Each of the following situations involves a possible violation of the Independen

Question

Each of the following situations involves a possible violation of the Independence Rule of the AICPAs Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why. a. Julia Roberto, a sole practitioner, has provided extensive advisory services for her audit entity Leather Ltd. She has interpreted financial statements, provided forecasts and other analyses, counseled on potential expansion plans, and counseled on banking relationships but has not made any management decisions. Leather is a privately held entity. b. Steve Rackwill, CPA, has been asked by his audit entity, Petty Plumbing Supply, to help implement a new control system. Rackwill will arrange interviews for Petty's hiring of new personnel and instruct and oversee the training of current entity personnel. Petty Plumbing is a privately held company. Petty will make all hiring decisions and supervise employees once they are trained. c. Kraemeer & Kraemeer recently won the audit of Garvin Clothiers, a large manufacturer of women's clothing. Jock Kraemeer had a subsaanvestment in Garvin prior to bidding on the engagement. In anticipation of winning the engagement, Kraemeer placed his shares of Garvin stock in a blind trust d. Zeker & Associates audits a condominium association in which the parents of a member of the firm own a unit and reside. The unit is material to the parents' net worth, and the member participates in the engagement. e. Jimmy Saad, a sole practitioner, audited Dallas Conduit, Inc.'s, financial statements for the year ended June 30 and was issued stock by the entity as payment of the audit fee. Saad disposed of the stock before commencing fieldwork planning for the audit of the next year's June 30 financial statements. However, Dip-lt has not paid f. Dip-It Paint C Allen & Allen the fees due for tax-related services performed two years ago. Dip-lt issued Allen & Allen a note for the unpaid fees, and Allen & Allen proceeded with the audit services. require s an audit for the current year

Explanation / Answer

a) The AICPA code allows auditors to take up advisory roles. This does not violate Rule 101. In the case, Julia's role is advisory in nature and client is a private entity.

b) Under the AICPA code, Rule 101 is not impaired under these circumstances provided Petty makes all significant management decisions. In the above case, Petty (company) will take the final hiring decision and train the people. Steve has to limit his role to arrange for interviews and oversee initial stages of training. Steve is not involved in day-to-day operations.

c) Auditor has a significant financial interest in the company. Jock Kraemer had a substantial investment in Garvin prior to bidding on the engagement. The independence of the auditor, under Rule 101, would be considered impaired whether or not the financial interest is placed in a blind trust.

d) Under the AICPA’s Code, there is a violation of rule 101. The parents of a member of the firm have a material interest in the condominium which is significant to their net work. The situation violates application of the independence rules to a covered member’s immediate family.

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