Which example could impair independence in appearance?
29 Pages Posted: 16 Jan 2011 Show Date Written: January 14, 2011 AbstractUsing non-accounting business students as a proxy for general public and senior accounting students as a proxy for accounting professionals, this study investigates the effect of ten different independent scenarios dealing with auditors’ appearance of independence on the chance that the auditor will not report a material misstatement in the financial statements. The results show that there are significant difference between accounting and non-accounting respondents when the auditor has a material direct financial interest in the client, when the auditor’s family members have a material direct financial interest in the client, when the auditor’s next of kin has a key position in the client, or when the auditor receives a more favorable loan term from a car dealer through the client arrangement. We did not find any differences between male and female respondents with respect to their perceptions of the ten scenarios in this study. Keywords: Appearence of Independence, Accountants vs non-accountants JEL Classification: M41 Suggested Citation: Suggested Citation Nouri, Hossein and Ahlawat, Sunita, Auditor Independence in Appearance: An Examination of Perception Differences between Accountants and Non-Accountants (January 14, 2011). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1740645 or http://dx.doi.org/10.2139/ssrn.1740645 1. Acceptance of a Gift .001 .002 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 2. Association Membership.003 .004 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [3.] Member as Signer or Cosigner of Checks[.005–.006] [Deleted May 1999] [4.] Payroll Preparation Services[.007–.008] [Deleted May 1999] [5.] Member as Bookkeeper[.009–.010] [Deleted June 1991] [6.] Member's Spouse as Accountant of Client[.011–.012] [Deleted November 2001] [7.] Member Providing Contract Services[.013–.014] [Deleted May 1999] 8. Member Providing Advisory Services.015 .016 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 9. Member as Representative of Creditor's Committee.017
Would independence be considered to be impaired with respect to the debtor corporation? .018 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 10. Member as Legislator.019 .020 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 11. Member Designated to Serve as Executor or Trustee.021 .022 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 12. Member as Trustee of Charitable Foundation.023 .024 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [13.] Member as Bank Stockholder[.025–.026] [Deleted November 1993] 14. Member on Board of Federated Fund-Raising Organization.027 .028 [Replaces previous ruling No. 14, Member on Board of Directors of United Fund, April 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [15.] Retired Partner as Director[.029–.030] [Deleted June 1991] 16. Member on Board of Directors of Nonprofit Social Club.031 .032 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 17. Member of Social Club.033 .034 [Replaces previous ruling No. 17, Member as Stockholder in Country Club, February 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [18.] Member as City Council Chairman[.035–.036] [Deleted June 1991] 19. Member on Deferred Compensation Committee.037 .038 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 20. Member Serving on Governmental Advisory Unit.039 .040 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 21. Member as Director and Auditor of an Entity's Profit Sharing and Retirement Trust.041 .042 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [22.] Family Relationship, Brother[.043–.044] [Deleted June 1991] [23.] Family Relationship, Uncle by Marriage[.045–.046] [Deleted June 1991] [24.] Family Relationship, Father[.047–.048] [Deleted June 1991] [25.] Family Relationship, Son[.049–.050] [Deleted June 1991] [26.] Family Relationship, Son[.051–.052] [Deleted June 1991] [27.] Family Relationship, Spouse as Trustee[.053–.054] [Deleted June 1991] [28.] Cash Account With Brokerage Client[.055–.056] [Superseded by ethics ruling No. 59.] 29. Member as Bondholder.057 .058 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [30.] Financial Interest by Employee[.059–060] [.059–060] [Deleted July 1979] 31. Performance of Services for Common Interest Realty Associations (CIRAs), Including Cooperatives, Condominium Associations, Planned Unit Developments, Homeowners Associations, and Timeshare Developments.061 .062
[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] Also see interpretation 101-1.C [ET section 101.02] for additional restrictions related to associations with a client. If the member has a relationship with a real estate developer or management company that is associated with the CIRA, see interpretation 102-2 [ET section 102.03] for guidance. [Revised, effective May 31, 1998, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [32.] Mortgage Loan to Member's Corporation[.063–.064] [Deleted December 1991] [33.] Member as Participant in Employee Benefit Plan[.065–.066] [Deleted May 1998] [34.] Member as Auditor of Common Trust Funds[.067–.068] [Deleted February 1991] 35. Stockholder in Mutual Funds.069 .070 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 36. Participant in Investment Club.071 .072 See interpretation 101-1.B [ET section 101.02] for additional restrictions relating to all partners and professionals of the firm. [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [37.] Retired Partners as Co-Trustee[.073–.074] [Deleted November 1980] 38. Member as Co-Fiduciary With Client Bank.075 .076 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [39.] Member as Officially Appointed Stock Transfer Agent or Registrar[.077–.078] [Deleted May 1999] [40.] Controller Entering Public Practice[.079–.080] [Deleted June 1979] 41. Financial Services Company Client Has Custody of a Member's Assets.081 .082
For guidance dealing with depository accounts, see ethics ruling No. 70 [ET section 191.140 and .141]. [Replaces previous ruling No. 41, Member as Auditor of Mutual Insurance Company, November, 1990. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee.] [42.] Member as Life Insurance Policy Holder[.083–.084] [Deleted April 1991] [43.] Member's Employee as Treasurer of a Client[.085–.086] [Deleted June 1991] [44.] Past Due Billings[.087–.088] [Superseded by ethics ruling No. 52.] [45.] Past Due Fees: Client in Bankruptcy[.089–.090] [Deleted November 1990] [46.] Member as General Counsel[.091–.092] [Superseded by ethics ruling No. 51.] [47.] Member as Auditor of Mutual Fund and Shareholder of Investment Advisor/Manager[.093–.094] [Deleted February 1991] 48. Faculty Member as Auditor of a Student Fund.095
