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Test your knowledge of professional ethics.

*This quiz is based on AICPA professional ethics division staff responses to written inquiries from members. It is not a pronouncement of the professional ethics executive committee nor does it purport to set forth an official position of the AICPA. In addition, the questions and answers do not address the requirements of other regulatory bodies, such as the state boards of accountancy and the Securities and Exchange Commission, whose positions may differ from those of the AICPA.

Edited by HERBERT FINKSTON, director of the AICPA professional ethics division.


From time to time the Journal publishes questions on ethics topics that have been raised by members of the American Institute of CPAs. This group deals with interpretations under Conduct Rules 101-Independence, 505-Form of Practice and Name and 301-Confidential Client Information. * C ONCERNING INDEPENDENCE

1 . The brother of a partner's spouse is the 50% owner of a prospective audit client of the partner's firm. Would the firm be considered independent with respect to the prospective client?

Yes No

2. A member's client is a 30% owner of a corporation. The investment is material to the client. May the member invest in the corporation without impairing independence with respect to the client?

Yes No

3. The stepbrother of a manager in a firm is the president of a prospective audit client. The stepbrothers have a common father and, therefore, carry the same name. State probate law dictates that individuals with one common parent are treated as full blood siblings. Would the stepbrother's job with the prospective client impair firm independence?

Yes No

4. A partner of a firm is a part-time faculty member of a university. The partner has been asked to audit a local foundation whose sole function is to provide scholarships to students attending the university. All scholarship applications are received from the students. Additionally, the university and the foundation do not have any common directors or employees. Would the partner's independence be considered impaired with respect to the foundation?

Yes No

5. A staff accountant in a firm has an immaterial direct financial interest in a prospective audit client of the firm. Would the firm be precluded from expressing an opinion on the client's financial statements due to a lack of independence?

Yes No

6. A partner of a firm resigned from a corporation's board of directors as of March 31, 1989. In February 1990, the firm was asked to perform an audit of the corporation's financial statements for the fiscal year ended December 31, 1989. Would the firm be considered to be independent with respect to the corporation?

Yes No


7. A member's firm is currently named Jones, Smith & Company. The partners wish to change the firm name to one that reflects the services offered, for example, Litigation Support Consultants. Would the proposed firm name be permissible under Rule 505?

Yes No

8. A member is establishing an accounting practice as a sole practitioner. Would it be permissible for the firm's name to include "and Company"?

Yes No


9. A regulatory agency has asked a member to supply confidential client information in connection with an investigation of the client. May the member comply with the agency's request if the client refuses to give the member permission to do so?

Yes No


1. Yes. The brother of a spouse is not considered a nondependent close relative under interpretation 101-9 of the Code of Professional Conduct. Therefore, the brother-in-law's ownership interest would not impair the firm's independence with respect to the client. (However, the spouse of the partner's sister or brother is considered a nondependent close relative, and the provisions of interpretation 101-9 must be considered).

2. No. As the investment in the corporation is material to the client, any investment by the member in the corporation would impair independence with respect to the client under interpretation 101-8. If the investment was not material to the client, the member's investment, if not material to the member's net worth, would not impair independence with respect to the client.

3. Possibly. Interpretation 101-9 does not specifically define a step-sibling as a nondependent close relative. However, in view of state probate law and the common name attribute, in this situation the stepbrother should be treated as a nondependent close relative for purposes of independence.

As president, the stepbrother is in a position of significant influence with the prospective client. Therefore, the firm would be considered independent only if the manager (1) does not participate in the engagement and (2) is not located in an office participating in a significant portion of the engagement.

4. No. Pursuant to Ethics Ruling no. 48, independence would not be considered impaired, since the partner would not be auditing any of the management functions performed by the employer-university.

5. No. The staff member's independence is considered impaired due to the direct financial interest; the materiality of the interest is not a factor. However, the position of the member within the firm must be taken into account to determine whether the impairment of independence extends to the firm itself. If the staff member is not above the level of a professional employee and he or she does not participate in the engagement, firm independence would not be considered impaired.

6. No. Under interpretation 101-1.B.1, the firm would not be considered independent for this engagement, as a partner served on the corporation's board of directors during the period covered by the financial statements. Absent any other factors, the firm would be considered to be independent with respect to the financial statements for the year ended December 31, 1990.

7. Yes. Rule 505 no longer prohibits a member from practicing public accounting under a fictitious firm name. Only misleading firm names are prohibited.

8. Yes. It would not be a violation of the AICPA Code of Conduct for a sole practitioner to include "and Company" or "and Associates" in the firm's name. (Ethics Ruling no. 147, which previously prohibited this, was deleted from the code in November 1989).

9. No. As provided in Rule 301, a member may disclose confidential client information only with the client's specific consent. However, the rule is not intended to interfere with a member's compliance with a validly issued and enforceable summons or subpoena.
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Article Details
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Author:Finkston, Herbert
Publication:Journal of Accountancy
Date:Sep 1, 1991
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