Amember, is an audit manager at the firm of Winn & Lite, CPAs. Wu is employed by North State University (an audit client of Winn & Lite’s). Wu is contracted on a part-time, non-tenured basis and teaches intermediate accounting. He does not participate in the audit of North State University nor is he in a position to influence the audit in any way. Wu must participate in an employee benefit plan sponsored by the University but he does not make contributions beyond what is required. Which of the following is TRUE regarding the firm’s independence to the audit of North State University as it relates to Wu’s teaching position? Wu’s teaching position as described does not impair the firm’s independence. Wu’s participation in the employee benefit plan will impair the firm’s independence. Wu’s teaching position is not allowed in any capacity if the firm wants to maintain its independence with respect to the audit of North State University. None of the above statements is true.
The Correct Answer and Explanation is:
Correct Answer: Wu’s teaching position as described does not impair the firm’s independence.
Explanation:
Independence is a fundamental ethical requirement for auditors, ensuring objectivity and impartiality in conducting audits. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct outlines the rules and interpretations that CPAs must follow regarding independence when providing audit services.
In this scenario, Wu is an audit manager at the CPA firm Winn & Lite, which audits North State University (NSU). Wu also holds a part-time, non-tenured teaching position at NSU, where he teaches intermediate accounting. Importantly, Wu does not participate in the audit of NSU and is not in a position to influence the audit.
According to AICPA Interpretation 101-3 (Nonattest Services) and the Independence Rule (1.200.001), a CPA’s independence is not impaired if the CPA is employed by an attest client in a non-management, non-key position, and the CPA does not influence the audit engagement. Wu’s position as a part-time instructor is considered non-management and non-influential.
Regarding the employee benefit plan, Wu’s mandatory participation without voluntary contributions does not impair independence. The AICPA allows such participation when the employment is not significant to the audit and the individual cannot affect the audit outcome.
Therefore, as long as Wu is:
- Not involved in the audit of NSU,
- Not in a position to influence the audit,
- Holding a part-time, non-tenured (thus non-key) academic role, and
- Not making discretionary financial investments in NSU’s benefit plan,
his position does not compromise the firm’s independence.
This scenario is commonly encountered in academia, and the AICPA has clear guidelines affirming that such teaching roles, under these conditions, are permissible without impairing auditor independence.
