American Institute of Certified Public Accountants (AICPA) Practice Exam

What is considered an indirect financial interest according to the provided text?

1. An investment in a client directly held by the CPA.

2. Investments in a nonclient mutual fund that owns stocks of a client.

3. A loan made to a client.

4. Ownership of property directly associated with client services.

The correct answer is: Investments in a nonclient mutual fund that owns stocks of a client.

An indirect financial interest refers to a situation where a CPA has a financial interest in a client, but the interest is not held directly by the CPA. Instead, it exists through another entity or intermediary. In this context, investments in a nonclient mutual fund that owns stocks of a client exemplify such indirect interests. The CPA does not directly hold the stocks of the client; rather, the mutual fund does, creating a layer between the CPA and the client's financial interest. This distinction is important in the context of ethical standards and independence, as direct interests can raise more significant concerns regarding objectivity and impartiality compared to indirect interests. By holding an indirect interest, such as through a mutual fund, the CPA may mitigate potential conflicts of interest since the CPA is not in direct control of the investment or decision-making regarding the client's stocks. In contrast, other options represent direct interests or more direct relationships with the client, which do not fit the definition of an indirect financial interest. For example, an investment in a client directly held by the CPA or ownership of property directly associated with client services demonstrates a direct relationship where financial interests are explicitly tied to the client. Similarly, a loan made to a client signifies a direct financial engagement which could impair independence and object