Question

In: Accounting

The firm of Sun & Brinkley, CPAs, has been asked to perform attest services for Star...

The firm of Sun & Brinkley, CPAs, has been asked to perform attest services for Star Corporation (a nonpublic company) for the year ended December 31, 20X9. Sun & Brinkley has two offices: one in Wilmington and the other in Charlotte. Star Corporation would be audited by the Wilmington office. For each of the following cases, indicate whether or not Sun & Brinkley’s (the firm’s) independence is definitely impaired. If it is not definitely impaired, but might be under some circumstances, discuss those circumstances.

  1. A partner in the Wilmington office of Sun & Brinkley has been a long-time personal friend of the chief executive officer of Star Corporation.
  1. The former controller of Star Corporation became a partner in the Charlotte office of Sun & Brinkley on March 15, 20X7, resigning from Star Corporation on that date.
  1. A manager in the Charlotte office of Sun & Brinkley is the son of the treasurer of Star Corporation.
  1. A partner in the Wilmington office of Sun & Brinkley jointly owns a cattle ranch in Montana with one of the directors of Star Corporation. The value of the investment is material to both parties.
  1. Star Corporation has not yet paid Sun & Brinkley for professional services rendered in 20X6. This fee is substantial in amount and is now 15 months past due.

Solutions

Expert Solution

a.

Not definitely impaired. The facts alone lead to an independent conclusion, but the Code of Professional Conduct states that CPAs should consider whether personal relationships between the CPA and the client would lead a reasonable person aware of all the relevant facts to conclude that there is an unacceptable threat to the CPA's independence. Being a partner in the engagement office, he is a covered member, and therefore the firm’s independence would be impaired if his independence is deemed to be impaired.

b.

Not definitely impaired. While the partner's independence is impaired, the firm's independence is not impaired if the new partner does not participate in audits related to periods for which he or she served as the controller of Star Corporation.

c.

Not definitely impaired. The independence of the manager is impaired because of the business position of his father. However, since he does not work on the engagement, the independence of the public accounting firm is not impaired.

d.

Definitely impaired. Section a of Interpretation 101-1 specifically prohibits material joint ventures between directors of the client organization and covered members of the public accounting firm. Since the partner is a covered member, both his and the firm’s independence is impaired.

e.

Definitely impaired. Fees that are long overdue may create the impression that the auditors' prospects for collection depend upon the nature of the auditors' report on the current year's financial statements. Thus, independence is impaired if professional fees for services rendered in prior years are not collected prior to the issuance of the auditors' report for the current year. Of course, this independence problem can be resolved immediately by Star Corporation paying this liability.


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