Family Relationships Flashcards
Independence
Karen works at the In-and-Out Accounting Firm. The firm audits the Nolan Smith Corporation (NSC). Karen’s mother works for NSC. Which of the following does not impair independence?
A- Karen is on the audit team and her mother is NSC’s CEO.
B- Karen is on the audit team and knows that her mother is a receptionist at NSC who over the years has placed most of her savings into NSC stock.
C- Karen is a tax partner in the In-and-Out office that audits NSC and her mother is a receptionist at NSC who owns such a large chunk of NSC stock that she could if she wished to exercise significant influence over NSC.
D- Karen is a tax manager at the In-and-Out office that audits NSC and she provides 20 hours of tax advising to NSC per year while her mother-in-law is CEO at NSC.
D- Karen is a tax manager at the In-and-Out office that audits NSC and she provides 20 hours of tax advising to NSC per year while her mother-in-law is CEO at NSC
Correct. This relationship would not impair independence and is therefore the correct answer. Karen’s mother-in-law (the company’s CEO) is not considered a close relative or immediate family under the independence rules.
Which of the following are not defined as immediate family members (IFM)?
Spouses
Spouse equivalents
Parents
Dependents
Parent
Correct! Parents are not IFMs, unless they are also dependents.
Which of the following are not defined as close relatives (CR)?
Parents
Spousal equivalents
Siblings
Nondependent children
Spousal equivalents
Correct! Spousal equivalents are immediate family members.
Member Cinda is an auditor. She is married to Terry. One of her clients is Bowen Corporation. Which of the following relationships would not impair Cinda's independence? Terry owns stock in Bowen. Terry is an internal auditor at Bowen. Terry is a custodian at Bowen. Terry is general counsel at Bowen.
Terry is a custodian at Bowen.
Correct! IFMs may work for audit clients, though not in key positions. A custodial position should not be a key position.
Chad is an auditor. One of his clients is MLS Corporation. Chad’s spouse, Jeremy, works for MLS. Which of the following would impair Chad’s independence?
Jeremy is a truck driver for MLS.
Jeremy is MLS’s treasurer.
Jeremy is a receptionist at MLS and participates in
MLS’s pension plan which owns a substantial block of MLS shares, but Jeremy gets no special treatment and has nothing to do with operating the plan.
Jeremy works in MLS’s printing shop.
Jeremy is MLS’s treasurer.
Correct! This is an important position and it would impair independence of an IFM of an audit team member like Chad for his spouse to occupy it.
In which of the following situations would a CPA firm be independent with respect to an audit client?
A partner in the office but not assigned to the engagement owns 10% of the outstanding stock of the client.
A professional employee assigned to the engagement has a spouse that is employed as a salesperson by the client.
The partner that manages the firm’s audit practice owns 100 shares of the client’s stock.
A manager that provides twenty hours of nonattest services to the client has a material indirect interest in the client.
A professional employee assigned to the engagement has a spouse that is employed as a salesperson by the client.
This answer is correct because a covered member’s spouse may be employed by an attest client providing that he or she is not employed in a key position.
Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client?
A marketing position related to the client’s primary products.
A policy-making position in the client’s finance division.
A staff position in the client’s research and development division.
A senior position in the client’s human resources division.
A policy-making position in the client’s finance division.
This answer is correct because individuals in positions of significant influence include individuals in a policy-making position in the finance department. These individuals can significantly affect the financial statements of the company.
Which of the following family relationships is most likely to impair a CPA’s independence with respect to a particular audit client on which the CPA works as a “covered member”?
A close relative has a material investment in that client of which the CPA is not aware.
A cousin has an immaterial investment in the client of which the CPA is aware.
The CPA’s father is president of the audit client.
The CPA’s spouse participates in a savings plan sponsored by the client.
The CPA’s father is president of the audit client.
This answer is correct because the CPA’s father is in what is considered a key position, and as such the CPA is not independent.
When the dependent daughter of a partner in a CPA firm owns ten shares of stock in an audit client, which rule of the Code of Professional Conduct is most directly relevant?
Acts discreditable.
Commissions and referral fees.
Compliance with standards.
Independence.
Independence.
This answer is correct. Investments by dependents are considered under independence.
Wiley works for the Imlauf Accounting Firm. He is a tax partner in the Peoria office. The Bradley Manufacturing Co. (BMC) is an audit client of the Peoria office of Imlauf. Wiley provides more than 10 hours of tax advisory services to BMC each year. Wiley’s spouse, Karen, works for Spiggot Corporation and participates in its employee benefit plan which holds a lot of BMC shares. Regarding Wiley’s independence and the BMC audit, which of the following is not true?
This arrangement is okay as long as Karen did not have any other benefit plan opportunities with Spiggot.
This arrangement is okay as long as Karen divests herself of any interest in BMC should that opportunity arise under Spiggot’s plan.
This arrangement is okay, but if Wiley took up auditing and joined the audit team for BMC, problems would arise.
Someone in Karen’s shoes may never hold a material, indirect interest in a firm that her IFM is a covered member for.
Someone in Karen’s shoes may never hold a material, indirect interest in a firm that her IFM is a covered member for.
Correct! This statement is not true. An IFM of a covered member is not completely barred from holding a material indirect interest in an audit client. However, three safeguards must be met: (1) the covered member (Wiley) may not be on the attest team or be in a position to influence the team; (2) the investment in BMC must be an unavoidable consequence of Karen’s participation in her employer’s plan; and (3) if Karen is given an opportunity to take another plan option and divest her interest in BMC, she must do so.
Anchorage Alltime Dairy (AAD) is an audit client of Thorn Granton’s Juneau office. Al is on the audit team. Betsy evaluates Al’s work and determines his pay. Carol is a tax professional in the Juneau office, who provided 20 hours of tax advice to AAD during the last audit cycle. Dave is a tax partner in the Juneau office, who has never provided any services to AAD. Which of the following situations would create an independence problem under the AICPA rules?
Al’s brother Sam is in charge of manure disposal for AAD.
Betsy’s live-in lover owns enough AAD stock that it is material to him, but it does not allow him to exert significant influence over AAD.
Carol’s mother is a receptionist for AAD and, via its pension plan, indirectly owns a small amount of AAD stock.
None of the choices provided.
Betsy’s live-in lover owns enough AAD stock that it is material to him, but it does not allow him to exert significant influence over AAD.
Betsy is in a position to influence the attest engagement team. Her live-in lover is a spousal equivalent, which qualifies him as an immediate family member. He is therefore covered by the independence rules. Although he could hold a non-key position, if he owns enough AAD stock that it is material to him, there is clearly a significant independence problem.
Which of the following is not an immediate family member? A covered member's spouse. A covered member's spousal equivalent. A covered member's nondependent child. A covered member's dependent stepson.
A covered member’s nondependent child.
Immediate family members include spouses, spousal equivalents, and dependents but not nondependent children.
Which of the following is not a close relative? A parent. A spousal equivalent. A sister. A nondependent child.
A spousal equivalent.
Close relatives include parents, siblings, and nondependent children but not spousal equivalents, who are immediate family members.
Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor’s family is most likely to impair the auditor’s independence?
A. A parent’s immaterial investment in a client.
B. A first cousin’s loan from a client.
C. A spouse’s employment with a client.
D. A sibling’s loan to a director of a client.
Choice “C” is correct. According to the Independence Rule, independence requirements
extend to the member’s spouse, dependent children, and dependent relatives. A spouse
working for a client is considered part of the class of “members” subject to independence
requirements.
Choices “A”, “B”, and “D” are incorrect. These choices do not, by definition, fall within the
“member” class.
