Health Management Inc by Jamaica Water Properties

26 Case 1.4 Health Management, Inc.

Suggested Solutions to Case Questions

1.

The

two

dimensions

of

auditor

independence

are

relevant

to

this

context:

appearance

of

independence and de facto independence. A close friendship between an auditor and a client employee

can

jeopardize

the

auditor’s

appearance

of

independence

(and

that

of

the

entire

audit

team)

even

though

the

auditor

scrupulously

protects

his

or

her

de

facto

independence.

If

third

parties

lose

confidence in an auditor’s independence, then the purpose of the audit is undermined, period. I would

suggest that the de facto independence

of

an

auditor

has

been

compromised

by

a

relationship

with

a

client

employee

when

that

relationship

begins

to

influence

important

decisions

of

the

auditor.

For

example, if an auditor decides

not

to

pursue

a

suspicious

transaction

or

other

item

because

doing

so

might result in negative consequences for his or her friend, clearly the actual independence of the auditor

has been compromised. More globally, I would suggest

that

an

auditor’s

de

facto

independence

has

been impaired by a client relationship when that relationship results in the auditor violating one or more

GAAS.

Loss

of

independence

may

result

in

an

auditor

failing

to

gain

a

proper

understanding

of

a

client’s

internal

controls,

deciding

not

to

collect

sufficient

appropriate

evidence

to

support

an

audit-

related decision, or even issuing an inappropriate audit opinion.

2.

Interpretation

101-

2,

“Employment

or

Association

with

Attest

Clients,”of

the

AICPA

Code

of

Professional

Conduct

addresses

the

situation

in

which

an

auditor

is

considering

the

possibility

of...