Question

Which of the following legal situations would be considered to impair the auditor's independence?

A. An expressed intention by the present management to commence Litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed.
B. Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services.
C. Actual litigation by the auditor against the present management, alleging management fraud or deceit.
D. Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services.

Answer 1

Actual litigation by the auditor against the present management for allegations of fraud or deceit would impair the auditor's independence, as it creates a conflict of interest and questions the auditor's objectivity.

Step-by-step explanation:

Among the given options, C. Actual litigation by the auditor against the present management, alleging management fraud or deceit would be considered to impair the auditor's independence. The auditor's independence is crucial for providing an unbiased opinion on the financial statements of an entity. When auditors litigate against the current management, especially on grounds of fraud or deceit, their impartiality and objectivity could be compromised, potentially impairing their independence in conducting an audit.

Options A and D, although they involve legal disputes, are concerned with matters that are 'not material' to the financial statements or to the auditor. Therefore, these would typically not impair the auditor's independence. Option B also involves actual litigation for an amount not material and is more related to ancillary services rather than the audit itself. However, it's important to note that any significant litigation between the auditor and the client can create an adversarial relationship that may impair independence.