32820°7 Wiley CPexce! - AUD Overview Upon completion of this lesson, candidates should be able to: + Understand to what the label "immediate family members" applies. * Understand which restrictions apply to each category. * Understand to what the label "close relatives" applies. ipstappoficertlerning com/pvSivStapplcpataud hI dashboard wiesn017 Witey CPhexeel - AUD Study Guide 1 Introduction 1. Two categories of family relationships create potential independence problems: 1 Immediate family members: Spouses, spousal equivalents, and dependents 2. Close relatives: Parents, siblings, and nondependent children. 2. Immediate Family Members 1. With substantial exceptions that are about to be spelled out, immediate family members of covered members must comply with the same independence rules as covered members themselves. They may not work for attest clients or own financial interests in them (unless the interests are both indirect and immaterial). 2 Irrespective of the exceptions below, immediate family members cumulatively may not own more than 5% of an attest client. 3. Immediate Family Members Employed by Attest Client—A covered member's immediate family members may work for an attest client, just not in a “key position” such as one in which an employee has: L Primary responsibility for significant accounting functions that support material components of the financial statement; 2. Primary responsibility for the preparation of the financial statement; or 3, The ability to exercise influence over the contents of the financial statement, including when the individual is a member of the board of directors or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accountancy officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position. 4, Immediate Family Member Participation in an Employee Benefit Plan—Immediate family members may not only work for an attest client in a nonkey position, they may also participate in an employee benefit plan that is an attest client or is sponsored by an attest client, so long as all of the following safeguards are followed 1. The plan is offered to all employees in comparable employment positions; 2. The immediate family member does not serve in a position of governance for the plan; and 3, The immediate family member does not have the ability to supervise or participate in the plan's investment decisions or in the selection of the investment options made available to plan participants. 5, Immediate Family Member Participation in an Employee Benefit Plan with Financial Interests in an Attest Client—An immediate family member might work for a company that is not an attest client, but participate in its employee benefit plan and learn that the plan holds stock of an attest client. The general rule is that in this setting an immediate family member may hold a direct financial interest or material indirect financial interest in an attest client if all of the following safeguards are met: ipstappoficertlerning com/pvSivStapplcpataud hI dashboard anesn017 Witey CPhexeel - AUD 1. The covered member is neither on the attest team nor in a position to influence. (So, the immediate family member could be a 10-hour person or other partner in the office but not a team member or in a position to influence in relationship to the attest client); 2. Such investment is an unavoidable consequence of such participation; the immediate family member had no other investment options available for selection and 3. If the plan creates an option that would allow the immediate family members to invest ina nonattest client, the immediate family members should select that option and dispose of the attest client shares as soon as practicable but within 30 days. 3, Close Relatives 1. Generally, close relatives of covered members must follow the same independence rules as the covered members themselves, but the restrictions are looser than for immediate family members and they are looser for close relatives of covered members who are not on the engagement team. 2. Independence is impaired if the close relative of an audit team member has either of the following: 1. Akey position with the attest client, or 2. Afinancial interest in the attest client that: 1. The team member knows or has reason to know was material to the close relative, or 2. Enabled the close relative to exercise significant influence over the attest client. 3, Independence is impaired if the close relative of a person in a position to influence or other partner in the office has either of the following: 1 Akey position with an attest client, or 2. Afinancial interest that: 1. The person in a position to influence or other partner in office has reason to believe was material to the close relative, and 2. Enabled the close relative to exercise significant influence over the attest client. 4, There are no specific restrictions on close relatives of 10-hour people (though the Conceptual Framework should always be kept in mind). ipstappoficertlerning com/pvSivStapplcpataud hI dashboard ane32820°7 Wiley CPexce! - AUD Notes You haven't made any notes or highlights yet. ipstappoficertlerning com/pvSivStapplcpataud hI dashboard aneDas Wiley CPAexcel’ Family Relationships32820"7 Wiley CPexcel - AUD Introduction Two categories of family relationships create potential independence problems 1. Immediate Family Members: spouses, spousal equivalents, and dependents 2. Close Relatives: parents, siblings, and nondependent children (vil applcpataud hI itashbcard aie32820"7 Wiley CPexcel - AUD Immediate Family Members With substantial exceptions that are about to be spelled out, immediate family members of covered members must comply with the same independencerules as covered members themselves. Irrespective of exceptions below, immediate family members may not cumulatively own >5% of an attest client. (vil applcpataud hI itashbcard32820"7 Wiley CPexcel - AUD Immediate Family Members Employed by Attest Client A covered member’s immediate family members may work for an attest client, just not in a key position such as one in which an employee has: + Primary responsibility for significant accounting functions that support material components of the F/S; + Primary responsibility for the preparation of the F/S; or + The ability to exercise influence over the contents of the F/S * Can’t be:a member of the BOD, CEO, president, CFO, COO, general counsel, CAO, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position. ipstappoficertlerning com/pvSivStapplcpataud hI dashboard32820"7 Wiley CPexcel - AUD Immediate Family Members Participation in an Employee Benefit Plan Immediate family members may participate in an employee benefit plan that is an attest client or is