Question

Rule 101 of the AICPA Code of Professional Conduct (independence) considers which of the following situations a violation of the code?

A. A partner in the New York office is married to the president of a client for which the firm's Connecticut office performs audit services. The New York partner does not perform services out of or for the Connecticut office, cannot exercise significant influence over the engagement, and has no involvement with the engagement.
B. An audit partner holds an investment in a well-diversified mutual fund which sometimes makes immaterial investments in his audit clients. The auditor's investment in the mutual fund is not material to the auditor or the mutual fund. The auditor has no influence over investment decisions of the mutual fund. The auditor is a covered member.
C. An audit partner has a brother who owns a 20% interest in an audit client, which is material to the brother's net worth. The partner participates in the audit engagement and is aware of his brother's investment.
D. All of the possible answers are violations of Rule 101 of the AICPA Code of Professional Conduct.

Answer 1

Situation C, where an audit partner has a brother with a significant investment in an audit client and the partner is part of the audit, violates Rule 101 of the AICPA Code of Professional Conduct on independence.

Step-by-step explanation:

Among the situations presented that would violate Rule 101 of the AICPA Code of Professional Conduct, which relates to independence, the situation that specifically constitutes a violation is:

C. An audit partner has a brother who owns a 20% interest in an audit client, which is material to the brother's net worth. The partner participates in the audit engagement and is aware of his brother's investment.

This scenario breaches independence requirements because the audit partner is considered a covered member due to their direct participation in the audit. The material financial interest that the partner's brother holds in the client creates a self-interest threat that cannot be mitigated sufficiently, thus impairing the auditor's independence. According to the AICPA Code of Professional Conduct, family relationships involving material financial interests in the audit client can create impairments to independence when the auditor is directly associated with the engagement.

Conversely, scenarios A and B do not constitute violations under Rule 101: