The public accounting firm Cuppers and Smith, LLC (CS) are looking to expand their professional audit practice and have recently hired an experienced audit manager, John Smith from a competing firm to lead this effort. After several months in his new position, Smith engaged several key new audit clients for his firm.
A full year has now passed, and the compliance department of CS has begun its annual “best practices” internal review to ensure that the accounting firm is complying with several external agencies’ code and standards as it applies to its existing issuer audit clients. After their initial due diligence, the compliance department assembled the following discussion items pertaining to the principle of independence on several recent audit engagements.
Using the template provided, determine if each item identified by the compliance department either did or did not impair auditor independence principles as outlined by the Sarbanes-Oxley Act (SOX), Public Company Accounting Oversight Board (PCAOB), and the U.S. Securities and Exchange Commission (SEC) by selecting the appropriate response from the drop-down menu.
Transaction independence impaired or not
A CS staff auditor had been employed as the assistant controller of one of CS current audit clients 18 months ago. The auditor worked as a senior auditor on a recent engagement with that company.
The partner-in-charge for one of the audit firm’s most visible corporate clients was the lead auditor for that company’s annual audit for 5 consecutive years ending 4 years ago. given his knowledge of the industry he was reassigned as the lead audit partner on this year’s engagement.
The compliance department noted that CS had performed actuarial services for one of its audit clients over the past 2 years. After further investigation it was deemed that these services were not material in nature.
An audit partner assigned to a new audit client was deemed to hold 1000 shares of the clients stock. it was determined that her stock interest in the company was liquidated prior to CS officially signing the initial audit engagement letter.
A senior audit who performed work on an existing audit client has a cousin who works in a financial reporting capacity for a subsidiary of that audit client. Upon further review, the compliance department determined that the subsidiary’s financial results were not consolidated with the audit client’s financial statements.
A retired CS partner now serves on the board of directors of a new audit client. The CS auditors did not have any direct contract with any of the directors during the recent audit engagement. The retired partner does not serve on the client audit committee.
The compliance department verified that during the past year the lead audit partner on every audit engagement met with the respective audit committee prior to and after completion of the audit field work. Prior to commencing each audit, the lead auditor had discussions with the audit committee regarding significant accounting policies and practices used by the clients as well as the financial statement impact of any alternative accounting treatment used by the client. After completing the audit field work on each audit engagement, the lead auditor met again with the audit committee to discuss any material written documentation shared between CS and client management to provide a schedule of unadjusted audit differences that remain at the close of the audit.
Prior to each new audit engagement, CS provided a written list to the respective audit committees with all relationships that the partners and senior audit managers had with the client that could impact potential audit independence. This written document was updated and provided to the audit committee of existing clients every 2 years.