4-26 (OBJECTIVES 4-5, 4-6) The following relate to auditors’ independence:
a. Why is independence so essential for auditors?
b. Compare the importance of independence of CPAs with that of other professionals,
such as attorneys.
c. Explain the difference between independence in appearance and independence of mind.
d. Assume that a partner of a CPA firm owns two shares of stock of a large audit client on which he serves as the engagement partner. The ownership is an insignificant part of his total wealth.
(1) Has he violated the AICPA Code of Professional Conduct?
(2) Explain whether the ownership is likely to affect the partner’s independence of mind.
(3) Explain the reason for the strict requirements about stock ownership in the rules
of conduct.
e. Discuss how each of the following could affect independence of mind and indepen-
dence in appearance, and evaluate the social consequence of prohibiting auditors
from doing each one:
(1) Having the annual audit performed by the same CPA firm for 10 years in a row
(2) Owning stock in a client company
(3) Having bookkeeping services for an audit client performed by the same person
who does the audit
(4) Having a spouse who is the chief financial officer of a client company
(5) Having management select the CPA firm
(6) Recommending adjusting entries to the client’s financial statements and preparing financial statements, including footnotes, for the client
(7) Providing valuation services on complex financial instruments for an audit
client performed by individuals in a department that is separate from the audit department
f. Which of (1) through (7) in part e. are prohibited by the AICPA Code of Professional
Conduct? Which are prohibited by the Sarbanes–Oxley Act or the SEC?
4-27 (OBJECTIVE 4-6) The U.S. national stock exchanges require listed companies to have an
independent audit committee.
a. Describe an audit committee.
b. What does it mean for the audit committee members to be “independent”?
c. What are the typical functions performed by an audit committee?
d. Explain how an audit committee can help an auditor be more independent.
e. Describe the nature of the audit firm’s communications with the audit committee
regarding independence issues.
f. Some critics of audit committees believe that they bias companies in favor of larger and perhaps more expensive CPA firms. These critics contend that a primary concern of audit committee members is to reduce their exposure to legal liability. The committees will therefore recommend larger, more prestigious CPA firms, even if thecost is somewhat higher, to minimize the potential criticism of selecting an unqualified firm.
Evaluate these comments.
4-28 (OBJECTIVES 4-5, 4-7) The following questions relate to the AICPA Code of Professional
Conduct, which can be viewed online or downloaded in pdf format at www.aicpa.org:
a. When should a member apply the conceptual framework for members in public
practice? Which rule or rules have their own conceptual framework?
b. Covered members are not allowed to have a direct financial interest in a client. What
should covered members do if they become aware they are to receive an unsolicited
financial interest in an attest client as a result of a bequest? Be sure to note where you
can find the applicable guidance in the Code.
Required
Required
Research
PROFESSIONAL ETHICS
c. The Accounting Principles Rule indicates that members can justify a departure from
generally accepted accounting principles only in unusual circumstances. What are
examples of unusual circumstances discussed in the Code?
d. The AICPA provides for a number of specialist designations. How should a member
use the designation? When may a firm include a specialty designation on firm letter-
head? Where would you find the applicable guidance in the Code?
