Question

A San Diego office does all the work for an attest client, Atlas Mfg. Co. A partner in this office has a father who lives in San Diego and a cousin in Los Angeles. The partner furnishes no financial support for his father but completely financially supports his cousin. The father owns 400 shares of stock in Atlas and the cousin owns 30 shares. The shares owned by the father and the cousin are not material to either of them and neither of them have any influence with Atlas.

What effect do these stock holdings by the partner’s father and cousin have on the partner’s firm’s independence with Atlas?
I. The cousin’s stock ownership impairs independence
II. The father’s stock ownership impairs independence
A. I only
B. II only
C. I and II
D. Neither stock holding impairs independence with the client.

Answer 1

The audit firm's independence is compromised by the cousin's stock ownership since the partner provides complete financial support to this relative, representing a potential conflict of interest. The father's stock ownership does not impair independence as there is no financial dependence or materiality.

Step-by-step explanation:

The independence of an audit firm is essential for ensuring that the attest engagements they perform maintain both the fact and appearance of impartiality. According to the AICPA’s Code of Professional Conduct, an auditor must be free of conflicts of interest that could influence their objectivity and professional judgement. In the given scenario, the partner’s cousin’s stock ownership would impair independence since the partner is providing complete financial support to the cousin. This could be perceived as a direct interest in the company by proxy, which compromises independence. As for the father’s stock ownership, since the partner does not furnish financial support, and the shares owned are not material to the father and he has no influence over the company, this does not impair the firm’s independence. Therefore, only the cousin’s stock ownership impacts the firm’s independence with Atlas Mfg. Co.

Answer 2

The cousin's stock ownership impairs the firm's independence due to the partner's financial support, whereas the father's stock ownership does not affect independence as there is no financial dependency or influence over the company.

Step-by-step explanation:

When assessing the independence of an audit firm with respect to its client, it is crucial to consider both direct and indirect financial interests that could be perceived as impairing independence. In the scenario provided, the partner does not support the father who owns 400 shares of Atlas Mfg. Co. Therefore, as it is not material to the father and he does not have any influence over the company, the father's stock ownership does not impair independence. However, the partner fully supports the cousin who owns 30 shares. Since the partner's financial support could be seen as an indirect financial interest through the cousin, this could potentially impair the firm's independence.

The correct answer is A. I only, meaning that only the cousin's stock ownership impairs the audit firm's independence with Atlas Mfg. Co.