Question 3.

Roger Royce, a CPA, has encountered a situation that he thinks may pose a threat to his
independence with respect to Watson, Inc. an audit client. The situation is not addressed by an
independence rule or regulation. Using the AICPA Conceptual Framework for Independence
Standards, describe how Royce can determine whether the threat truly impairs his independence.

Question 3.2

Jenko Corp. is an audit client of the Phoenix office of Williams and Co., CPA’s. Williams and Co. has
offices in Arizona, including ones in Phoenix, Tucson, and Tombstone. For purposes of independence,
the AICPA requires that no ‘covert members’ may have a direct or a material indirect financial
interest in an audit client such as Jenko. Determine whether each of the following individuals is a
covert member.

a) Bill Jones is a partner in the Tucson office of Williams. He does not work on the Jenko-audit.
b) Mary Adams is a first year staff assistant who works on the Jenko-audit.
c) Mary Anderson is a partner in the Phoenix office of Williams. She does not work on the Jenko-
audit.
d) Bill Jepson, a staff auditor who does not work on the audit, owns a immaterial amount of stock of
Jenko Corp.
e) Ken Sanders, a Tombstone office partner, provides no service for the Jenko-audit other than
serving as a consultant to the attest team regarding industry related issues specific to Jenko.

Question 3.3

James Daleiden, a CPA, is interested in expanding his practice through acquisition of new clients. For
each of the following independent cases, indicate whether Daleiden would violate the AICPA Code of
Professional Conduct by engaging in the suggested practice and explain why.

If more information is required to arrive at a final determination, indicate the nature of such
information.

a) Daleiden wishes to form a professional corporation and use the name ‘AAAAAA the CPA’s, to
obtain the first ad in the yellow pages of the telephone book.
b) Daleiden wishes to prepare a one-page flyer which he will have his son stuff on the windshields
of each car at the Pleasant Valley shopping mall. The flyer will outline the services provided by
Daleiden’s firm and will include a $50-off coupon for services provided on the first visit.

Question 3.4

Gloria & Deloria, CPA’s, have started their public accounting firm and intend to provide attestation
and a variety of consulting services for their clients, which are all nonpublic. Both Gloria & Deloria
have their particular expertise in designing payroll and other disbursement systems. Gloria is
concerned about whether any of the following services would impair their audit independence.

For each of the services in the table provide a judgment as to whether providing the service would
impair attest independence.
In all situations assume that management has designated a management-level individual to be
responsible for overseeing the CPA’s services and has established appropriate internal control.

No Service description Independence Additional information

impaired needed

1 Customize and implement a prepackaged

payroll system.

2 Manage a client's local area network

system related to payroll.

3 Generate unsigned payroll checks on a

continuing basis for the client; the client
signs the checks.

4 Prepare the payroll tax return form and

sign it on behalf of management.

5 Approve employee time cards.

6 Accept responsibility to sign payroll

checks, but only in emergency situations.

7 Monitor employee time cards and make

changes when errors are detected.

8 Post client approved entries to client's

trial balance.

9 Provide all of the initial training and

instruction to client employees on a
newly implemented payroll information
and control system.

10 Screen candidates and recommend the

most highly qualified candidate to serve
 as treasurer for the client.

11 Supervise client personnel in the daily

operation of the payroll system.

12 Present payroll business risk

considerations to the board of directors
on behalf of management.

Question 3.5