Requirement a. Why is independence so essential forauditors?Independence is essential for auditors because Highlight correct answer a-d

A.

auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct arefollowed, including independence. Auditors in violation of the Code immediately lose their license to practice.

B.

users of financial statements expect an unbiased viewpoint in theCPA's attestation to the fairness of the financial statements. If users believe that auditors are notindependent, the value of the audit function is eliminated.

C.

users of financial statements expect an unbiased viewpoint in theCPA's attestation to the accuracy of the financial statements. If users believe that auditors are notindependent, the value of the audit function is eliminated.

D.

auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct arefollowed, including independence. Auditors in violation of the Code may be subject to fines and sanctions.

Requirement b. Compare the importance of independence of CPAs with that of otherprofessionals, such as attorneys.Most other professions(attorneys, doctors,dentists, etc.) represent their clients and perform services intended primarily to assist their clients. For thisreason, no assumption of independencethe or same level of independence as that of auditorsis required.Judges, however, must maintain a advocacy or nonadvocacy position, in contrast with or similar toauditors.

Requirement c. Explain the difference between independence in appearance and of mind. Highlight correct answer a-d

A.

Independence in appearance refers to theauditor's use of an audit committee to remain independent of management. Independence of mind refers to whether the auditor has followed all of the rules of conduct in the AICPA Code of Professional Conduct.

B.

Independence in appearance refers to whether the auditor has followed all of the rules of conduct in the AICPA Code of Professional Conduct. Independence of mind refers to theauditor's use of an audit committee to remain independent of management.

C.

Independence in appearance is how independent the auditor appears to outsiders such as users of financial statements. Independence of mind refers to whether the auditor has maintained an attitude of independence throughout the engagement.

D.

Independence in appearance refers to whether the auditor has maintained an attitude of independence throughout the engagement. Independence of mind is how independent the auditor appears to outsiders such as users of financial statements.

Requirement d.

Assume that a partner of a CPA firm owns two shares of stock of a large audit client on which he serves as the engagement partner. The ownership is an insignificant part of his total wealth.(1)Has he violated the Code of Professional Conduct?(2) Explain whether the ownership is likely to affect thepartner's independence of mind.(3) Explain the reason for the strict requirements about stock ownership in the rules of conduct.No, he has not violated or Yes, he has violatedthe Code of Professional Conduct,because Such a small ownership is likely or unlikelyto have any impact on apartner's objectivity in evaluating the financial statements. It is likely or unlikely to affect thepartner's independence of mind. The stock ownership could affect the appearance of independence or confidentiality of clients' information or costs of future auditsand therefore impact the financial stability or interpretations of the rules of conduct or reputation and credibilityof auditors.Additionally, these strict requirements eliminate any controversy as to the line between a material and immaterial or objective and subjective or public and privateownership

.Requirements e and f. Discuss how each of the following situations

(1)	Owning stock in a client company
(2)	Having bookkeeping services for an audit client performed by the same person who does the audit
(3)	Having a spouse who is the chief financial officer of a client company
(4)	Having the annual audit performed by the same CPA firm for 10 years in a row
(5)	Having management select the CPA firm
(6)	Recommending adjusting entries to theclient's financial statements and preparing financialstatements, includingfootnotes, for the client
(7)	Providing valuation services on complex financial instruments for an audit client performed by individuals in a department that is separate from the audit department

could affect independence of mind and independence inappearance, and evaluate the social consequence of prohibiting auditors from doing each one. Which of(1) through(7) are prohibited by the AICPA Code of Professional Conduct?Which are prohibited by theSarbanes-Oxley Act or theSEC?Complete the following table by using these statements

Effects on independence ofmind:

(a) This situation would have no effect on independence of mind.

(b) Absence of checks and balances because the auditor prepared the statements.

(c) Auditor concerned that spouse may lose job if errors are found.

(d) Auditor is complacent due to considerable familiarity with the client.

(e) Auditor may not audit his or her own work as carefully.

(f) Auditor may permit misstatements to enhance personal wealth.

(g) Auditor unwilling to criticize something prepared by his or her own firm.

(h) Auditor unwilling to disagree with management for fear of termination.

Effects on independence inappearance:

(i) This situation would have no effect on independence in appearance.

(j) Users may perceive that the auditor is unwilling to disagree with management.

(k) Users may perceive that the auditor may not independently audit the work performed.

(l) Users may perceive that the auditor would permit misstatements if it would benefit them financially.

(m) Users may perceive the possibility of complacency.

Socialconsequences:

(n) Minor, if any.

(o) It is costly for a new audit firm to obtain the knowledge because of confidentiality requirements and communication difficulties between CPA firms.

(p) It may be less expensive for this work to be done by the auditor.

(q) Management is in the best position to evaluate the effectiveness and cost of alternative auditors.

PrintDone

to evaulate how each situation could affect independence of mind and independence inappearance, and the social consequence of prohibiting auditors from doing each one.Then, indicate whether or not the situation is prohibited by the AICPA Code of Professional Conduct or theSarbanes-Oxley Act and SEC. (Complete all answer boxes. Each statement may be used more than once or not atall.)

Prohibited by
	Independence	Independence	Social	Code of	Sarbanes-Oxley/
Situation	of mind	in appearance	Consequence	Conduct?	SEC?
(1)
(2)
(3)
(4)

(5)
(6)
(7)

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Requirement a. Why is independence so essential forauditors?Independence is essential for auditors because Highlight correct answer a-d

A.

auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct arefollowed, including independence. Auditors in violation of the Code immediately lose their license to practice.

