Question

1. The office of Stella and Aurora, CPAs, has two offices, one in Boston and one in Miami. The firm has audited the AJAX Inc. out of its Boston office for the past ten years. For the following case, which occurred during the year under audit, indicate whether the independence of either the CPA involved, or the firm would be impaired:
Alonso Wade is the father of Lebron Wade, a Miami partner. Alonso Wade has an immaterial indirect investment in AJAX, Inc. Lebron Wade is unaware of his father's investment and does not participate in the audit for AJAX, Inc.

Select one:

a. Independence is not impaired

b. Independence is impaired

2. Audit evidence is ordinarily more reliable when it is:

Select one:

a. Obtained indirectly or by inference rather than directly by the auditor

b. Provided by copies rather than original documents

c. Generated internally through a system of effective controls rather than ineffective controls

d. Obtained from knowledgeable nonindependent sources inside the client company rather than independent sources

Answer 1

1. Option (a) is correct. Independence is impaired if the member has direct financial interest or indirect material financial interest in the client. Here, Alonso Wade has an immaterial indirect investment in AJAX, Inc. Also, Lebron Wade is unaware of his father's investment and does not participate in the audit for AJAX, Inc. Hence, the independence of either the CPA involved, or the firm is not impaired.

2. Option (c) is correct. Audit evidence is ordinarily more reliable when it is generated internally through a system of effective controls rather than ineffective controls.

Option (a) is incorrect. Obtaining directly by the auditor is more reliable than indirectly or by inference.

Option (b) is incorrect. Original documents are more reliable than the copies.

Option (d) is incorrect. Obtained from knowledgeable independent sources inside the client company are more reliable rather than nonindependent  sources.