The following relate to auditors' independence:

Read the requirements

a.	Why is independence so essential for auditors?
b.	Compare the importance of independence of CPAs with that of otherprofessionals, such as attorneys.
c.	Explain the difference between independence in appearance and independence of mind.
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 AICPA Code of Professional Conduct?
	(2) Explain whether the ownership is likely to affect the partner's independence of mind.
	(3) Explain the reason for the strict requirements about stock ownership in the rules of conduct.
e.	Discuss how each of the following could affect independence of mind and independence in appearance, and evaluate the social consequence of prohibiting auditors from doing each one:
	(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 the client's financial statements and preparing financial statements, including footnotes, 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.
f.	Which of (1) through (7) are prohibited by the AICPA Code of Professional Conduct? Which are prohibited by the Sarbanes-Oxley Act or the SEC?

.

Requirement a. Why is independence so essential for auditors?

Independence is essential for auditors because

A.

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

B.

users of financial statements expect an unbiased viewpoint in the CPA's attestation to the accuracy of the financial statements. If users believe that auditors are not independent, the value of the audit function is eliminated.

C.

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

D.

users of financial statements expect an unbiased viewpoint in the CPA's attestation to the fairness of the financial statements. If users believe that auditors are not independent, the value of the audit function is eliminated.

Requirement b. Compare the importance of independence of CPAs with that of other professionals, such as attorneys.

Most other professions (attorneys, doctors, dentists, etc.) represent their clients and perform services intended primarily to assist their clients. For this reason no assumption of independence is required. Judges, however, must maintain a(n)

nonadvocacy position, similar to auditors.

Requirement c.

Explain the difference between independence in appearance and of mind.

A.

Independence in appearance refers to the auditor'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 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.

C.

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.

D.

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 the auditor's use of an audit committee to remain independent of management.

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 AICPA Code of Professional

Conduct?

(2) Explain whether the ownership is likely to affect the partner's independence of mind. (3) Explain the reason for the strict requirements about stock ownership in the rules of conduct.Yes, he has violatedthe AICPA Code of Professional

Conduct, because independence rules permit any direct ownership by a partner or shareholder. Such a small ownership is likely to have any impact on a partner's objectivity in evaluating the financial statements. It is unlikely to affect the partner's independence of mind. The stock ownership could affect the appearance of independence and therefore impact the financial stability of auditors. Additionally, these strict requirements eliminate any controversy as to the line between a public and private ownership.

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 the client's financial statements and preparing financial statements, including footnotes, 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 in appearance, 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 the Sarbanes-Oxley Act or the SEC?Complete the following table by using these statements

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 the Sarbanes-Oxley Act and SEC. (Complete all answer boxes. Each statement may be used more than once or not at all.)

Effects on independence of mind:

(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 in appearance:

(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.

Social consequences:

(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.

Prohibited by

Independence

Independence

Social

Code of

Sarbanes-Oxley/

Situation

of mind

in appearance

Consequence

Conduct?

SEC?

(1)

(2)

(3)

(4)

(5)
(6)
(7)

Choose from any drop-down list and then continue to the next question.