Question

Assume that you are analyzing relationships for your firm to identify situations in which an auditors independence may be impaired. For each of the following numbered situations, determine whether the auditor (a covered member in the situation) is considered to be independent.

IF the auditor’s independence would NOT be impaired select NO.

IF the auditor’s independent WOULD be impaired select YES.

-       A.       B.    The auditor is a cosigner of a clients checks.       -       A.       B.    The auditor is a member of a country club which is a client.       -       A.       B.    The auditor owns a large block of stock in a client but has placed it in a blind trust.       -       A.       B.    The auditor placed her checking account in a bank which is her client. The account is fully insured by a federal agency.       -       A.       B.    The client has not paid the auditor for services for the past two years.       -       A.       B.    The auditor is leasing part of his building to a client.       -       A.       B.    The auditor joins, as an ordinary member, a trade association which is also a client.       -       A.       B.    The auditor has an immaterial, indirect financial interest in the client.

Answer 1

1. The auditor is a cosigner of a clients checks.

Yes.

2. The auditor is a member of a country club which is a client.

No. Independence is not impaired because membership in the country club is essentially a social matter.

3. The auditor owns a large block of stock in a client but has placed it in a blind trust.

Yes. An auditor may not hold a direct financial interest in a client. Putting it in a blind trust does not solve the impairment of independence.

4. The auditor placed her checking account in a bank which is her client. The account is fully insured by a federal agency.

No. If the auditor places his/her account in a client bank, this does not impair independence if the accounts are state or federally insured. If the accounts are not insured, independence is not impaired if the amounts are immaterial.

5. The client has not paid the auditor for services for the past two years.

Yes. The auditor's independence is impaired when prior years' personal fees for professional services remain unpaid for more than one year.

6. The auditor is leasing part of his building to a client.

Yes. The auditor's independence is impaired when they leas space out of a building they own to a client.

7. The auditor joins, as an ordinary member, a trade association which is also a client.

No. When the auditor does not serve in management, they may join a trade association who is a client.

8. The auditor has an immaterial, indirect financial interest in the client.

No. Independence is impaired for direct financial interests and material. indirect finacnial interests but not for immaterial indirect financial interests.