Question

A CPA who is a "covered person" 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 were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered impaired with respect to the client?

a. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child.
b. No, because the CPA would not be considered to have a direct financial interest in the client.
c. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.
d. No, because the CPA would not be considered to have a material indirect financial interest in the client.

Answer 1

A CPA's independence is considered impaired if they purchase stock in a client corporation for a trust for their child when it is material to the child's net worth, as this would be considered an indirect financial interest that is material to the CPA's child.

Step-by-step explanation:

The question revolves around whether a CPA's independence is impaired if they purchase stock in a client corporation for their minor child's educational trust when the stock is material to the child's net worth but not to the CPA. According to the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct, independence would be considered impaired due to the CPA having an indirect financial interest that is significant to the child. Even though the CPA would not have a direct financial interest, an indirect financial interest can still impair independence if it is material to the close relative (in this case, the minor child). Therefore, the correct answer would be a. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child.