Question

You have recently become a Partner for a public accounting firm in Fort Worth, Texas. One of your new clients is the Fort Worth Independent School District (FWISD). Your close family friend, who your family vacationed with last summer, has been the Superintendent of FWISD for 5 years. According to the AICPA Independence standards, are you considered independent from the FWISD? Should you accept this engagement? Should you notify your firm of your relationship? Defend your decision. Include the importance of the independence standards, note which standard(s) is applicable to this situation, and how the guidance applies to this decision.

Answer 1

No, as per AICPA independence standards, you are not considered independent from the FWISD as you have familarity threat.

Familiarity threat means members having a close or longstanding relationship with an attest client or knowing individuals or entities (including by reputation) who performed nonattest services for the client.the Different kinds of familiarity threats are stated below-

a. A member of the attest engagement team whose spouse is in a key position at the client, such as the client's CEO

b. A partner or partner equivalent of the firm who has provided the client with attest services for a prolonged period

c. A member who performs insufficient audit procedures when reviewing the results of a nonattest service because the service was performed by the member's firm

d. A member of the firm having recently been a director or an officer of the client e. A member of the attest engagement team whose close friend is in a key position at the client.

e. A member of the attest engagement team whose close friend is in a key position at the client.

Therefore, you should not accept the engagement.

Yes, you must notify this to your firm.

In this Situation Auditing Standard 1001 is Applicable+

AICPA professional standards require your firm, including the firm's partners and professional employees, to be independent in accordance with the “Independence Rule” whenever your firm performs an attest engagement for an attest client.

Independence is defined as: a. Independence of mind—The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism. b. Independence in appearance—The avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards2 applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team had been compromised.