Auditing MBAZ03 D1-Module B 1. B.47 Independence, Integrity, and Objectivity Cas
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Auditing MBAZ03 D1-Module B 1. B.47 Independence, Integrity, and Objectivity Cases. Read the following cases Required For each case, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct,esplain why ifit does, and cite the relevant rule. a. CPA Ellen Stout performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the board of directors. b. CPA Darcy Wolfe practices management consulting in the area of computerized information systems under the firm name of Wolfe & Associates. The "associates" are not CPAs, and the firm is not an accounting firm. However, Wolfe shows "CPA" on business cards and uses these credentials when dealing with clients. CPA Alex Goodwin performs significant day-to-day bookkeeping services for Harper Corporation and supervises the work of the one part-time bookkeeper employed by Hadley Harper. This year, Harper wants to engage CPA Goodwin to perform an audit. CPA H. Poirot bought a home in 1989 and financed it with a mortgage loan from Farraway Savings and Loan. Farraway was merged into Nearby S&L, and Poirot became the manager in charge of the Nearby audit. Poirot inherited a large sum of money from old Mr. Giraud in 2000. Poirot sold his house, paid off the loan to Nearby S&L, and purchased a much larger estate. Nearby S&L provided the financing. Poirot and Mala Lemon (a local real estate broker) formed a partnership to develop apartment buildings. Lemon is a 20 percent owner and managing partner. Poirot and three partners in the accounting firm are limited partners. They own the remaining 80 percent of the partnership but have no voice in everyday management. Lemon obtained permanent real estate financing from Nearby S&L c. d. e. f. Page 66Lemon won the lottery and purchased part of the limited partners' interests She now owns 90 percent of the partnership and remains general partner while the CPAs remain limited partners with 10 percent interest. CPA Justin Shultz purchased a variable annuity insurance contract that offered the option to choose the companies in which this contract will invest. As directed, the insurance company purchased common stock in one of Shultz's audit clients h.Explanation / Answer
a. CPA Ellen Stout is independent due to Interpretation Honorary Directorships and Trusteeships (IHDT). According to IHDT, CPA Ellen Stout can be independent if following conditions are fulfilled:
1) Her position is purely honorary.
2) In list of directors, she is named as an honorary director.
3) She does not use her name as director of company.
4) There is no participation by her in management.
b. CPA Darcy Wolfe is independent. An auditor can give management counselling to an organization. No violation in case of independence. Since Wolfe & Associates is neither CPA nor accounting firm, it cannot use the name CPA with its name and the credentials are not allowed to Wolfe & Associates. The CPA Darcy Wolfe is required to know the fact that the company’s publishing cannot be misleading. Wolfe & Associates cannot take the advantage of professional designation of CPA Darcy Wolfe. CPA Darcy Wolfe can advise Wolfe & Associates in management related works.
c. The . CPA Alex Goodwin should ensure that the relationship does not look like an employee-employer relationship to the persons who are concerned with the business. In this case, such impression has been given. Hence, independence of CPA Darcy Wolfe will be impaired.
In particular, the . CPA Alex Goodwin cannot have:
d. In this case interpretation of Rule 101.A.4 will be applied CPA H. Poirot has taken a loan before 1992 from Farraway Savingsand Loan. Farraway Savings and Loan is not required for independence because it became a client after merger. After merger, the independence will be required for Farraway Savings and Loan too. Hence, independence is not impaired for CPA H. Poirot .
e. In this case interpretation of Rule 101.A.4 will be applied According to the rule, the if a CPA takes certain loans from the audit client, the independence will be impaired on the ground of financial interest. In this case, Independence is impaired by CPA Poirot due to the home loan.
f. According to rule 101, the auditors cannot have 50% or more shares in any partnership. This will impair the independence. In this case, Mala Lemon has taken a loan from the client. Any such loan will impair the independence of auditor. Hence, independence is impaired for CPA Mala Lemon .
g. According to rule 101, The CPAs own less than 50% of the share in the partnership; they are not in position to impact the decisions of management. In this case CPA Lemon can be independent. It will not be impaired
h. In this case interpretation of Rule 101.A.4 will be applied Independence is impaired. Since CPA Justin Shultz can order the investment under the insurance contract, this will be a financial interest. If a CPA has financial interest in a firm, CPA cannot be independent Hence, independence is impaired for CPA Justin Shultz .
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