Network Firms and Affiliates Flashcards
Network firms cooperate to enhance their capabilities to provide professional services and share one or more of all of the following, except:
A common brand name
Common control
Professional business strategy
Software
Software
Correct! Software is not one of the listed items where sharing is indicative of the presence of network firms. Others include sharing of profits or costs, common quality control policies and procedures, and professional resources. It is conceivable that software might count as a professional resource, but this is still the best answer among the four.
ABC Accounting and DEF Accounting are firms in the same network. ABC is preparing an audit report for client GHI Corporation. DEF must be independent of GHI if:
The use of ABC’s audit report regarding GHI is unrestricted.
The use of ABC’s audit report regarding GHI is restricted.
GHI is located in the same state as ABC.
ABC and DEF share the same CEO.
The use of ABC’s audit report regarding GHI is unrestricted.
Correct! Network firms must comply with independence rules regarding audits by other network firms if the use of the audit or review report for the client is not restricted.
Audit firms clearly should not own stock in an audit client. LMN Accounting Firm audits RST Corporation. Which of the following situations would not create an independence problem?
LMN’s employee benefit plan owns stock in a wholly-owned subsidiary of RST.
LMN’s employee benefit plan owns stock in RST’s parent corporation that owns 100% of RST’s stock and counts RST as its largest subsidiary.
LMN’s employee benefit plan owns stock in Lambert Corporation, which sells 10 million widgets to TUV annually.
LMN’s employee benefit plan owns stock in FGH Corporation, an entity in which RST has invested $300 million.
LMN’s employee benefit plan owns stock in Lambert Corporation, which sells 10 million widgets to TUV annually.
Correct! There is no direct rule against an attest firm having a financial interest in a supplier of a client. If a creative mind can invent the potential for an independence issue here, then the Conceptual Framework should be applied.
The Bilbao accounting firm audited Logan Co. and acquired the Seedman accounting firm, which provided internal audit services to Logan Co. Which of the following steps need not be taken to avoid impairing Bilbao’s independence relative to Logan Co.?
Seedman must stop providing internal audit services to Logan Co. before the acquisition is closed.
Seedman employees who provided the internal audit services must not serve on the new firm’s audit team for Logan.
A threats and safeguards evaluation must be conducted to determine whether threats to independence have been reduced to an acceptable level.
Any employees providing internal audit services to Logan must be fired.
Any employees providing internal audit services to Logan must be fired.
Correct! Firing these employees is not required and would not truly advance the cause of independence.
Which of the following is (are) true?
If Firm A and Firm B are in the same network, A must be independent of B’s attest clients if use of the audit or review reports is unrestricted.
If Firm A and Firm B are in the same network, A must be independent of B’s attest clients if use of the audit or review reports is restricted.
Firms may never use partners or professional employees of other firms on their audit teams.
All three answer choices provided are true.
If Firm A and Firm B are in the same network, A must be independent of B’s attest clients if use of the audit or review reports is unrestricted.
Independence is required if use of such reports is unrestricted.
Which of the following are “affiliates” of clients so that a member in public practice might have to worry about its relationships with the entity in order to preserve independence?
The Dawes accounting firm is auditing ABC Co., which owns 61% of the stock of DEF Mfg. Co. (from which
Dawes has borrowed quite a bit of money).
The Dawes accounting firm is auditing DEF Co., which is owned substantially by ABC Mfg. Co. (from which
Dawes has borrowed quite a bit of money).
The Dawes accounting firm is auditing ABC Co. and has borrowed quite a bit of money from DEF Mfg. Co. while the Pensive Hedge Fund owns a majority control of both ABC and DEF.
All three answer choices provided.
All three answer choices provided.
Because all three answer choices are correct, this is the best answer.
