Question 2 (30 marks)

You are a partner in a CPA rm and you are asked to consider the following ve situations that have recently come to your notice. Foreach of the situations given, state whether it has violated or impaired independence or the Code of Ethics for Professional Accountants. Make recommendations for corrective action.

i )One of the partners in your rm, who is a tax expert, advised a clientthat he could help him to request a refund of a substantial amount of the tax paid in the previous year by applying a technical provision in the tax law. It was also agreed that the professional fee to be charged would be 50% of the amount being refunded.

ii )Another partner in the CPA rm has set up a small company of hisown specializing in providing management consultancy services. His wife is the general manager of the consultancy company. The partner is seldom involved in his consultancy practice as hebasically works full-time with his CPA rm.

iii )A car dealer, which is one of the rms long-time clients, islaunching a special discount promotion for all its longstanding customers. The general manager of the car dealer advised that,since the rm has been the companys auditor for over ten years, he had decided that all the partners in the rm could be entitled to thediscount currently offered within the promotion period.

iv )Sally Li, CPA, advertised in the South China Morning Post(newspaper) that her rm performs the audit for 14 of the 36 largeststockbroking companies in Hong Kong. The advertisement also states that the average audit fee, as a percentage of the total assets for the stockbroking companies she audits, is lower than that of anyother CPA rm in the city.

v )Frank Lo, CPA, owns a material amount of shares in a mutual fundinvestment company, which in turn owns shares in Franks largest audit client. One day, on receipt of the most recent nancial reportfrom the investment company, Frank was very surprised to learn thatthe mutual funds ownership of his client had increased dramatically.