Overview and Unsolicited Financial Interests Flashcards
Cyr is on her firm’s audit team for the Molar Corporation audit. She thinks Molar Corporation is a pretty promising investment. Which of the following forms of investment would it be proper for her to acquire?
A material, direct investment.
An immaterial, direct investment.
A material, indirect investment.
An immaterial, indirect investment.
An immaterial, indirect investment.
Correct! The only form of investment that is allowed to a covered person like Cyr is one that is both immaterial and indirect.
Blake is on his firm’s audit team for the Mignon Corporation audit. He knows that if he has a financial interest in Mignon, it might impair his independence. Which of the following interests would be permissible?
Blake buys a large amount of Mignon preferred shares that do not carry voting rights.
Blake does not buy, but commits to acquire in 3 months’ time, Mignon preferred shares that do not carry voting rights.
Blake buys a very small amount of Mignon common shares with voting rights.
Blake is the beneficiary of a blind trust that owns a small amount of stock in a corporation that has made a small operating loan to Mignon.
Blake is the beneficiary of a blind trust that owns a small amount of stock in a corporation that has made a small operating loan to Mignon.
Correct! This investment is both indirect and apparently immaterial and therefore probably permitted.
For covered member Ted, a financial interest in an audit client is not direct if it is:
Owned by a trust that is managed by one of Ted’s distant relatives.
Owned directly by Ted, even if managed by others.
Under Ted’s control, even if managed by others.
Owned by Ted beneficially through a trust if Ted has authority to participate in the trust’s investment decisions.
Owned by a trust that is managed by one of Ted’s distant relatives.
Correct! This interest is indirect because Ted has neither ownership nor control.
PriceCooperHouse (PCH) audits XYZ Corporation. Shelley is a tax partner at PCH who does no work for XYZ. She is not a covered member relative to XYZ. Nonetheless, PCH’s independence would be impaired if Shelley owned more than what percentage of XYZ’s common stock?
1%
3%
5%
10%
5%
Correct! POPEs (professional employees of the audit firm) who are not covered members may nonetheless not own more than 5% of a client’s ownership interests without impairing independence.
If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial direct financial interest, the accountant is
Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion.
Not independent and, therefore, may not issue a review report.
Not independent and, therefore, may not be associated with the financial statements.
Independent because the financial interest is immaterial and, therefore, may issue a review report.
Not independent and, therefore, may not issue a review report.
This answer is correct because even an immaterial direct financial interest impairs accountant independent and makes performing attest services (including reviews) not allowable. Independence is considered to be impaired if any direct financial interest in the enterprise is acquired. If an accountant is not independent, he can neither perform a review engagement nor perform an audit.
According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA’s independence?
All direct and indirect financial interests.
Only direct financial interests.
Only direct or material indirect financial interests.
Only material financial interests.
Only direct or material indirect financial interests.
This answer is correct because either a direct or a material indirect financial interest impairs independence.
In which of the following circumstances would a covered member’s independence be impaired with respect to a nonissuer client?
The member is designated to serve as guardian of a friend’s children if the need arises, and the friend’s estate, which would be held in trust for the children, holds significant stock ownership in a client entity.
The member’s spouse qualifies because of geographical residence to belong to a client’s credit union, and all transactions with the credit union are conducted under normal operating practices.
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.
The member belongs to a client golf club that requires members to acquire a share of the club’s debt securities.
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.
This answer is correct because a covered member may hold no direct financial interest in an audit client, and such bonds are a direct financial interest.
Lil is on her firm’s audit team for MNO Corporation. She receives notice that her rich aunt Sephora has died and left her stock in MNO. The will is in probate and probably will be for a few months. Which of the following steps are not steps that Lil should take to preserve independence?
Dispose of the shares within 30 days of gaining the right to do so.
Not participate in the engagement after learning of the interest and before disposing of it.
Not purchase more MNO shares.
Resign immediately from her firm and hope to be rehired in the following year.
Resign immediately from her firm and hope to be rehired in the following year.
Correct! Lil need not resign from her firm…there is plenty of work that she can do for other clients.
A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities are not material to the CPA’s wealth but are material to the child’s personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA’s independence with the client?
No, because the CPA would not have a direct financial interest in the client.
Yes, because the stock would be a direct financial interest and materiality is a factor.
Yes, because the stock would be an indirect financial interest and materiality is not a factor.
Yes, because the stock would be a direct financial interest and materiality is not a factor.
Yes, because the stock would be a direct financial interest and materiality is not a factor.
This is a direct financial interest. Therefore, materiality is not a factor. A direct financial interest impairs independence even if it is immaterial.
Which of the following create(s) an independence problem?
Sam is on the attest team for client ABC Co. While he does not currently own any ABC stock, he has signed a commitment to purchase a small amount but not until a month after the audit report will issue.
Sam is on the attest team for client ABC Co. While he does not currently own any ABC stock in his own name. He is beneficiary of a trust that holds a significant amount of ABC stock. Sam does not control the trust’s investments.
Sam is not a “covered member” for purposes of his firm’s audit of ABC Co., but he is a partner in a different office and does own 7% of ABC’s shares.
All three answer choices provided
All three answer choices provided.
Because all three answer choices are correct, this is the best answer.
