American Institute of Certified Public Accountants (AICPA) Practice Exam

Under what condition would independence be impaired for a covered member?

1. If they had an automobile loan during the engagement

2. If they had a bank loan with low interest

3. If they had a personal loan with a family member

4. If they had a mortgage loan

The correct answer is: If they had an automobile loan during the engagement

Independence for a covered member can be impaired when they have a financial interest that would jeopardize their objectivity in their duties. In this context, car loans, personal loans, and other financial engagements can present potential conflicts depending on the size and nature of the loan relative to the covered member's financial situation. Having an automobile loan during the engagement represents a direct financial relationship that could bias the member's judgment or decisions. All loans carry some inherent risk of controlling or influencing behavior, particularly if the lender's financial interests could be directly impacted by the member's professional findings or advice. Independence is crucial in auditing and accounting, and engaging in financial transactions while advocating for the integrity of a client can lead to a perceived or actual conflict of interest. In contrast, options involving bank loans with low interest or mortgage loans typically do not impair independence unless the amounts are substantial relative to the auditor's financial capacity or the nature of the financial engagements suggests undue influence. Personal loans with family members could create ethical considerations, but they do not always impair independence unless they could materially affect judgment. Thus, while these situations may warrant evaluation, the specific context of having an automobile loan is a clear indicator of compromised independence.