American Institute of Certified Public Accountants (AICPA) Practice Exam

What is the relationship between a covered member’s indirect financial interest and the assessment of independence?

1. The interest must never be considered material.

2. Independence is not affected by indirect interests.

3. The materiality of the interest plays a role in determining independence impairment.

4. Indirect interests are not considered under independence rules.

The correct answer is: The materiality of the interest plays a role in determining independence impairment.

In assessing independence, the materiality of a covered member's indirect financial interest is significant. Indirect interests refer to financial interests held through an intermediary, such as a family member or an entity in which the covered member has a stake. The key here is that these indirect interests can potentially impact the perception of independence, particularly if they are material in nature. When determining independence impairment, all financial interests—including direct and indirect—must be evaluated with respect to their materiality. If an indirect financial interest is deemed material, it may lead to questions about the covered member's ability to remain objective and impartial in their professional responsibilities, particularly when it comes to audit and assurance services. Therefore, the materiality of the indirect interest plays a critical role in assessing whether independence has been compromised. While independence rules do address indirect interests, they are certainly not disregarded; rather, they require careful consideration to ensure no material interests could impair the independence of the member. Thus, the relationship between a covered member's indirect financial interest and independence is crucial in maintaining ethical standards in accounting and auditing practices.