American Institute of Certified Public Accountants (AICPA) Practice Exam

What is the effect of a CPA's prior financial association with a client on their independence?

1. It automatically impairs independence

2. It does not affect independence

3. It may affect independence depending on context

4. It always qualifies for independence review

The correct answer is: It does not affect independence

In the context of a CPA's prior financial association with a client, the effect on independence is nuanced rather than absolute. A CPA's independence is primarily evaluated based on the nature and extent of their relationship with the client. The existence of a prior financial association does not automatically impair independence as long as certain conditions are met. For example, if a CPA has had a financial interest or affiliation with a client in the past, independence may still be maintained if the relationship has been sufficiently resolved or if there is a significant time gap since the association. The context surrounding the financial association, including its nature (such as whether it was a loan, investment, etc.), duration, and how recently it occurred, plays a critical role in assessing potential independence impairment. It is essential for CPAs to evaluate past relationships thoroughly and consider any relevant regulations and guidelines, ensuring their current relationships comply with required standards of independence. Thus, while prior financial associations merit careful consideration, they do not inherently preclude the possibility of maintaining independence.