Question

Your firm is proposing to assist Company X (a tax client) with plans to acquire your audit client. Which best describes an important consideration when determining whether this service would create a potential conflict of interest?

A. Whether the PCAOB consented to your firm performing the services.
B. Whether you have already drawn up an engagement letter to perform the services.
C. Whether a reasonable and informed third party would conclude that a conflict of interest exists.
D. Whether violation of the code would subject your firm to substantial penalties.

Answer 1

The correct option is C. When determining whether a proposed service would create a potential conflict of interest, it is important to consider whether a reasonable and informed third party would conclude that a conflict of interest exists.

Step-by-step explanation:

An important consideration when determining whether a proposed service would create a potential conflict of interest is whether a reasonable and informed third party would conclude that a conflict of interest exists.

For example, if your firm is proposing to assist Company X with plans to acquire your audit client, it is important to evaluate whether this creates a conflict of interest that may compromise the independence and objectivity of your firm's audit work.

Therefore, the correct answer is C. Whether a reasonable and informed third party would conclude that a conflict of interest exists.