audit staff member and a client employee were addressed
D)   An auditor sends an exceedingly generous gift to the CEO of a client to celebrate her fifth-year anniversary as the CEO

Question 7

A CPA firm has multiple locations throughout the Midwest of the United States. This firm has an audit client that is headquartered in Milwaukee, Wisconsin and the partner in charge of this audit is also located in the Milwaukee office of the firm. The audit client is a beverage manufacturer and the partner in charge of this audit is the Chairman of the firm's Food and Beverage Industry Audit Committee. To preserve the CPA firm's independence, which of the following individuals definitely must not own any direct interests in this beverage manufacturer?

Accepted Answer

A)   The aunt of the partner in charge
B)   A partner in the Oklahoma City office of this CPA firm who does not participate in rendering services to this client
C)   A partner in the Chicago office who also serves on the firm's Food and Beverage Industry Audit Committee
D)   A junior staff member in the Milwaukee office who spent 6 hours preparing a tax research memorandum relating to beverage sales taxes imposed on this manufacturer 's products

Question 8

A "covered member" of a CPA firm owns 4% of the bonds outstanding in an audit client. In accordance with the Independence Rule, does this CPA firm have the independence to audit this client?

Accepted Answer

A)   Yes, as long as the CPA's immediately family does not have any additional financial interests in this client
B)   Yes, as long as the bonds are not convertible into common stock
C)   No, unless the CPA agrees to not directly participate in the audit
D)   No, because of the self-interest threat

Question 9

Under ordinary circumstances, both the CFO and CEO of a particular company authorize and sign check disbursements exceeding $10,000. However, when the CEO of this audit client is unavailable for an extended period due to her travel schedule, the client's CPA co-signs checks that exceed $10,000 only after these checks first have been authorized and signed by the client's CFO. The CPA:

Accepted Answer

A)   Has created a management participation threat that impairs his independence
B)   Has created an undue influence threat that impairs his independence
C)   Has created an advocacy threat that impairs independence, unless appropriate safeguards are put into place
D)   Should be commended for assisting the client and has not affected his independence

Question 10

For many years, a partner in a CPA firm worked on the audit of Grossnomics, Inc. This partner now has retired from the CPA firm and serves as a consultant to Grossnomic's Audit Committee. This partner's former CPA firm:

Accepted Answer

A)   No longer maintains the independence to audit Grossnomics, unless the CPA firm demonstrates to the AICPA that it remains independent in fact and in attitude
B)   No longer maintains the independence to audit Grossnomics under any circumstance
C)   Maintains the independence to audit Grossnomics as long as this former partner no longer has any actual or apparent financial ties to his former CPA firm
D)   Maintains the independence to audit Grossnomics as long as the former partner does not participate in the preparation of Grossnomics' financial statements

Question 11

What are the seven threats to independence identified in the AICPA's Code of Professional Conduct? Give examples of each.

Accepted Answer

The answer of What are the seven threats to independence...

Question 12

Cyndi's husband Larry works as a cashier at Starstrucks, a chain of coffee shops. Cyndi, a CPA, may:

Accepted Answer

A)   Not serve as the main partner in charge of the audit of Starstrucks
B)   Not serve as a senior staff member on the audit of Starstrucks
C)   Not serve in any capacity as a member of the audit team engaged to audit Starstrucks
D)   Definitely may serve in any capacity as a member of the audit team engaged to audit Starstrucks

Question 13

The term "safeguard," as it used in determining auditor independence, refers to:

Accepted Answer

A)   Actions or other preventative measures that reduce threats to auditor independence to an acceptable level
B)   Actions or other preventative measures that eliminate all known threats to auditor independence
C)   Actions or other preventative measures that eliminate all threats, known and unknown, to auditor independence
D)   Actions taken by a client to protect confidential information from subsequent disclosure by an audit team

Question 14

A CPA has multiple office locations. In evaluating whether a CPA firm satisfies the independence rules with regard to an audit client, the concept of a "covered member" includes:

Accepted Answer

A)   An administrative assistant who assists the principal partner in charge of the audit
B)   A second audit partner who provides a concurring opinion on an audit and is located in a different office from the partner in charge of the audit
C)   An audit partner who works in a different office from the partner in charge of the audit and does not influence a particular audit
D)   An information systems partner who spent four hours on a consulting project for an audit client

Question 15

Status as a "covered member" is important in determining independence because CPAs who are classified as a "covered member" lack the independence to conduct an audit if:

Accepted Answer

A)   They have an indirect ownership interest in even a single share of stock outstanding in an audit client
B)   They refuse to subordinate their best judgment to the wishes of their client
C)   Their college-age, dependent child works in the client's warehouse during the summer as a shipping clerk
D)   Their sister is an attorney who works as the company's General Counsel

Question 16

A CPA firm audits Zaxstation, Inc. To avoid impairing the CPA firm's independence, members of this CPA firm may never:

Accepted Answer

A)   Authorize capital expenditures for the company, even if the projects are worthwhile
B)   Authorize junior staff members who have not yet passed the CPA exam to perform required audit procedures
C)   Evaluate whether the company's internal controls have weaknesses or deficiencies
D)   Suggest changes to the company's selection of accounting policies

Question 17

A CPA's mother-in-law owns stock in one of the CPA's audit clients. The CPA just learned this fact. In all likelihood, the CPA's independence is:

Accepted Answer

A)   Not impaired
B)   Impaired if the mother-in-law's stock holdings are material to her net worth
C)   Impaired if the mother-in-law owns sufficient stock to be able to significantly influence the governance of the audit client
D)   Automatically impaired, unless the mother-in-law immediately disposes of her share holdings

Question 18

The undue influence threat is most likely to be present when:

Accepted Answer

A)   A client and a CPA disagree over whether a change in accounting principle has a material effect on the client's reported results
B)   A client and a CPA disagree over whether the valuation model selected by the client for expensing compensation costs associated with employee grants of stock options adequately reflects the economic costs associated with this expense
C)   A CPA firm generates 19% of its total revenues from services provided to a corporation and its seven subsidiaries
D)   A CPA gives its client a "one-time only" 20% discount on fees so the CPA firm can acquire a new audit client

Question 19

An auditor is allowed to have:

Accepted Answer

A)   An indirect financial interest in a client as long as the interest constitutes an immaterial stake in the client
B)   An indirect financial interest in a client as long as the interest is immaterial to the auditor's net worth
C)   Any financial stake in a client as long as the interest is immaterial
D)   A direct interest in a client as long as safeguards on independence are satisfactory to the client

Question 20

An auditor may not perform an audit unless threats to independence are:

Accepted Answer

A)   Agreed to by the audit client
B)   Reduced to an acceptable level
C)   Nonexistent
D)   Eliminated entirely by the client prior to commencement of the audit

Exam 10: Independence and Moral Seduction