sponsored by an attest client, so long as all of the following safeguards are followed: * The plan is offered to all employees in comparable employment positions, * Immediate family members do not serve in a position of governance, and + Immediate family members does not have the ability to supervise or participate in the plan’s investment decisions or in the selection of the investment options. ipstappoficertlerning com/pvSivStapplcpataud hI dashboard one32820"7 Wiley CPexcel - AUD IFM Participationin an Employee Benefit Plan with Financial Interests in an Attest Client An immediate family member might work for a company that is not an attest client but participate in its employee benefit plan and learn that the plan holds stock of an attest client. An immediate family member may hold a direct financial interest or material indirect financial interest in an attest client if: + The covered member is neither on the attest team nora PTI. [So, an immediate family member could be a 10-hour person oran OPIO]; Such investment is an unavoidable consequence of such participation; and Ifthe plan creates an option that would allow the immediate family member to invest ina nonattest client, the immediate family member should select that option and dispose of the attest client shares as soon as practicable but within 30 days, ipstappoficertlerning com/pvSivStapplcpataud hI dashboard ry32820"7 Wiley CPexcel - AUD Close Relatives Generally, close relatives of covered members must follow the same independencerules as the covered members themselves, but the restrictions are looser than for immediate family members and they are looser for close relatives of covered members who are not on the engagement team. 111832820"7 Wiley CPexcel - AUD Close Relatives Independence is impaired if the close relative of an audit team member has either of the following: + Akey position with the attest client, or » Afinancial interest in the attest client that: * The team member knows or has reason to know was material to the close relative, or * Enabled the close relative to exercise significant influence over the attest client. sate32820"7 Wiley CPexcel - AUD Close Relatives Independence is impaired if the close relative of a PTI or a OPIO has either of the following: * Akey position with an attest client, or + Afinancialinterest that: * The PTI or OPIO has reason to believe was material to the close relative, and * Enabled the close relative to exercise significant influence over the attest client. There are no restrictions on CRs of 10-hour people. re32820°7 Flashcards 1 What is a "key position" that an immediate family member may not occupy with an attest client? Under what conditions will a financial interest of a close relative of a team member impair independence? May a close relative of another partner in the office hold a key position with an attest client? Which type of covered member has no restrictions on close relatives? ipstappoficertlerning com/pvSivStapplcpataud hI dashboard Wiley CPexce! - AUD A position with: (1) primary responsibility for significant accounting functions that support the financial statement; (2) primary responsibility for preparing the financial statement; or (3) ability to exercise influence over contents of the financial statement (such as directors, C- level officers, director of internal audit, or similar positions) If either the team member knows or has reason to know the financial interest is material to the close relative, or if the financial interest enables the close relative to exercise significant influence over the attest client. No. 10-hour people we32820°7 Immediate family members cumulatively may not own more than what percentage of an attest client? Name three "immediate family members." Name three "close relatives." ipstappoficertlerning com/pvSivStapplcpataud hI dashboard Wiley CPexce! - AUD 5% ‘Spouses, spousal equivalents, and dependents Parents, siblings, and nondependent children sre32820°7 Wiley CPexce! - AUD Supplementary Questions Question 1 (RESP-0017B) Kar, CPA, isa staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances impairs Kar's independence? During the period of the professional engagement, Fort gives Kar tickets to a football game worth $75. Kar owns stock in a corporation that Fort's 401(k) plan also invests in. Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns. Kar's sibling is director of internal audit at Fort. ipstappoficertlerning com/pvSivStapplcpataud hI dashboard wwesn017 Witey CPhexeel - AUD Knowledge Checks Question 1 (PQ8864) During the last audit cycle, tax partner Tim provided 15 hours of tax advisory services to his firm's attest client. Walton Co. Tim's brother is chief financial officer of Walton. Tim's firm has an independence problem. True False Question 2 (PQ8862) Covered member Whitney's longtime live-in boyfriend, Jake, isa truck driver for Sara's attest client ABC Co. Sara has an independence problem. True False Question 3 (PQ8867) Willis on his firm's attest team for the audit of ABC Co. Wil's spouse, Sue, works for ABC as a real estate lawyer. Like all other ABC employees, Will's spouse (Sue) participates in ABC's employee retirement plan. Sue has no input whatsoever into the plan's investments and plays no role in its governance. This situation creates an independence problem for Will. True False Question 4 (PQ8861) Covered member Sara's longtime live-in companion, Michelle, is chief financial officer of Sara's attest client ‘ABC Co, Sara has an independence problem. True False Question 5 (PQ8865) Anne supervises her firm's attest team on the ABC Co. account. Anne's son, Freddie, is chief financial officer of ABC Co. If Freddie is completely independent financially from Anne, then there is no independence problem for Anne. True False Question 6 (PQ8866) Fran supervises her firm's attest team on the ABC Co. account. Fran’s son, Teddie, owns a pretty big chunk of ABC stock, but not so much that he can exercise significant influence over ABC. Fran probably has an ipstappoficertlerning com/pvSivStapplcpataud hI dashboard wes820°7 Wiley CPRexce- AUD independence problem nonetheless. True False Question 7 (PQ7518) Friehling audited Bernard L. Madoff Investment Securities LLC for a fee of $12,000 ~ $14,000 per month. Many members of Friehling's family invested their personal funds with Bernard L. Madoff Investment Securities LLC. Because the Madoff firm was not a public company, this relationship did not create an independence problem. True False Question 8 (PQ8863) Attest team member Carson's grandfather owns 4% of attest client ABC Co. Carson has an independence problem. True False ipstappoficertlerning com/pvSivStapplcpataud hI dashboard swe