a.

Samantha Lopez, CPA, is a partner in the Philippines office of Bill &

Gates, CPAs. Samantha’s brother is employed as the controller of Scotch
Appliances, a large publicly held company in Manila, Philippines. Scotch
Philippines is one of Bill & Gates’ audit clients. Neither Samantha nor
the Philippines office of Bill & Gates is involved in the audit of Scotch
Appliances.

Violation: No

Explanation:

According to the International Code of Ethics for Professional

Accountants – 2018 edition, section 521, a self-interest, familiarity or
intimidation threat is created when a close family member of an audit
team member is:

(a) A director or officer of the audit client; or

(b) An employee in a position to exert significant influence over the

preparation of the client’s accounting records or the financial
statements on which the firm will express an opinion.

Such threats can be eliminated if such individual is removed from the

audit team. With this, even though Samantha Lopez’s brother is in the
position to exert significant influence over Scotch’s financial statements,
there is no violation of independence under the Code of Ethics since she
does not take part in the engagement.

b. Enron Phelps, CPA, is a partner in the Las Piñas office of Magadia &
Franks, CPAs. Enron’s brother, Glenn, owns an immaterial amount of
bonds issued by Lucky You Industries, a company based in Manila.
Lucky You industries is one of Magadia & Franks’ audit clients. Neither
Enron nor the Las Piñas office of Magadia & Franks is involved in the
audit of Lucky You.

Violation: No

Explanation:

According to the International Code of Ethics for Professional

Accountants – 2018 edition, section 510, a self-interest threat might be
created if an audit team member knows that a close family member has
a direct financial interest or a material indirect financial interest in the
 audit client. Such threat might be eliminated if, (1) the close family
member dispose, as soon as practicable, of all of the direct financial
interest or enough of the indirect financial interest so that the remaining
interest is no longer material, or (2) the individual has been removed
from the audit team. Since neither Enron nor the Las Piñas office is
involved in the audit, no violation of Independence has occurred even
though Enron’s brother owns a direct financial interest in Lucky You.

c. Divine Sweaty, CPA, owns a material amount of stock in La PAZ Corp.

The La PAZ is not an audit client of Divine’s. However, Divine audits The
Manila Funeral Corp., which owns a material amount of stock in La PAZ.

Violation: Yes

Explanation:

According to the International Code of Ethics for Professional

Accountants – 2018 edition, section 510, a firm, or a network firm, or an
audit team member, or any of that individual’s immediate family shall
not hold a financial interest in an entity when an audit client also has a
financial interest in that entity, unless:

(i) The financial interests are immaterial to the firm, the network firm,
the audit team member and that individual’s immediate family
member and the audit client, as applicable; or
(ii) The audit client cannot exercise significant influence over the
entity.

In addition, if an individual wants to be an audit team member, the

individual or that individual’s immediate family shall either dispose of all
of the interest or dispose of enough interest so that the remaining
interest is no longer material. Since Divine Sweaty owns a material
amount of stock in La PAZ Corp., in which her audit client also owns a
material amount, this is clearly a breach of Independence under the
Code of Ethics, unless Divine Sweaty chooses to dispose of enough stock
to make her financial interest immaterial to the firm.

d. Christopher Hagada, CPA, is a partner assigned to a review engagement.

Chris has a dependent daughter who is employed by the review client as
a machine operator – a non-audit sensitive position.
 Violation: No

Explanation:

According to the International Code of Ethics for Professional

Accountants – 2018 edition, section 521, a self-interest, familiarity or
intimidation threat is created when an immediate family member of an
audit team member is an employee in a position to exert significant
influence over the client’s financial position, financial performance or
cash flows.

Since Christopher Hagada’s daughter is a machine operator of the client,

it does not violate his Independence as a partner in the review
engagement since his daughter’s role in the company will not exert
significant influence in the preparation of the client’s financial statement.

e. On April 08, 2012, Pagie Dapne, CPA, issued the audit report on Bornut
Chochnut Corporation’s January 30, 2012 financial statements. On April
30, 2012, Bornut paid Pagie’s audit fee with stock rather than cash.
Pagie sold the stock on May 15, 2012, two months prior to the beginning
of the planning phase for the audit of the January 30, 2013 financial
statements.

Violation: Yes

Explanation:

According to the International Code of Ethics for Professional

Accountants – 2018 edition, independence is required to be maintained
during both (a) the engagement period, and (b) the period covered by the
financial statements. Bornut Chocnut Corporation paid Pagie with
stocks, therefore creating a direct financial interest to the audit client
and having a conflict of interest. The period covered by the financial
statements starts on February 1, 2012, and ends on January 30, 2013.
Even though Pagie sold the stock two months prior to the beginning of
the planning phase, but the fact that she already owns a direct financial
interest on the audit client on the period covered by the financial
statements is not in adherence on the Code of Ethics, thereby impairing
her independence in the engagement.