Question

Auditor Independence

Facts: Assume that Santa Claus's recently deceased grandfather let him an inheritance . which includes a direct investment in shares of Toys r Us. his audit client. Santa Claus is partner on the Toys r Us engagement. Toys r Us is a privately held company. Santa Claus anticipates, if necessary, the shares could be sold immediately,

Required: Determine

1) Whether Santa Claus is a covered member with respect to this client, and

2) Whether is appropriate for Santa Claus to keep the inheritance shares of Toys r Us. stock.

Respond in the form of an issue memo. Clearly explain your conclusion and support your position with authoritative guidance.

Answer 1

ANSWER

Memorandum

To: Santa Claus, Audit Partner

From: ABC

Date: 12th November, 2019

Re: Guidance on Auditor Independence

FACTS

Santa Claus has recently inherited shares of Toys r Us. Santa Claus is also an audit partner on Toys R Us engagement

ISSUES

1. Whether Santa Claus is a covered member with respect to his client Toys R Us

2. Whether Santa Claus can keep the inheritance shares in Toys R Us

GUIDANCE

1. Yes Santa Claus is a covered member with respect to his client Toys r Us. This is because Santa Claus is an audit partner on the attestation engagement of Toys R Us. Therefore there is a conflict of interest because he will be directly financially  interested in the value of the shares, being a shareholder of the company.

2. No, it would not be appropriate for Santa Claus to keep the inheritance shares of Toys R Us. In fact, he should immediately dispose off the shares if he wants to associated in any capacity with the audit engagement of Toys R Us. He should also disclose the facts to the audit committee of Toys R Us. If he wishes to keep the shares, he should recuse himself completely and should resign from the audit engagement. Keeping the shares will directly impair audit independence.

CONCLUSION

Santa Claus is a covered member with respect to his client Toys R Us. It is recommended that he immediately dispose off the inheritance shares, or resign from the audit engagement of Toys R Us, considering the above issues mentioned with respect to audit independence