Understanding Audit Independence in CPA Profession
What factors can impair an auditor's independence?
a. Owns $1,000 worth of Ajax stock.
b. Has a husband who owns $1,000 worth of Ajax stock.
c. Has a sister who is the financial vice president of Ajax.
d. Owns $1,000 worth of the stock of Pericles Corporation, which is controlled by Ajax as a result of Ajax's ownership of 40 percent of Pericles' stock, and Pericles contributes 3 percent of its total assets and income in Ajax's financial statements.
Answer:
CPA Kara Rambo's audit independence would not be impaired if she owns $1,000 worth of Pericles Corporation's stock, as it is only indirectly related to her client, Ajax Corporation.
Auditor independence is a critical element in the world of auditing. In the scenario presented, Kara Rambo's ability to objectively audit Ajax Corporation is not compromised by her ownership of Pericles Corporation's stock worth $1,000. This is because Ajax only holds a 40 percent stake in Pericles, which contributes a mere 3 percent of assets and income to Ajax's financial statements.
It is essential for auditors to maintain independence and avoid conflicts of interest to ensure the integrity and reliability of the audit process. Direct financial interests in the client company or close relationships with key personnel can potentially bias the auditor's judgment and compromise the quality of the audit.
By understanding the boundaries of audit independence and adhering to professional standards, auditors like Kara Rambo can uphold their ethical responsibilities and provide accurate and unbiased assessments of their clients' financial statements.