Exercise of Chapter 5 – Code of Conduct Does the following violate the Code of C

Question

Exercise of Chapter 5 – Code of Conduct

Does the following violate the Code of Conduct (assuming all clients are publicly listed firms)?

For each question, please answer whether the independence requirement is violated or not, and briefly explain why.

1) Tax returns are reports filed with the tax collection agency (for example, Inland Revenue Department of Hong Kong) used to calculate income tax or other taxes. Eric Leung, CPA, provides payroll services and prepares tax returns for his audit client.

2) A&H LLP, a CPA firm performs consulting services to the management of McAlister Global Inc. to streamline its production operations. McAlister Global Services structured the fee for this engagement to be a fixed percentage of the resulted cost savings once the new processes are implemented. A&H LLP does not perform other services for McAlister Global Inc.

3) Charlie Bradley, CPA, is on the audit team of MCF, a new client of the CPA firm. Billy Bradley, his father, is the accounting manager of MCF that oversees the preparation of financial statements.

4) KMY LLP., a CPA firm in Hong Kong provides a wide range of services to its clients. Recently it signed a contract to audit the financial statements of GoGreen Inc., a high-tech company specialized in clean energy. In the previous year KMY LLP provided valuation services to GoGreen Inc. on its properties located in Qianhai District in Shenzhen for the company’s bank loan application. The properties are the largest piece of assets on the company’s balance sheet.

5) Jessica Wong has been on the audit team of Crystal Consulting for ten years, and is very familiar with the CFO and accounting staff at Crystal Consulting. She was just promoted to be a partner of the CPA firm, and continues to serve Crystal Consulting.

6) Alice Chang, CPA, is on the audit team of HSBC Hong Kong. She purchased a flat in Ma On Shan with a mortgage of four million HKD from HSBC Hong Kong. The contract terms and conditions follow the regular standards of HSBC Hong Kong.

7) WK Inc., a client of Calvin CPA, is in the process of buying another publicly listed company in the same industry. The deal reached a significant milestone last week and Calvin shared the information with his best friends in college at a weekend party. Calvin does not own any shares of the client or the company being purchased.

8) The IT consulting department of the CPA firm helps SPNT Inc., the audit client of the CPA firm to install new accounting software that replaces the old one. The audit department provides audit services to the SPNT in the same year.

9) CKM is a medium sized CPA firm and HX Corp. is its largest client, contributing to 20% of its annual revenue from assurance services. CKM has been its auditor since 2012.

Explanation / Answer

A member would be considered n violation of the independence rule, if the member cannot demonstrate that safeguard were applied that eliminated or reduced significant threats to an acceptable level.

1. eric leung , cpa , provides payroll services as well as prepared tax returns.these two are two independent services and will not affect the independence of member

2.A&H, LLP, will be paid for its services as a percentage of savings in cost . It is a self interest threat to the LLP becuase of which i.e, to increase its fee , can modify the accounts accordingly . Independence will be effected

3.billy bradley. father of charlie bradley is the accounting manager of mcf and this relationship poses a familiarity threat on firm

4.KMY LLP provided valuation sevices in the previous year to its client while now taking up audit of its financial statements will pose an advocacy threat on firm.

5.jessica wong who worked as a member of audit team , now promoted as a partner and continue to serve the crystal consulting . but she doesnt have any direct relationship with the management and therefore independence is not violated.

6. Though alice chang took a loan from hsbc hong kong , it will not affect her independence in the audit of hsbc because the terms and conditions of loan are on regular terms of clients business.

7.calvin shared very sensitive informarion about the clients takeover of another company with his best friends , which is against his ethical conduct

8.the IT consulting dept and audit dept are two individual departments and IT dept helps SPNT in the installation of new software will not be an independence threat to CPA firm

9.HX corp , one of the biggest clients of CKM CPA firm . As long as fee is decided in regular terms and conceptual framework is applied , independence of CPA firm will not be violated

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