Module 2 Critical Thinking Assignment o 4 8.33/8.33 points awarded ] eBook D References Read the following cases. Required: Submitted For each case, select whether the action or situation shows a violation of the AICPA Code of Professional Conduct, and select the relevant rule. a. CPA Ellen Stout performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the board of directors. b. CPA Darcy Wolfe practices management consulting in the area of computerized information systems under the firm name of Wolfe & Associates. The “associates” are not CPAs, and the firm is not an accounting firm. However, Wolfe shows “CPA” on business cards and uses these credentials when dealing with clients. c. CPA Alex Goodwin performs significant day-to-day bookkeeping services for Harper Corporation and supervises the work of the one part-time bookkeeper employed by Hadley Harper. This year, Harper wants to engage CPA Goodwin to perform an audit. Yes d. CPA H. Poirot bought a home in 2022 and financed it with a mortgage loan from Farraway Savings and Loan. Farraway was merged into Nearby S&L, and Poirot became the manager in charge of the Nearby audit. e. Poirot inherited a large sum of money from old Mr. Giraud in 2023. Poirot sold his house, paid off the loan to Nearby S&L, and purchased a much larger estate. Nearby S&L provided the financing. f. Poirot and Mala Lemon (a local real estate broker) formed a partnership to develop apartment buildings. Lemon is a 20 percent owner and managing partner. Poirot and three partners in the accounting firm are limited partners. They own the remaining 80 percent of Independence Rule Form of Organization and Name Rule Independence Rule Independence Rule Independence Rule Independence Rule | 9 9 50/50 Total points awarded Help Exit the partnership but have no voice in everyday management. Lemon obtained permanent real estate financing from Nearby S&L. g. Lemon won the lottery and purchased part of the limited partners’ interests. She now owns 90 percent of the partnership and remains general partner while the CPAs remain No 9 Independence Rule 9 limited partners with 10 percent interest. h. CPA Justin Shultz purchased a variable annuity insurance contract that offered the option to choose the companies in which this contract will invest. As directed, the insurance company purchased common stock in one of Shultz’s audit clients. Yes 9 Independence Rule 9 Explanation The author team would like to gratefully acknowledge Jeanie Folk’s additional explanations in parts b and g which clarify the given interpretations. a. N o m - © = The Independence Rule. Honorary Directorships and Trusteeships. While independence is ordinarily impaired if a CPA serves on an organization's board of directors, members can be honorary directors of organizations such as charity hospitals, fund drives, symphony orchestra societies, and similar not-for-profit organizations so long as: (1) The position is in fact purely honorary. (2) Listings of directors show she is an honorary director. (3) She restricts participation strictly to the use of her name. (4) She does not vote or participate in management functions. . Form of Organization and Name Rule. This is not a violation, but students should note that Wolfe is holding himself out to be a CPA and performing the types of services normally performed by CPA firms. However, Wolfe can call himself a CPA (that is, include that designation after his name on his business card). He uses the terminology "and Associates” in the name of his firm but does not indicate that it is a CPA firm. As such, there is no violation of the Code of Conduct. . The Independence Rule. This rule prohibits a covered member from acting in the capacity of a manager, employee, promoter, or trustee of a client. Generally, independence is impaired if the public accounting firm even appears to outside observers to be working in the capacity of management or employee of the client. So, this is likely that this would be a situation that would impair independence. The Independence Rule. Independence is not impaired. Poirot's loan is "grandfathered" because it was obtained from a financial institution for which independence was not required (Farraway was not a client before merger with Nearby) but later became part of an audit client's portfolio. The Independence Rule. Independence is impaired. Not even home loans made under normal lending conditions are exempt from the prohibition. Paying off the old grandfathered loan does not matter. The Independence Rule. Independence is impaired. Because the accounting firm and its partners own more than 50 percent of the partnership, the loan is considered to be a prohibited loan from a client. The Independence Rule. Independence is not impaired. The CPAs own less than 50 percent of the partnership. Note that it is generally important to distinguish between direct and indirect financial interests. As stated in an interpretation to the code of conduct, "the financial interests held by a limited partnership are considered to be indirect financial interests of a covered member who is a limited partner as long as the covered member does not control the partnership or supervise or participate in the partnership’s investment decisions." As such, because this is an indirect investment, if the investment of the CPA's was material to their net worth, they could not audit the partnership. However (and perhaps this is the tricky part), this case does not indicate that the CPAs do (or intend to) audit the partnership (as is the case with item h). The Independence Rule. Independence is impaired. Because Schultz can order the investment under the insurance contract, the financial interest is a prohibited “direct” financial interest.