Would independence be considered to be impaired under these circumstances? .096 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [49.] Investor and Investee Companies[.097–.098] [Superseded by interpretation 101-8.] [50.] Family Relationship, Brother-in-Law[.099–.100] [Deleted June 1983] [51.] Member Providing Legal Services[.101–.102] [Deleted May 1999] 52. Unpaid Fees.103 .104 This ruling does not apply to fees outstanding from a client in bankruptcy. [Replaces previous ruling No. 52, Past Due Fees, November 1990. Revised, effective November 30, 1997, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [53.] Member as Auditor of Employee Benefit Plan and Sponsoring Company[.105–.106] [Deleted June 1991] [54.] Member Providing Appraisal, Valuation, or Actuarial Services[.107–.108] [Deleted May 1999] [55.] Independence During Systems Implementation[.109–.110] [Deleted May 1999] [56.] Executive Search[.111–.112] [Deleted May 1999] [57.] MAS Engagement to Evaluate Service Bureaus[.113–.114] [Deleted August 1995] [58.] Member as Lessor[.115–.116] [Deleted May 1998] [59.] Account With Brokerage Client[.117–.118] [Deleted November 1987] 60. Employee Benefit Plans—Member's Relationships With Participating Employer.119 .120 When auditing plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), Department of Labor (DOL) regulations must be followed. fn 1 [Replaces previous ruling No. 60, Employee Benefit Plans—Member's Relationships With Participating Employer(s), November 1993. Revised, effective November 30, 2001, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [61.] Participation of Member's Spouse in Client's Stock Ownership Plans (Including an ESOP)[.121–.122] [Deleted May 1998] [62.] Member and Client Are Limited Partners in a Limited Partnership[.123–.124] [Deleted April 1991] [63.] Review of Prospective Financial Information—Member's Independence of Promotors[.125–.127] [Deleted August 1992] 64. Member Serves on Board of Organization for Which Client Raises Funds.128 .129 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 65. Use of the CPA Designation by Member Not in Public Practice.130 .131 [Replaces previous ruling No. 65, Use of the CPA Designation by Member Not in Public Practice, February 1996, effective February 29, 1996.] 66. Member's Retirement or Savings Plan Has Financial Interest in Client.132 .133 See interpretation 101-1.B [ET section 101.02] for additional restrictions relating to all partners and professionals of the firm. [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 67. Servicing of Loan.134 .135 [Replaces previous ruling No. 67, Servicing of Loan, November 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 68. Blind Trust.136 .137 [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 69. Investment With a General Partner.138 .139 [Replaces previous ruling No. 69, Joint Investment With a Promoter and/or General Partner, April 1991, effective April 30, 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 70. Member's Depository Relationship With Client Financial Institution.140 .141
A firm's depository relationship would not impair its independence provided that the likelihood of the financial institution experiencing financial difficulties was considered to be remote. [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee.] 71. Use of Nonindependent CPA Firm on an Engagement.142 .143 However, use of the work of such individuals in a manner similar to internal auditors is permissible provided that there is compliance with the Statements on Auditing Standards. Applicable literature contained in the Statements on Auditing Standards should be consulted. [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 72. Member on Advisory Board of Client.144 .145 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [73.] Meaning of the Period of a Professional Engagement[.146–.147] [Deleted February 1998] 74. Audits, Reviews, or Compilations and a Lack of Independence.148 .149 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [75.] Membership in Client Credit Union[Paragraphs .150-.151 deleted.] [76.] Guarantee of Loan[.152–.153] [Deleted December 1991] [77.] Individual Considering or Accepting Employment With the Client[.154–.155] [Deleted April 2003] [78.] Service on Governmental Board[.156–.157] [Deleted August 1995] 79. Member's Investment in a Partnership That Invests in Client.158 .159 If a covered member is a limited partner in a partnership that invests in a client, the covered member is considered to have an indirect financial interest in the client. Independence would be considered to be impaired if the indirect financial interest is material to the covered member's net worth. [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [80.] The Meaning of a Joint Closely Held Business Investment[.160–.161] [Deleted November 2001] 81. Member's Investment in a Limited Partnership.162 .163 2. The LP is an investee of the client because the client is a general partner in the LP. Therefore, under interpretation 101-8 [ET section 101.10], if the investment in the LP were material to the client, a covered member's financial interest in the LP would impair independence. However, if the client's financial interest in the LP were not material to the client, a covered member's immaterial financial interest in the LP would not impair independence. 3. If the covered member is a limited partner in the LP, the covered member is considered to have an indirect financial interest in all subsidiaries of the LP. If the indirect financial interest in the subsidiaries were material to the covered member, independence would be considered to be impaired with respect to those subsidiaries under interpretation 101-1.A.1 [ET section 101.02]. If the covered member or client general partner, individually or together can control the LP, the LP would be considered a joint closely held investment under ET section 92.16. [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 82. Campaign Treasurer.164 .165 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [83.] Member on Board of Component Unit and Auditor of Oversight Entity[.166–.167] [Deleted January 1996] [84.] Member on Board of Material Component Unit and Auditor of Another Material Component Unit[.168–.169] [Deleted January 1996] 85. Bank Director.170 .171 These implications fall into two categories:
