American Institute of Certified Public Accountants (AICPA) Practice Exam

How does the prior employment of key executives with a CPA firm affect independence?

1. It always enhances independence

2. It creates a potential independence issue

3. It has no bearing on independence

4. It guarantees independence

The correct answer is: It creates a potential independence issue

The prior employment of key executives with a CPA firm creates a potential independence issue due to the risk of familiarity and the relationships that may exist as a result of that past employment. When executives who were previously employed by the firm are involved in a client's operations, there is a concern that they may have a bias or an inclination to protect the interests of the client, which can lead to a lack of objectivity. Independence is a cornerstone principle for CPAs conducting audits; they must remain impartial and free from any conflicts of interest. Prior employment could compromise this objectivity if, for example, the key executives maintain a personal relationship with the audit team, or if their past experiences with the firm influence decisions made during the audit. The notion that prior employment always enhances independence is inaccurate, as independence relies significantly on the relationship dynamics rather than a mere history. Similarly, stating that it has no bearing on independence overlooks the subtle influences that such relationships can have. Lastly, suggesting that it guarantees independence does not reflect the reality that such relationships can introduce biases that impair objectivity. Thus, the correct interpretation centers on the potential risk posed to the independence of the audit due to prior associations with the CPA firm.