QQuestionAuditing
QuestionAuditing
The firm of Bell & Greer, CPAs, has been asked to perform attest services for Trek Corporation
(
a nonpublic company
)
for the year ended December
3
1
,
Year
5
.
Bell & Greer has two offices: one in Los Angeles and the other in Newport Beach. Trek Corporation would be audited by the Los Angeles office. For each of the following cases, indicate whether Bell and Greer's independence is definitely impaired. If it is not definitely impaired, but might be under some circumstances, discuss those circumstances.
a
.
A partner in the Los Angeles office of Bell & Greer has been a long
-
time personal friend of the chief executive officer of Trek Corporation.
b
.
The former controller of Trek Corporation became a partner in the Newport Beach office of Bell & Greer on March
1
5
,
Year
5
,
resigning from Trek Corporation on that date.
c
.
A manager in the Newport Beach office of Bell & Greer is the son of the treasurer of Trek Corporation.
d
.
A partner in the Los Angeles office of Bell & Greer jointly owns a cattle ranch in Montana with one of the directors of Trek Corporation. The value of the investment is material to both parties.
e
.
Trek Corporation has not yet paid Bell & Greer for professional services rendered in Year
4
.
This fee is substantial in amount and is now
1
5
months past due.
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Answer
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Step 1**Case a:**A partner in the Los Angeles office of Bell & Greer has been a long-time personal friend of the chief executive officer of Trek Corporation.
The independence of Bell & Greer is not definitely impaired in this scenario. However, the friendship between the partner and the CEO could potentially influence the partner's judgment, which might compromise their independence. The American Institute of Certified Public Accountants (AICPA) states that a relationship is considered intimate when it is likely to affect the partner's objectivity. In this case, the partner should evaluate whether their friendship with the CEO could affect their objectivity and, if so, disclose the relationship and consider recusal from the engagement.
Step 2**Case b:** The former controller of Trek Corporation became a partner in the Newport Beach office of Bell & Greer on March 15, Year 5, resigning from Trek Corporation on that date.
The independence of Bell & Greer is definitely impaired in this scenario. According to the AICPA's rules, a self-interest threat to independence exists if a firm audits the financial statements of an entity in which a partner or professional employee had any direct financial interest within the past three years. In this case, the former controller of Trek Corporation became a partner in Bell & Greer, creating a self-interest threat. This threat is so significant that it cannot be eliminated through safeguards, requiring Bell & Greer to withdraw from the engagement or seek a waiver from the Independence Standards Board.
Final Answer
This fee is substantial in amount and is now 15 months past due. The independence of Bell & Greer is not definitely impaired in this scenario. However, a significant financial relationship between the firm and the client could create a self-interest threat to independence. In this case, the unpaid fee is substantial and past due, which might create pressure on the firm to compromise its independence. The AICPA states that the firm should evaluate whether the relationship could affect its objectivity and, if so, disclose the relationship and consider recusal from the engagement. Additionally, Bell & Greer should establish appropriate policies and procedures to ensure that it is compensated for its services in a timely manner.
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