Loans, Leases, and Business Relationships Flashcards
An auditor’s independence is considered impaired if the auditor has
An immaterial, indirect financial interest in a client.
An automobile loan from a client bank, collateralized by the automobile.
A joint, closely held business investment with the client that is material to the auditor’s net worth.
A mortgage loan, executed with a financial institution client on March 1, 1990, that is material to the auditor’s net worth.
A joint, closely held business investment with the client that is material to the auditor’s net worth.
This answer is correct. The Code prohibits joint closely held investments that are material to the auditor.
According to the profession’s ethical standards, a CPA who is a covered member would be considered independent in which of the following instances?
A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA.
The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust.
The CPA owns an office building and the mortgage on the building is guaranteed by a client.
The CPA belongs to a country club that is a client in which membership requires the acquisition of a pro rata share of equity.
The CPA belongs to a country club that is a client in which membership requires the acquisition of a pro rata share of equity.
This answer is correct because as long as membership in a club is essentially a social matter, CPA independence is not impaired.
Which of the following situations does not create an independence problem for the Brixton Accounting Firm relative to its attest client ABC Co.
Both Brixton and ABC Co. own Microsoft stock.
Both Brixton and ABC Co. purchase major stakes in a local technology start-up company.
One of Brixton’s covered members is friends with ABC’s chief executive officer, and they pursue their passion for skiing by jointly purchasing a ski chalet in Vail.
None of the above create an independence problem.
Both Brixton and ABC Co. own Microsoft stock.
Because Microsoft is a public company, this situation creates no independence problem, although it might be considered a joint investment.
Tondry is a CPA working for a Big Four firm as an auditor. Tondry has purchased a small minority interest in XYZ Co., which provides technical computer support and other nonaudit services for businesses. At least one of the businesses that receives technical support from XYZ (and purchases software on XYZ’s recommendation for which XYZ received a commission), is an audit client for which Tondry is on the audit engagement team. Given these facts, which of the following is true?
I. Tondry’s actions have created an independence problem.
II. The employees and agents of XYZ must follow independence rules just as Tondry must.
I only.
II only.
I and II.
Neither I nor II.
Neither I nor II.
Because Tondry only has a minority share in the business, even though the business provides services to an attest client, there is no independence violation and no need for the business’ employees to follow independence requirements.
When the member, individually or collectively with the member’s firm or others in the firm, does not control the separate business, the provisions of the code would apply to the member’s actions but not t o the separate business, its other (nonmember) owners, and its professional employees. For example, the separate business could enter into a contingent fee arrangement with the member’s attest client or accept commissions for the referral of products or services to the member’s attest client.
The Bilton Accounting Firm needs office space, and ABC Co. has office space to lease out. ABC is an attest client of Bilton. Which of the following would not create an independence problem?
ABC signs a capital lease agreement with Bilton on terms and conditions that are comparable with other leases in the area.
ABC signs an operating lease with Bilton on terms and conditions that are comparable with other leases in the area, and Bilton is always on time with its payments.
ABC signs an operating lease with Bilton that gives it a 10% discount from what ABC charges its other tenants.
All three of the choices provided.
ABC signs an operating lease with Bilton on terms and conditions that are comparable with other leases in the area, and Bilton is always on time with its payments.
If an operating lease is on normal terms and all amounts are paid in accordance with the terms of the lease, there are no independence problems.
