CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesHard
A CPA firm has been asked to provide tax services to a public audit client. The tax services involve advocating for the client in a tax court dispute where the amounts are material to the financial statements. According to AICPA independence rules, what action should the firm take?
- AThe firm is prohibited from performing these tax services for a public audit client.
- BThe firm may provide the tax services if the audit engagement partner is not involved in the tax dispute.
- CThe firm may provide the tax services if the client agrees to disclose the conflict in its financial statements.
- DThe firm may provide the tax services if they are approved by the client's audit committee.
Show answer & explanationAnswer & explanation
Correct answer: A. The firm is prohibited from performing these tax services for a public audit client.
AICPA independence rules, particularly for public audit clients, strictly prohibit an auditor from acting as an advocate for the client in a tax court or similar adversarial proceeding if the amounts are material. This creates a self-review threat and an advocacy threat that cannot be mitigated.
Why the other options are wrong
- B. The prohibition applies to the firm as a whole, not just the audit engagement partner, due to the advocacy threat.
- C. Disclosure does not mitigate the impairment of independence created by acting as an advocate.
- D. Audit committee approval does not override the fundamental prohibition on advocacy services for public audit clients.
Advocacy Threat to Independence
A threat to independence that occurs when a CPA promotes a client's interests or position in such a way that the CPA's objectivity may be compromised.
- Prohibited for public audit clients in material matters (e.g., litigation, tax court).
- Cannot be mitigated by safeguards for certain services.
- Impairs both independence in fact and in appearance.
Memory trick: An auditor's scales must always be fair, no client's case should you bear.