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Unformatted text preview: ards-setting bodies.
c. These bodies include, among others, the AICPA, the IFAC, the Securities and
Exchange Commission (SEC), the Public Company Accounting Oversight
Board (PCAOB), and the Government Accountability Office (GAO).
2) To inspire public confidence, an auditor must not only be independent
(intellectually honest) but also recognized as independent (free of any
obligation to, or interest in, the client, management, or owners). As defined in
the AICPA Conceptual Framework, this is termed “independence in mind (fact)”
and “independence in appearance,” respectively.
Independence is impaired if a covered member has certain interests or relationships.
A covered member includes
4) An individual on the engagement team or who can influence the engagement,
A partner or manager who provides nonattest services to a client,
A partner in the office where the lead engagement partner primarily practices in
relation to the engagement, and
The accounting firm, including the firm’s employee benefit plans. Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com 3 SU 2: Professional Responsibilities 2. Impairment
a. Independence is impaired if a covered member has a direct financial interest in a
CONCEPT The covered member must have no ownership of equity, debt securities, or other investments in a client. The restriction
includes the covered member’s immediate family (spouse and dependents). EXAMPLES
A covered member must not (1) own shares in a mutual fund that is an attest client, (2) participate in a retirement fund or
savings plan sponsored by an attest client, (3) own bonds issued by an attest client, or (4) own a prepaid (529) tuition plan
administered by an attest client. Even if shares of a client were held in a blind trust for the covered member, independence
would be impaired.
An unsolicited financial interest in a client, such as through a gift or inheritance, does not impair independence if disposed
of within 30 days. b. Independence is impaired if a covered member has loans to or from a client or its
officers, directors, or 10% (or greater) owners.
1) Exceptions. Independence is not impaired by
a) b) Certain loans from a client financial institution (e.g., bank). These include
(1) auto loans and leases collateralized by the auto, (2) loans fully
collateralized by the cash surrender value of insurance, (3) loans fully
collateralized by cash deposits, and (4) credit cards with a total
outstanding balance of $10,000 or less on a current basis by the payment
Certain loans that are considered “grandfathered” because they were in
existence before independence rules became more restrictive.
CONCEPT Loans are considered a direct financial interest. The restriction on loans includes the covered member’s immediate family
(spouse and dependents). EXAMPLES
A covered member must not borrow money from an attest client. Also, fees outstanding from an attest client for more than
1 year are considered a loan and would impair independence. c. Independence is impaired if a covered member has a material indirect financial
interest in a client.
CONCEPT A covered member (and his/her immediate family) may have some limited financial interests in clients as long as they are
not direct and not material to the wealth of the member or the client. EXAMPLE
A covered member or spouse may own shares in a mutual fund that holds shares of a client as long as the mutual fund
investment was not material to the member. Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com 4 SU 2: Professional Responsibilities d. Independence is impaired if a covered member is a trustee of a trust or executor of
an estate that has a direct or material indirect financial interest in a client.
CONCEPT A covered member must not be in a position to make decisions related to a trust or an estate that involves investments or
other financial interests in clients. EXAMPLE
A covered member must not be a trustee of a trust that holds any shares of a client. But (s)he may be a trustee of a trust
that holds shares of a mutual fund that has an investment in a client as long as the amount is not material. e. Independence is impaired if a covered member has a material joint, closely held
investment with a client.
CONCEPT A covered member is prohibited from having a material financial relationship with a client that might cause third parties to
question the member’s objectivity. EXAMPLES
A covered member must not join with a client to develop and market a product. A covered member also must not own a
vacation home jointly with a key officer or principal shareholder of a client. f. Independence is impaired if a firm partner or professional employee owns more than
5% of a client.
CONCEPT This allows some members of a CPA firm, other than covered members, to have some financial interest in clients without
affecting the indepen...
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This note was uploaded on 04/02/2013 for the course ACCT 7100 taught by Professor Swanson during the Spring '13 term at Valdosta State University .
- Spring '13