Auditor Independence

Utilize the AICPA website to respond, however to respond to this case, please consult not only auditing standards (AU-C), but also the AICPA's revised Code of Conduct.

Facts: Tim Smith is an audit partner in a CPA firm, and Tim recently invested in a diversified mutual fund managed by Fidelity Investments. He owns less than 1% of the total shares outstanding of the mutual fund itself. One of the mutual fund's holdings is shares of Lava Corp. Lava Corp is one of Tim's clients and is a nonpublic company.

Required: What guidance tells Tim that he must be independent of Lava Corp, and does his investment impair his firm's independence on this audit?

Respond to these questions in the form of an issues memo. Explain your analysis, citing from the guidance to support your response. If the guidance states that a "covered member" must be independent, you will need to define covered member to fully explain your analysis. Make a clear, reasoned argument, using a logical discussion of relevant guidance. You can use the following headers to begin your response.

Issue 1: What guidance requires Tim to be independent of Lava Corp?

Issue 2: Does this investment impair Tim's firm's independence on this audit?