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Accounting ethics - Comprehensive Questions Your college friend has always respected your financial acumen as a...

Accounting ethics - Comprehensive Questions

Your college friend has always respected your financial acumen as a CPA. As a result, when your college friend formed his business in February, he asked you to serve on the company's Board of Directors. You gladly served on the Board of Directors for one month, without compensation, and then resigned in March when the company appointed an experienced venture capitalist to replace you. During the time you served on the Board, you successfully promoted the firm's business model to prospective investors. As compensation, the company awarded you 300 long-term stock options.Toward the end of the year, the company's Board of Directors selected you to audit the company's calendar-year financial statements for its first year of operation. Your college friend did not participate in that decision. Rather, the other Board members unanimously selected you based on your prior experience in their industry. Your friend did help you celebrate your selection by buying an extremely expensive bottle of aged wine. What threats exist to your ability to serve as the lead auditor on this client engagement?

Solutions

Expert Solution

The following threats exist: Familiarity, Management Participation, Advocacy, Undue Influence, and Self-Interest. You are a covered member who held a key position with this audit client.

•           Familiarity: Your close friendship created issues of familiarity.

•           Management Participation: If an auditor served a client in a managerial position for any portion of a year, the auditor is disqualified from auditing the company’s financial statements for that year. A CPA acts in a managerial role by serving as a director, officer, stock promoter, stock underwriter, or key employee of a client. You served as both a director and a stock promoter.

•           Advocacy: Promoting the company’s stock offering was an act of advocacy.

•           Undue Influence: Accepting the bottle of expensive wine created issues of undue influence.

•           Self-Interest: A covered member may not have any direct interest in an attest client. Your stock ownership created issues of self-interest.


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