1) Each of the following situations involves a possible
violation of the rule on independence. For each situation, (1)
decide whether the Code of Professional Conduct has been violated,
and (2) briefly explain how the situation violates (or does not
violate) the Code of Professional Conduct.
(a) Harry Brown is a partner in the Topeka office of Hedley
& Co., CPAs. Harry's brother is employed in an audit-sensitive
position by Jensen Appliances, a publicly held company in Kansas.
Jensen Appliances is one of Hedley & Co.'s audit clients.
Neither Harry nor personnel from the Topeka office is involved in
the audit of Jensen.
Violation? ________ Yes ________ No
Explanation:
(b) John Woods is an audit manager with Calden & Co.,
CPAs, a one-office CPA firm. John owns 100 shares of common stock
in one of the firm's audit clients, but he does not provide any
audit or non-audit services to the company.
Violation? ________ Yes ________ No
Explanation:
(c) The accounting firm of Fine & Herman, CPAs, provides
bookkeeping and tax services for Henderson Corporation, a privately
held company. Fine & Herman also performs the annual audit of
Henderson Corporation.
Violation? ________ Yes ________ No
Explanation:
(d) Bob Shelton, CPA, is the auditor of Cafe Ecko. A couple of
weeks ago, Cafe Ecko's management commenced litigation against Bob,
alleging he was negligent in last year's audit.
Violation? ________ Yes ________ No
Explanation:
(e) Hamilton Appliance has not paid Karen Linwood, CPA, her
audit fee for the past two years. Karen is starting work on the
current year's audit of Hamilton.
Violation? ________ Yes ________ No
Explanation:
2) The following situations involve a possible violation of
the AICPA's Code of Professional Conduct. For each situation, (1)
determine the applicable rule from the Code, (2) decide whether or
not the Code has been violated, and (3) briefly explain how the
situation violates (or does not violate) the Code.
(a) In 2014, Freeman and Johnson, both CPAs, decided to form a
CPA practice. In 2016, Freeman and Johnson approached Bill Delaney,
a physician and medical expert, and asked him to assist them with
their growing medical consulting practice. Delaney agreed, but only
after he was given an ownership interest in the firm. Delaney does
not intend to quit his private medical practice.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(b) Brian DePalie has a successful dentistry practice in
Charleston. Brian has recommended one of his patients to Katie
Walton, CPA. To show gratitude for the referral, Katie has agreed
to pay Brian a token gift of $50. Katie discloses the payment
arrangement to her new clients.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(c) The accounting firm of Bayer & Peng, CPAs, is
negotiating a fee with a new audit client. They agree the client
will pay $50,000 if Bayer & Peng issues a clean, unmodified
opinion, $40,000 if a qualified opinion is issued, and only $20,000
if an adverse opinion is issued.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(d) Don Smith, CPA, is a member of the engagement team that
performs the audit of Shaw Corporation. Don's five-year-old
daughter, Precious, received ten shares of Shaw Corporation's
common stock for her fifth birthday. The stock was a gift from
Precious's grandmother.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(e) Jennifer Harris, CPA, is a partner in the CPA firm that
audits Alltech, Inc., a closely held corporation. Jennifer's
sister-in-law is the chief financial officer at Alltech, Inc.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
3) The following situations involve a possible violation of
the AICPA's Code of Professional Conduct. For each situation, (1)
determine the applicable rule from the Code, (2) decide whether or
not the Code has been violated, and (3) briefly explain how the
situation violates (or does not violate) the Code.
(a) Howard Cunningham & Co., CPAs, designates its firm as
"Members of the American Institute of Certified Public
Accountants." All of the partners of the firm are CPAs. However,
one of the partners has recently chosen to allow her membership to
lapse because of personal reasons.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(b) Brad Long, CPA, was traveling from Orlando to Miami,
Florida when he was pulled over by a police officer on suspicion of
driving under the influence. He was convicted in court of driving
while under the influence of alcohol. Because of past convictions,
Brad was sentenced to 5 years in prison.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(c) Kelley Brent, CPA, is a partner in a one-office CPA firm
that audits Dane, Inc., a closely held corporation. Kelley's sister
was recently appointed as the chief financial officer for Dane,
Inc.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(d) Sarah Martin, CPA, is a senior auditor in the San
Francisco office of Cooper & Howell, CPAs. Sarah's father is
employed as the controller of Line Electronics, a public company in
Detroit, Michigan. Line Electronics is one of the firm's audit
clients. Neither Sarah nor the San Francisco office is involved in
the audit of Line Electronics.
Rule: ________ Violation? ________ Yes ________ No
Explanation:
(e) On August 20, 20x7, Min Lee, CPA and partner, was offered
and accepted the engagement to audit the annual financial
statements of Jernigan Corporation for the year ended December 31,
20x7. Preliminary work began on the audit on September 15, 20x7 and
the engagement ended on March 7, 20x8. Jernigan is regulated by the
SEC. Min served as controller of Jernigan Corporation from December
1, 20x2, until April 10, 20x7, at which time she terminated her
employment with Jernigan.
Rule: ________ Violation? ________ Yes ________ No
Explanation: