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.

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.

to evaulate how each situation could affect independence of mind and independence inappearacce, and the social consequence of prohibiting auditors from doing each one.T hen. indicate whether or not the situation is prohibited by the AICPA Code of Professional Conduct or theSarbanesxley 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 Sarl':ranes-IDJ