h. CPA Justin Shultz purchased a variable annuity insurance to choose the companies in which this contract will invest. As directed, the insurance company purchased common stock in one of Shulu's audit clients. B.48 Independence, Integrity, and Objectivity Cases. Read the following cases. Required: For each separate case, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct, if so, 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 fal- sification of the records. The board discussed the matter and authorized its attorneys 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 bring litigation against certain offi- cers of the company alleging management fraud and deceit. You are asking for a damage judgment of $500,000. d. The Allright Insurance Company paid Contrary Corporation $700,000 under a fidelity bond covering an inventory theft by employees. Allright is suing your public accounting firm for damages on the grounds of negligent performance of the audit, claiming that a proper audit would have uncovered the theft sooner and the amount of loss would have been considerably less. e. Your audit client, Science Tech Inc., installed a cost accounting system devised by the con- sulting services department of your firm. The system failed to account properly for certain product costs (according to management), and the system had to be discontinued. Science Tech management was very dissatisfied and filed a lawsuit demanding return of the $10,000 consulting fee. The audit fee is normally about $50,000, and $10,000 is not an especially large amount for your firm. However, you believe that Science Tech management operated the system improperly. You are willing to do further consulting work at a reduced rate to make the system operate, but you are unwilling to return the entire $10,000 fee. 1. 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. CPA Ellis Lisa, a shareholder in the firm of Eden, Benjamin, and Block, P.C. (a profes- sional accounting corporation), owns 25 percent of the common stock of Dove Corporation (not a client of Eden, Benjamin, and Block). This year. Dove purchased a 32 percent interest in Tale Company and is accounting for the investment using the equity method of accounting. The investment amounts to 11 percent of Dove's consolidated net assets. Tale Company has been an audit client of Eden, Benjamin, and Block for 12 years. h. CPAs Mark and Ben Saliba are the father-and-son partners of Queens, LLP. They have a 12 percent joint private investment in ownership of the voting common stock of Hydra Corporation, which is not an audit client of Queens, LLP. However, the firm's audit client, Howard Company, owns 46 percent of Hydra, and this investment accounts for 20 percent of Howard's assets (using the equity method of accounting). i. Drew Francie and Madison Brian, CPAs, regularly perform the audit of the First National Bank, and the firm is preparing for the audit of the financial statements for the year ended December 31, 2017. (1) Two directors of the First National Bank became partners in Francie and Brian, CPAs, on July 1, 2017, resigning their directorship on that date. They will not partici- pate in the audit. (2) During 2017, the former controller of the First National Bank, now a partner in Fran- cie and Brian, was frequently called on for assistance regarding loan approvals and the bank's minimum checking account policy. In addition, the former controller con- ducted a computer feasibility study for First National. h. CPA Justin Shultz purchased a variable annuity insurance to choose the companies in which this contract will invest. As directed, the insurance company purchased common stock in one of Shulu's audit clients. B.48 Independence, Integrity, and Objectivity Cases. Read the following cases. Required: For each separate case, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct, if so, 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 fal- sification of the records. The board discussed the matter and authorized its attorneys 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 bring litigation against certain offi- cers of the company alleging management fraud and deceit. You are asking for a damage judgment of $500,000. d. The Allright Insurance Company paid Contrary Corporation $700,000 under a fidelity bond covering an inventory theft by employees. Allright is suing your public accounting firm for damages on the grounds of negligent performance of the audit, claiming that a proper audit would have uncovered the theft sooner and the amount of loss would have been considerably less. e. Your audit client, Science Tech Inc., installed a cost accounting system devised by the con- sulting services department of your firm. The system failed to account properly for certain product costs (according to management), and the system had to be discontinued. Science Tech management was very dissatisfied and filed a lawsuit demanding return of the $10,000 consulting fee. The audit fee is normally about $50,000, and $10,000 is not an especially large amount for your firm. However, you believe that Science Tech management operated the system improperly. You are willing to do further consulting work at a reduced rate to make the system operate, but you are unwilling to return the entire $10,000 fee. 1. 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. CPA Ellis Lisa, a shareholder in the firm of Eden, Benjamin, and Block, P.C. (a profes- sional accounting corporation), owns 25 percent of the common stock of Dove Corporation (not a client of Eden, Benjamin, and Block). This year. Dove purchased a 32 percent interest in Tale Company and is accounting for the investment using the equity method of accounting. The investment amounts to 11 percent of Dove's consolidated net assets. Tale Company has been an audit client of Eden, Benjamin, and Block for 12 years. h. CPAs Mark and Ben Saliba are the father-and-son partners of Queens, LLP. They have a 12 percent joint private investment in ownership of the voting common stock of Hydra Corporation, which is not an audit client of Queens, LLP. However, the firm's audit client, Howard Company, owns 46 percent of Hydra, and this investment accounts for 20 percent of Howard's assets (using the equity method of accounting). i. Drew Francie and Madison Brian, CPAs, regularly perform the audit of the First National Bank, and the firm is preparing for the audit of the financial statements for the year ended December 31, 2017. (1) Two directors of the First National Bank became partners in Francie and Brian, CPAs, on July 1, 2017, resigning their directorship on that date. They will not partici- pate in the audit. (2) During 2017, the former controller of the First National Bank, now a partner in Fran- cie and Brian, was frequently called on for assistance regarding loan approvals and the bank's minimum checking account policy. In addition, the former controller con- ducted a computer feasibility study for First National