Situation 1:

Gloria and Deloria, CPAs, have recently started their public accounting firm and intend to provide attestation and a variety of consulting services for their clients, which are all nonpublic. Both Ms. Gloria and Mr. Deloria have particular expertise in designing payroll and other disbursement systems. Ms. Gloria is concerned about whether any of the following services would impair their audit independence.

1. For each of the services in the accompanying table provide a judgment as to whether providing the service would impair attest independence. In all 12 situations, assume that management has designated a management-level individual to be responsible for overseeing the CPA's services and has established appropriate internal control. Also assume that the client is privately held and does not report to the SEC. Please include an explanation in your response.

1. Now assume that the 12 services are being contemplated for nonattest clients. Which of the services does the AICPA Code of Professional Conduct prohibit under this assumption? Please include an explanation in your response.

Situation Number	Service Description	Independence Impaired (Yes, No, Indeterminate)	Additional Information Needed for Indeterminate Replies
1	Customize and implement a prepackaged payroll system.
2	Manage the portion of a client's local area network system related to payroll.
3	Using payroll time records approved by management, generate unsigned payroll checks on a continuing basis for the client; the client signs the checks.
4	Prepare the payroll tax return form and sign it on behalf of management.
5	Approve employee time cards.
6	Accept responsibility to sign checks, but only in emergency situations.
7	Monitor employee time cards and make changes when errors are detected.
8	Post client-approved entries to client's trial balance.
9	Provide all the initial training and instruction to client employees on a newly implemented payroll information and control system
10	Screen candidates and recommend the most highly qualified candidate to serve as treasurer for the client.
11	Supervise client personnel in the daily operation of the payroll system.
12	Present payroll business risk considerations to the board of directors on behalf of management.

Situation 2:

Use the following to provide the type of audit report the auditors generally should issue in the situations presented below and include an explanation as to why:

Unmodifiedstandard.

Unmodifiedwith an emphasis-of-matter paragraph.

Qualified.

Adverse.

Disclaimer

Situation:

1. Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
2. The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.
3. The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements.
4. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets.
5. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.