An audit firm is performing an audit of a private company. The audit engagement partner's spouse holds a material direct financial interest in the client company. Which of the following statements regarding the firm's independence is correct?
- AIndependence is not impaired if the spouse's financial interest is held through a blind trust.
- BIndependence is impaired because the spouse is a 'covered member' and holds a direct financial interest.
- CIndependence is not impaired if the partner is not involved in the audit of the specific financial interest.
- DIndependence is impaired only if the partner is aware of the spouse's financial interest.
Show answer & explanationAnswer & explanation
Correct answer: B. Independence is impaired because the spouse is a 'covered member' and holds a direct financial interest.
According to AICPA independence rules, a spouse of a covered member (which an engagement partner is) is considered a covered member. A direct financial interest in an attest client by a covered member, regardless of materiality, or a material indirect financial interest, impairs independence. In this case, a material direct financial interest held by a spouse directly impairs independence.
Why the other options are wrong
- A. A blind trust might mitigate certain indirect financial interests, but a direct financial interest by a covered member (or their spouse) generally impairs independence, regardless of a blind trust, if it's material.
- C. The impairment applies to the firm and the engagement, not just the partner's direct involvement with that specific financial interest.
- D. Awareness is not the determining factor for impairment. The existence of the prohibited relationship or interest is what impairs independence.
Covered Member - Spouse
For independence purposes, a spouse (or spousal equivalent) of a covered member is generally subject to the same independence restrictions as the covered member.
- Direct financial interests in an attest client by a covered member or their spouse are generally prohibited.
- Material indirect financial interests are also prohibited.
- Applies to those in a position to influence the attest engagement.
Memory trick: Money in client, a spouse's stake, independence you will break.