Question

In: Accounting

V. Each of the following situations involves possible violations of the AICPA Code of Professional Conduct....

V. Each of the following situations involves possible violations of the AICPA Code of Professional Conduct. For each situation, state what section of the Code is involved. Explain whether the action is a violation of that section, and explain the rationale for the rule. A. Colonial, Inc. has struggled financially and has not been able to pay the audit fee to its auditor, Shively and Starch, CPAs, for the 2018 and 2019 audits. Shively and Starch is currently planning the 2020 audit. B. Margo Rabil is a former partner of Howe and High, CPAs. Recently, she left the firm to become the chief operating officer of Gravy Town, Inc, which is an audit client of Howe and High. In her new role, Rabil has no responsibilities for financial reporting. HJowe and High made significant changes to the audit plan for the upcoming audit. C. Ben Parsley is the partner in charge of the audit of Eastern Gate Bank. Parsley is in the process of purchasing new lakefront property and has obtained mortgage financing from Eastern Gate. D. Ellen Grant is CPA, but not a partner, with three years of professional experience with James and Wallace, CPAs. She owns 25 shares of stock in an audit client of the firm, but she does not take part in the audit of the client, and the amount of stock is not material in relation to her total portfolio. E. Christian and Knight, a regional CPA firm, is performing consulting services to help management of Airtrans Services streamline its production operations. The fee for this engagement is a percentage of the cost savings that results once the new process is implemented. This is the only service that Christian and Knight provide for the client.

Solutions

Expert Solution

A.

Unpaid fees for professional services rendered to client more than one year before the current year report. The member is called as not independent.

As per section 1.230.010 of code of professional, unpaid fees of auditor Shivley and Starch CPA members for 2018 and 2019 audits and they are currently planning the audit 2020 . Therefore the fees is unpaid for more than one year prior to the current year report that would impaired the independence of auditor.

B.

Under rule 101-2 a firms independence will be considered as impaired with respect to client if a partner or professional employee leaves the firm and subsequently employed by client in key position unless

1. An amount due to a former partner or employee not material to the firm.

2. Former partner or professional employee not in position to influence firms accounting operation.

3. Former partner or employee dose not participate and not associated with firm.

In present case Rabil is former partner of Howe and High CPAs, joined Gravy Town inc company but not having responsibilities for financial reporting in audit client.

Therefore if the Rabil is complied with conditions above mentioned then Rabil is not impaired independence.

C.

Rule 101.5 - Loans from financial clients & individual , as per interpretation rule provides that except as permitted in this interpretation independence shall be considered to be impaired. If a auditor of client obtains any loan to or from a client, any officer, individual owning 10% or more of clients. However following are exceptions

1. If loan obtained from financial institution under the institutional normal lending procedure, terms.

2. Obtained loan prior to becoming client.

Here we consider parsley obtained loan from financial institution client under the institutions normal lending procedure, terms, requirements. Therefore independence of firm not impaired.

D.

Rule 101- independence

No violation of rule, because Ellen Grant is not partner and she dose not take part in audit of the client, and amount stock is not material. In interpretation of rule 101-3 independence not be considered as impaired.


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