American Institute of Certified Public Accountants (AICPA) Practice Exam

What implication does a financial connection to a client have on a member's independence?

1. It strengthens their ability to provide unbiased services.

2. Independence may be impaired depending on the nature of the relationship.

3. It has no impact if the member is a control person.

4. It guarantees impartiality in auditing processes.

The correct answer is: Independence may be impaired depending on the nature of the relationship.

A financial connection to a client can significantly impact a member's independence, leading to potential impairment. This is primarily because any financial interest or involvement in a client can create a conflict of interest, where the member's objectivity and professional judgment may be compromised. The independence standards set by regulatory bodies like the AICPA stipulate that auditors and their firms must maintain both independence in appearance and independence in fact when providing services to clients. If a member has a financial interest in a client, it could result in biased reporting or assessment of the client's financial condition. For example, if an auditor has a financial stake in the client, the auditor may be more inclined to overlook issues during the audit to protect their financial interest. Therefore, the nature of that financial relationship is critical. The potential for impaired independence is taken very seriously in the industry, which is why understanding the implications of such a connection is essential for maintaining professional integrity and the trust of stakeholders.