In view of the above factors, it is generally not desirable for a member in public practice to accept a position as bank director where the member's clients are likely to engage in significant transactions with the bank. If a member is engaged in public practice, the member should avoid the high probability of a conflict of interest and the appearance that the member's fiduciary obligations and responsibilities to the bank may conflict with or interfere with the member's ability to serve the client's interest objectively and in complete confidence. The general knowledge and experience of CPAs in public practice may be very helpful to a bank in formulating policy matters and making business decisions; however, in most instances, it would be more appropriate for the member as part of the member's public practice to serve as a consultant to the bank's board. Under such an arrangement, the member could limit activities to those which did not involve conflicts of interest or confidentiality problems. [86.] Partially Secured Loans[.172–.173] [Deleted February 1998] [87.] Loan Commitment or Line of Credit[.174–.175] [Deleted February 1998] [88.] Loans to Partnership in Which Members are Limited Partners[.176–.177] [Deleted February 1998] [89.] Loan to Partnership in Which Members are General Partners[.178–.179] [Deleted February 1998] [90.] Credit Card Balances and Cash Advances[.180–.181] [Deleted February 1998] [91.] Member Leasing Property to or From a Client[Paragraphs .182-.183 deleted.] 92. Joint Interest in Vacation Home.184 .185 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 93. Service on Board of Directors of Federated Fund-Raising Organization.186 .187 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 94. Indemnification Clause in Engagement Letters.188 .189 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 95. Agreement With Attest Client to Use ADR Techniques.190 .191 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 96. Commencement of ADR Proceeding.192 .193 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [97.] Performance of Certain Extended Audit Services[.194–.195] [Deleted August 1996] [98.] Member's Loan From a Nonclient Subsidiary or Parent of an Attest Client[Paragraphs .196-.197 deleted.] 99. Member Providing Services for Company Executives.198 .199 .200 .201 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 101. Client Advocacy and Expert Witness Services.202 .203 .204 .205 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 103. Attest Report on Internal Controls.206 .207
[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 104. Operational Auditing Services.208 .209 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 105. Frequency of Performance of Extended Audit Procedures.210 .211 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 106. Member Has Significant Influence Over an Entity That Has Significant Influence Over a Client.212 .213 See interpretation 101-8 [ET section 101.10] for further guidance. [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] 107. Participation in Health and Welfare Plan Sponsored by Client.214 .215 [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, November 2002, by the Professional Ethics Executive Committee.] [108.] Participation of Member, Spouse or Dependent in Retirement, Savings, or Similar Plan Sponsored by, or That Invests in, Client[.216–.217] [Deleted November 2001] 109. Member’s Investment in Financial Services Products That Invest in Clients.218 .219 If the covered member is not able to direct the investment and the financial services product invests in a client, the covered member is considered to have an indirect financial interest in the client. Independence would be considered to be impaired if the indirect financial interest becomes material to the covered member. (See ethics ruling No. 35 under rule 101 [ET section 191.069–.070] for additional guidance with respect to investments in mutual funds.) Further, an investment in a financial services product that invests only in clients with respect to which an individual is considered to be a covered member would be considered to be a direct financial interest in such client, and independence would be considered to be impaired. [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] [110.] Member is Connected With an Entity That Has a Loan to or From a Client[Paragraphs .220-.221 deleted.] 111. Employee Benefit Plan Sponsored by Client.222 .223 Independence would not be considered to be impaired with respect to the client sponsor of a defined contribution plan provided the member does not make any management decisions or perform management functions on behalf of the client sponsor or have custody of the sponsor's assets. [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.] What is independence of appearance?(b) Independence in appearance – the avoidance of facts and circumstances that are so significant a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm's, or a member of the assurance team's, integrity, objectivity or ...
What is impair independence in appearance?independence in appearance means an auditor is free from financial interests in the taxpayer being audited; is not employed by the taxpayer; does not have close personal ties with the taxpayer; nor has any relationship with the taxpayer that a third party would consider an impairment of the auditor's judgment.
What impairs independence of an auditor?The commencement of litigation by the present management alleging deficiencies in audit work for the client would be considered to impair independence. The commencement of litigation by the covered member against the present management alleging management fraud or deceit would be considered to impair independence.
What do mean by independent in fact and appearance?Independence in fact indicates that the auditor possesses an independent mindset when planning and executing an audit, and that the resulting audit report is unbiased. Independence in appearance indicates whether the auditor appears to be independent.
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