AICPA Code of Professional Conduct, Rule 101 Livingston and Associates is a audit firm in Las Vegas, Nevada and it performs the financial statement audit for Smith Plastics, Inc For each non-related situation below, determine if each individual

Question

represented is independent of Smith Plastics and if Livingston and Associates (the Firm) is independent of Smith Plastics: A. Sam Livingston, an audit partner, meets Jill Warner, CFO of Smith Plastics after the engagement begins and they fall in love. Sam and Jill marry in Lake Tahoe, California a short time later. Sam Livingston will not be on the audit engagement team of Smith Plastics. B. The Firm hires Billy Messer as a staff auditor. Billy is aware that his father has a material investment in Smith Plastics. Billy will not work on the Smith Plastics audit. C. Lucy Brown is an audit manager at the Firm. Bob, her high school aged son, owns 1% of the equity of Smith Plastics. The investment is not material to Bob or Lucy's net worth. Lucy is assigned as the audit manager for the Smith Plastics engagement. D. Smith Plastics has paid all but $5,000 of the previous years audit fees. E. Julie Simpson, tax partner at the Firm has a 401k plan with multiple securities making up the balance. One of the securities in the plan is that of Smith Plastics which comprises .05% of the total balance of Julie's 401k. Julie does not have a significant portion of her retirement or savings in this particular plan.

Answer 1

A. Sam's newly found family relationship with a person of significant influence over Smith Plastics will impair his independence. Sam is a partner in the office of the firm performing audit services and he is considered a covered member. As a covered member who is not independent of Smith Plastics, the Firm would not be independent of Smith Plastics.
B. Because Billy's immediate family member has a material investment and he is aware of this fact, he is not independent of Smith Plastics. Billy is not on the Smith Plastics engagement, therefore, he is not a covered member and the firm is independent.
C. Lucy has a direct financial interest in Smith Plastics. It is considered direct even though it is in the name of her dependant, Bob. As an audit manager of the Smith Plastics engagement, Lucy is a covered member and her ownership will impair the Firm's independence as well.
D. Because Smith Plastics has an outstanding balance due to the Firm from previous audit engagements, there is a essentially a debtor-creditor relationship between client and auditor. The previous year's audit fees must be paid or this relationship impairs Firm independence of Smith Plastics.
E. The component of Julie's 401k that is represented by shares of Smith Plastics is small. The investment in Smith Plastics by the 401k is considered an indirect interest to Julie. Additionally, the 401k is not material to her net worth. As an immaterial, indirect financial interest, the investment does not impair Julie's independence of Smith Plastics. Julie's status as a covered member is somewhat unclear. However, as Julie is independent it becomes irrelevant. The Firm will also be independent of Smith Plastics.