Partnerships, 529s, Trust and Estates, Employee Benefit Plans Flashcards
Member Ona is a tax accountant for Ernst & Touche (E&T). She provides 20 hours a year of tax services to Konkle Corporation, an audit client of E&T. Ona was named a trustee of the Chancellor Family Trust (CFT), which happens to own shares of Konkle. In which of the following situations is there not an independence problem?
Ona has the ability to make investment decisions for CFT.
CFT owns 15% of outstanding Konkle stock.
CFT has put 22% of its assets into Konkle stock.
Ona does not have the ability to make investment decisions for CFT, CFT owns only 4% of Konkle’s stock, and CFT has placed only 3% of its assets into Konkle stock.
Ona does not have the ability to make investment decisions for CFT, CFT owns only 4% of Konkle’s stock, and CFT has placed only 3% of its assets into Konkle stock.
Correct! With all three of these qualifications (no active role in investing, owns less than 10% of audit client’s stock, and less than 10% of its assets invested), there is no independence problem.
Jafar has been tapped for a government position. He owns stock in many companies and is planning to set up a trust to minimize conflicts of interest. He will be the grantor and the beneficiary. Because Jafar’s spouse and both of his children are auditors of public companies, Jafar is concerned as to whether his interests in these stocks will be direct or indirect once the trust is established. Which of the following statements is true?
If the trust is a blind trust, all interests in the underlying stocks will be considered indirect.
The interests in the underlying stocks will be considered to be indirect even if Jafar retains the ability to participate in the trust’s investment decisions.
The interests in the underlying stocks will be considered to be indirect even if Jafar retains the ability to supervise the trust’s investment decisions.
The interests in the underlying stocks will be considered to be direct if Jafar has the ability to revoke the trust.
The interests in the underlying stocks will be considered to be direct if Jafar has the ability to revoke the trust.
Correct! The statement is true because a trust’s investments are direct financial interests if the grantor retains the ability to amend or revoke the trust.
In which of the following situations would a CPA’s covered members’ independence be considered to be impaired?
I. The CPA maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution.
II. The CPA has a direct financial interest in an audit client, but the interest is maintained in a blind trust.
III. The CPA owns a commercial building and leases it to an audit client. The rental income is material to the CPA.
I and II.
II and III.
I and III.
I, II, and III.
II and III.
This answer is correct because situations II and III are prohibited by the Code of Professional Conduct, while situation I is allowed. Situation I is acceptable since a CPA may maintain a checking account that is fully insured by a government deposit insurance agency in an audit client. The Code of Professional Conduct states that independence is impaired both by a direct financial interest in an audit client, regardless of whether it is placed in a blind trust and by an indirect financial interest such as the earning of a material amount of rental income from an audit client.
Art is on his firm’s audit team for client ABC Co. Which of the following is an indirect financial interest?
Art is a general partner in a partnership that owns stock in ABC.
Art is a limited partner in a partnership that owns stock in ABC and is on the partnership’s investments committee.
Art is a member in a member-managed limited liability corporation that owns stock in ABC.
Art is a member in an agent-managed limited liability corporation that owns stock in ABC.
Art is a member in an agent-managed limited liability corporation that owns stock in ABC.
Unless Art participates in the investment decisions of his limited liability corporation, which is not indicated in the facts, his interests in its underlying investments are indirect if the LLC is agent managed.
The Lox Accounting Firm audits ABC Co. Pim is a Lox tax partner in the office that runs the ABC audit. Pim has been asked to be a trustee of an estate that has
ABC stock in its portfolio. In which of the following situations would there be an independence problem for Lox?
Pim has authority to make investment decisions for the estate.
The estate owns more than 10% of ABC stock.
More than 10% of the estate’s assets are invested in ABC stock.
All three choices provided.
All three choices provided.
Because all three situations create independence problems, this is the best answer.
Member Sam is an auditor, but he also has investments in several different businesses. In which of these is his interest in XYZ Co. not direct?
Sam is a general partner in the ABC Construction Company which, in turn, has invested some of its extra cash in XYZ Co.
Sam is a limited partner in the DEF Cleaning Company which, in turn, has invested some of its extra cash in XYZ Co. Sam is a member of DEF’s investment committee.
Sam is a member of the GHI LLC, a member-managed limited liability company that has invested some of its extra cash in XYZ Co.
Sam is a member of the JKL LLC, an agent-managed limited liability company that has invested some of its extra cash in XYZ Co.
Sam is a member of the JKL LLC, an agent-managed limited liability company that has invested some of its extra cash in XYZ Co.
Correct! Because JKL is agent-managed, it is akin to a limited partnership and absent evidence to the contrary we presume that Sam’s interest is passive. Therefore, this investment is viewed as indirect.
