American Institute of Certified Public Accountants (AICPA) Practice Exam

Which of the following is NOT classified as a direct financial interest?

1. Ownership of stock in a client company.

2. Investments made through an entity controlled by the CPA.

3. A loan receivable from the client.

4. An investment in a mutual fund.

The correct answer is: An investment in a mutual fund.

A direct financial interest refers to an interest that exists directly between an individual or entity and a client. This typically includes ownership stakes, loans, or receivables where there is a direct relationship with the client. In the context of this question, the investment in a mutual fund is not classified as a direct financial interest because it typically represents an indirect investment. When a CPA invests in a mutual fund, the fund itself holds various investments in different companies, which means the CPA does not have a direct stake in those companies. Instead, the interest is held in the mutual fund as a whole, which dilutes the direct relationship with any specific client entity. In contrast, ownership of stock in a client company, investments made through an entity controlled by the CPA, and a loan receivable from the client are considered direct financial interests. Each of these situations establishes a clear and immediate financial connection between the CPA and the client, thereby falling within the classification of direct interests. Understanding this distinction is crucial for ensuring compliance with ethical standards that govern professional conduct in accounting.