American Institute of Certified Public Accountants (AICPA) Practice Exam

Does a direct financial interest in a client impair independence?

1. Yes, it always impairs independence.

2. No, it does not impair independence.

3. Only if the client is publicly traded.

4. It depends on the nature of the financial interest.

The correct answer is: No, it does not impair independence.

A direct financial interest in a client does impair independence. Independence is a fundamental principle for CPAs in the context of audit and assurance services, meaning that they must maintain objectivity and integrity in their professional judgment. When a CPA has a direct financial interest in a client, this creates a conflict of interest, compromising their ability to act in an unbiased manner. The presence of a financial interest may lead to self-interest threats, where the CPA's own financial stake could influence their decisions and judgments regarding the client’s financial statements or the audit process. This is why the rule mandates that CPAs must avoid any direct or material financial interests in their audit clients to preserve the integrity of their findings and the trust placed in them by stakeholders. In considering the options, it is important to note that a financial interest being present is not conditional upon factors such as whether the client is publicly traded or the nature of the financial interest, as the foundational principle of independence still holds. Thus, always having a direct financial interest impairs independence is key to upholding the ethical standards expected in the profession.