Question

In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct?

1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers.
2. The CPA has a direct financial interest in an audit entity, but the interest is maintained in a blind trust.
3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA.

Answer 1

A CPA's independence is impaired if they own a commercial building and lease it to an audit entity where the rental income is material to the CPA, as this could compromise objectivity.

Step-by-step explanation:

According to the Code of Professional Conduct, a CPA's independence would be considered impaired in the following situations: The CPA owns a commercial building and leases it to an audit entity, and the rental income is material to the CPA. This arrangement could create a mutual interest that might compromise the CPA's objectivity and impartiality. Independence is not considered impaired if the CPA has a car loan from a bank that is an audit client, provided the loan was made under the same terms available to all customers, or if the CPA has a direct financial interest in an audited entity but the interest is maintained in a blind trust, assuming the CPA is unaware of the trust's holdings.