Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Which scenario indicates that a CPA's independence is impaired?

1. The CPA has a fully collateralized automobile loan from a client

2. The CPA is in litigation with an audit client for an immaterial amount

3. The CPA has direct ownership in a commercial property leased to an audit client

4. The CPA is a member of a local charity alongside a client

The correct answer is: The CPA has direct ownership in a commercial property leased to an audit client

Having direct ownership in a commercial property that is leased to an audit client is a clear indication of impaired independence. In the context of auditing, a CPA must maintain an unbiased perspective to ensure that their evaluation of the client's financial statements is objective and free from conflicts of interest. When a CPA has ownership in an asset that is utilized by the audit client, this creates a potential economic relationship that could compromise the CPA's objectivity. The CPA has a vested interest in the financial success of the audit client, which could lead to biases in reporting or decision-making. Such scenarios undermine the fundamental principle of independence that is critical for the integrity of the audit process. In contrast, while a fully collateralized automobile loan from a client may raise some concerns, it is not as definitive a conflict as ownership. Litigation over an immaterial amount might not significantly affect objectivity, and participation in a charity alongside a client generally does not create the same level of economic dependence or conflict as direct ownership does. Thus, option C most clearly delineates a situation where the CPA's independence is compromised.