Independence from the audit client is required during

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Unformatted text preview: statements. When, as a result of a merger or acquisition, an entity becomes a related entity of an audit client, the firm must evaluate interests and relationships with the related entity that could affect its independence and therefore its ability to continue the audit after the merger or acquisition. If an inadvertent violation occurs, it generally does not compromise independence, provided the firm has appropriate quality control policies and procedures and the violation is corrected promptly. In general, the independence rules for financial interests, including loans and guarantees, stated by the IFAC Code of Ethics are similar to those of the AICPA. A close business relationship between a firm, a member of the audit team, or a member of that individual’s immediate family and the audit client or its management arises from a commercial relationship or common financial interest and may create self-interest or intimidation threats. Unless any financial interest is immaterial and the business relationship is insignificant, independence is impaired. Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com SU 2: Professional Responsibilities 27 a) 8) 9) 10) 11) 12) 13) 14) The purchase of goods and services from an audit client by the firm, a member of the audit team, or a member of that individual’s immediate family does not generally create a threat to independence if the transaction is in the normal course of business and at arm’s length. Family and personal relationships between a member of the audit team and a director or officer or certain employees (depending on their role) of the audit client may create self-interest, familiarity, or intimidation threats. The existence and significance of any threats will depend on a number of factors, including the individual’s responsibilities on the audit team, the role of the family member or other individual within the client, and the closeness of the relationship. Familiarity or intimidation threats may be created if a director or officer of the client, or an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements, has been a member of the audit team or partner of the firm. The lending of staff by a firm to an audit client may create a self-review threat. Such assistance may be given, but only for a short time and if the firm’s personnel do not provide impermissible services or assume management responsibilities. Self-interest, self-review, or familiarity threats may be created if a member of the audit team has recently served as a director, officer, or employee of the audit client. This would be the case when, for example, a member of the audit team has to evaluate elements of the financial statements for which the member of the audit team had prepared the accounting records while with the client. Serving as a director or officer of an audit client impairs independence. Familiarity and self-interest threats are created by using the same senior personnel on an audit engagement over a long period. Firms provide to their audit clients a range of nonassurance services. Providing non-assurance services may, however, create threats to the independence of the firm or members of the audit team. a) b) If a firm were to assume management responsibility for an audit client, the threats created would be so significant that no safeguards could reduce the threats to an acceptable level. Providing an audit client with accounting and bookkeeping services, such as preparing accounting records or financial statements, creates a selfreview threat when the firm subsequently audits the financial statements. i) But accounting and bookkeeping services, which would otherwise not be permitted, may be provided to audit clients in emergency or other unusual situations when it is impractical for the audit client to make other arrangements. 15) Tax return preparation does not generally create a threat to independence if management takes responsibility for the returns, including any significant judgments made. a) Tax planning or other tax advisory services may result in a self-review threat if the advice will affect matters to be reflected in the financial statements. i) If the effectiveness of the tax advice depends on a material, doubtful accounting treatment or presentation in the financial statements, the self-review threat would be so significant that no safeguards could reduce the threat to an acceptable level. Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com 28 SU 2: Professional Responsibilities 16) The provision of internal audit services to an audit client creates a self-review threat to independence if the firm uses the internal audit work in the course of a subsequent external audit. Performing a significant part of the client’s internal audit activities increases the possibility that firm personne...
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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 .

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