EP 3-2 Required: Independence. Integrity, and Objectivity Cases. LO3, LO5 Knowledge of the rules of conduct; interpretations thereof; and related rulings on independence, integrity, and objectivity will help you respond to the following cases. For each case, state whether or not the action or situation violates the rules of professional conduct, explain why, and cite the relevant rule or interpretation. a. Your client. Contrary Corporation, is very upset over the fact that your audit last year failed to detect an $800,000 inventory overstatement caused by employee theft and falsification of the records. The board discussed the matter and authorized its lawyers to explore the possibility of a lawsuit for damages. b. Contrary Corporation filed a lawsuit alleging negligent audit work, seeking $1 million in damages. c. In response to the lawsuit by Contrary, you decided to start litigation against certain officers of the company, alleging management fraud and deceit. You are asking for a damages judgment of $500,000. d. The Allright Insurance company paid Contrary Corporation $700,000 under fidelity bonds covering the employees involved in the inventory theft. Both you and Contrary Corporation have dropped your lawsuits. However, under subrogation rights, Allright has sued your audit firm for damages on the grounds of negligent performance of the audit. e. Colt & Associates, PAs, audit Gore Company. Alice Colt (CEO) and Bill Gore (president) discovered a limited real estate partnership deal that looked too good to pass up. Colt purchased limited partnership interests amounting to 23% of all such interests, and Gore personally purchased 31%. Unrelated investors held the remaining 46%. Colt and Gore congratulated themselves on the opportunity and agreed to be passive investors with respect to the partnership. f. A group of dissident shareholders filed a class-action lawsuit against both you and your client, Amalgamated Inc., for $30 million. They allege there was a conspiracy to present misleading financial statements in connection with a recent merger. g. PA Anderson, a partner in the firm of Anderson, Olds & Watershed (AOW, a professional accounting corporation), owns 25% of the common shares of Dove Corporation (not a client of AOW). This year Dove purchased a 32% interest in Tale Company and is accounting for the investment using the equity method of accounting. The investment amounts to 11% of Dove's consolidated net assets. Tale Company has been an audit client of AOW for 12 years. h. Durkin & Panzer, PAs, regularly perform the audit of the North Country Bank, and the firm is preparing for the audit of the financial statements for the year ended December 31, 20X4. i. Two directors of the North Country Bank became partners in D&P, PAs, on July 1, 20X4, resigning their directorship on that date. They will not participate in the audit. j. During 20X4, the former controller of the North Country Bank, now a partner of D&P, was frequently called on for assistance regarding loan approvals and the bank's minimum chequing account policy. In addition, he conducted a computer feasibility study for North Country. (2000, American Institute for Certified Public Accountants, Inc. All Rights Reserved. Adapted by permission. AICPA Materials were selected solely by authors, and the AICPA is not responsible for the currency or reliability of materials chosen.)