Question

Megan Schmidt works for a Williams and Co, a smaller CPA firm that has a total of 11 professional staff members, including two partners. A financial statement attest client has requested the audit firm to prepare its depreciation schedule. Megan is a new staff member and will be responsible for this work. The client will have someone with suitable skills, knowledge and experience to oversee the preparation of the depreciation schedule. The audit firm has documented its understanding with the client including that the client will take responsibility for the depreciation schedule.

Questions:

 Identify the section in the AICPA Codification that addresses the independence issues associated with the case facts outlined above.

 What are the threats to the independence of Williams and Co?

 What safeguards can Williams and Co. put in place so that the firm's independence is not impaired?

Answer 1

The AICPA Code of Conduct is based on six principles;

(1) responsibilities

(2) serve the public interest

(3) integrity

(4) objectivity and independence:Accountants have to remain objective and cannot get to close to a client. They must also remain independent of their clients with no conflicts of interest.

(5) due care and

(6) scope and nature of services.

These principles are required practices for all certified public accountants who are members of the AICPA

AICPA professional standards require your firm, including the firm’s partners and professional employees, to be independent in accordance with the “Independence Rule” whenever your firm performs an attest engagement for an attest client.

as per the facts seen in the given question work conducted by the professional of a firm is being cross checked by the clients professional which clearly states that firm is not independent in give their decision and client firm is allowed to modify the answer as per their wish member in public practice should be independent in fact and appearance when providing auditing and other attestation services. Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in public practice and must be scrupulous in their application of generally accepted accounting principles and candid in all their dealings with members in public practice. [ section 55]

2) various threats to the independence of Williams and co are :

The FEE (1998) and the ISB (2000) (now defunct) identified five categories of threats -

self-interest threat,

self-review threat,

advocacy threat,

familiarity threat,

and intimidation threat

to better explain which type of threat fall in these categories there are few examples given below:

Employment with an Audit	Self-interest threat, familiarity threat and intimidation threat	Paragraphs 290.134-290.141
Temporary Staff Assignments	Self-review threat	Paragraphs 290.142
Recent Service with an Audit client	Self-interest threat, self-review threat and familiarity threat	Paragraphs 290.143-290.145
Serving as a Director or Officer of an Audit Client	self-interest threat, self-review threat and advocacy threat	Paragraphs 290.146-290.149

3) safeguards that  Williams and Co. put in place so that the firm's independence is not impaired are:

The safeguards include:

(a) Removal of the individual from the engagement team
(b) Structuring the responsibilities of the assurance team
Consideration should also be given as to whether the self interest, familiarity or intimidation threats are created by personal or family relationships between a partner or employee of the firm who is not a member of the assurance team and a director or officer of the assurance client.

c) changing the terms of engagement and taking away the right of reviewing the work from client .

if unable to implement fully adequate safeguards, the auditor must not carry out the work.