Which of the following is prohibited by the AICPA Code of Professional Conduct Quizlet

The firm of Schilling & Co., CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company.

a. Johnson, a partner in the Chicago office, owns 100 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit.

1. Independence is impaired
2. Independence is not impaired

b. Gizmo, a partner in the Green Bay office, owns 600 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit.

1. Independence is impaired
2. Independence is not impaired

c. Masterson is a staff assistant in the Green Bay office and owns 10 percent of Gillington's outstanding common stock. Masterson provides no services to Gillington and is not able to influence the engagement.

1. Independence is impaired
2. Independence is not impaired

d. Schilling, the partner in charge of the entire firm, works in the Green Bay office. He owns 100 shares of Gillington stock (market value $2 per share) but provides no services on the engagement.

1. Independence is impaired
2. Independence is not impaired

e. Gorman is a staff assistant on the audit. Gorman's mother owns shares of Gillington that are material to her net worth and of which Gorman has knowledge.

1. Independence is impaired
2. Independence is not impaired

(A): A spouse's employment with a client.

The immediate family (spouse, spousal equivalent, or a dependent) of a covered member (such as an individual on the attest engagement team or who is able to influence the engagement) is subject to the Independence rule. Under that rule, independence is impaired if, during the period covered by the financial statements or during the engagement, a firm partner or professional employee (including an immediate family member of such an individual) was also associated with the client as an officer, director, employee, promoter, underwriter, voting trustee, or member of management. However, independence is not impaired solely because of an immediate family member's employment by the client in a nonkey position.

(A): Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor.

Independence is impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. With some exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member is subject to eh Independence rule and its interpretations. Because the covered member is a grantor of a revocable trust, the trust and its underlying investments are direct financial interests. Given that the securities were stock in an audit client, independence is impaired.

(B) II and III

When a member leases property to or from a client, independence is not impaired if (1) the lease meets the criteria of an operating lease, (2) the terms and conditions of the agreement compare with those of similar leases, and (3) all amounts are paid in accordance with the lease. However, if the lease meets all the criteria of a capital lease, it impairs a covered member's independence. The reason is that a capital lease is considered a loan to or from the client. Moreover, independence is impaired if, during the period of the professional engagement, a covered member had (or was committed to acquire) any direct or any material indirect financial interest in the client. When a covered member is a trust beneficiary, the trust is deemed to be a direct financial interest, and the underlying investments are indirect financial interests. However, the beneficiary of a blind trust is also the grantor. The grantor normally can amend or revoke the trust, and the investments will finally revert to him or her. thus, the blind trust and the investments are deemed to be direct financial interests of the covered member.

(A): Performs expert witness services for a non-issuer attest client that is one of many plaintiffs in a class action lawsuit.

Litigation services, a type of forensic accounting services, involve assisting in actual or potential legal or regulatory proceedings. They include expert witness services, that is, the expression of an opinion based on the member's expertise, not his or her knowledge of disputed facts. These services impair independence unless (1) they are rendered to a large group of parties, (2) no attest client is the lead plaintiff or defendant, and (3) other requirements related to the influence of attest clients on the proceedings are met. Thus, the attest client must be less than 20% of (1) the members of the group of plaintiffs (or defendants), (2) the voting interests of the group, and (3) the claim. Moreover, the client should not have sole power to select the expert witness. However, if expert services unrelated to the audit are provided to an audit client that is an issuer covered by the Securities Exchange Act of 1934, the CPA will lack independence.

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