B.

users of financial statements expect an unbiased viewpoint in theCPA's attestation to the fairness of the financial statements. If users believe that auditors are notindependent, the value of the audit function is eliminated.

C.

users of financial statements expect an unbiased viewpoint in theCPA's attestation to the accuracy of the financial statements. If users believe that auditors are notindependent, the value of the audit function is eliminated.

D.

auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct arefollowed, including independence. Auditors in violation of the Code may be subject to fines and sanctions.

Requirement b. Compare the importance of independence of CPAs with that of otherprofessionals, such as attorneys.Most other professions(attorneys, doctors,dentists, etc.) represent their clients and perform services intended primarily to assist their clients. For thisreason, no assumption of independencethe or same level of independence as that of auditorsis required.Judges, however, must maintain a advocacy or nonadvocacy position, in contrast with or similar toauditors.

Requirement c. Explain the difference between independence in appearance and of mind. Highlight correct answer a-d

A.

Independence in appearance refers to theauditor's use of an audit committee to remain independent of management. Independence of mind refers to whether the auditor has followed all of the rules of conduct in the AICPA Code of Professional Conduct.

B.

Independence in appearance refers to whether the auditor has followed all of the rules of conduct in the AICPA Code of Professional Conduct. Independence of mind refers to theauditor's use of an audit committee to remain independent of management.

C.

Independence in appearance is how independent the auditor appears to outsiders such as users of financial statements. Independence of mind refers to whether the auditor has maintained an attitude of independence throughout the engagement.

D.

Independence in appearance refers to whether the auditor has maintained an attitude of independence throughout the engagement. Independence of mind is how independent the auditor appears to outsiders such as users of financial statements.

Requirement d.

Assume that a partner of a CPA firm owns two shares of stock of a large audit client on which he serves as the engagement partner. The ownership is an insignificant part of his total wealth.(1)Has he violated the Code of Professional Conduct?(2) Explain whether the ownership is likely to affect thepartner's independence of mind.(3) Explain the reason for the strict requirements about stock ownership in the rules of conduct.No, he has not violated or Yes, he has violatedthe Code of Professional Conduct,because Such a small ownership is likely or unlikelyto have any impact on apartner's objectivity in evaluating the financial statements. It is likely or unlikely to affect thepartner's independence of mind. The stock ownership could affect the appearance of independence or confidentiality of clients' information or costs of future auditsand therefore impact the financial stability or interpretations of the rules of conduct or reputation and credibilityof auditors.Additionally, these strict requirements eliminate any controversy as to the line between a material and immaterial or objective and subjective or public and privateownership

.Requirements e and f. Discuss how each of the following situations

(1)	Owning stock in a client company
(2)	Having bookkeeping services for an audit client performed by the same person who does the audit
(3)	Having a spouse who is the chief financial officer of a client company
(4)	Having the annual audit performed by the same CPA firm for 10 years in a row
(5)	Having management select the CPA firm
(6)	Recommending adjusting entries to theclient's financial statements and preparing financialstatements, includingfootnotes, for the client
(7)	Providing valuation services on complex financial instruments for an audit client performed by individuals in a department that is separate from the audit department

could affect independence of mind and independence inappearance, and evaluate the social consequence of prohibiting auditors from doing each one. Which of(1) through(7) are prohibited by the AICPA Code of Professional Conduct?Which are prohibited by theSarbanes-Oxley Act or theSEC?Complete the following table by using these statements

Effects on independence ofmind:

(a) This situation would have no effect on independence of mind.

(b) Absence of checks and balances because the auditor prepared the statements.

(c) Auditor concerned that spouse may lose job if errors are found.

(d) Auditor is complacent due to considerable familiarity with the client.

(e) Auditor may not audit his or her own work as carefully.

(f) Auditor may permit misstatements to enhance personal wealth.

(g) Auditor unwilling to criticize something prepared by his or her own firm.

(h) Auditor unwilling to disagree with management for fear of termination.

Effects on independence inappearance:

(i) This situation would have no effect on independence in appearance.

(j) Users may perceive that the auditor is unwilling to disagree with management.

(k) Users may perceive that the auditor may not independently audit the work performed.

(l) Users may perceive that the auditor would permit misstatements if it would benefit them financially.

(m) Users may perceive the possibility of complacency.

Socialconsequences:

(n) Minor, if any.

(o) It is costly for a new audit firm to obtain the knowledge because of confidentiality requirements and communication difficulties between CPA firms.

(p) It may be less expensive for this work to be done by the auditor.

(q) Management is in the best position to evaluate the effectiveness and cost of alternative auditors.

PrintDone

to evaulate how each situation could affect independence of mind and independence inappearance, and the social consequence of prohibiting auditors from doing each one.Then, indicate whether or not the situation is prohibited by the AICPA Code of Professional Conduct or theSarbanes-Oxley Act and SEC. (Complete all answer boxes. Each statement may be used more than once or not atall.)

Prohibited by
	Independence	Independence	Social	Code of	Sarbanes-Oxley/
Situation	of mind	in appearance	Consequence	Conduct?	SEC?
(1)
(2)
(3)
(4)

(5)
(6)
(7)