Final answer:
The correct answer is that an auditor's independence is compromised when they prepare and also audit financial statements for the same client. Auditor independence is critical for objective and credible auditing, in accordance with PCAOB and SEC guidelines.
Step-by-step explanation:
The question pertains to the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC) guidelines on auditor independence when the auditor also prepares financial statements for the same client. The correct answer to the question is a) The auditor's independence is compromised in such situations. Auditor independence is a fundamental principle in the auditing profession to ensure that audits are conducted objectively and without conflicts of interest. When auditors are involved in the preparation of financial statements they will later audit, their ability to remain objective can be called into question, leading to a potential compromise in their independence.
Both the PCAOB and the SEC have issued guidelines that clearly indicate that auditors should avoid performing management functions or making management decisions for their clients, including the preparation of financial statements, to maintain independence. Independence in fact and in appearance is essential, not only for audits of public companies but also for private companies and other entities, to maintain the credibility of the audit opinions provided.