Loans and Independence: Lynn's Financial Arrangements at WMC
Which of the following financial arrangements would not create an independence problem for Lynn?
Lynn is on the attest engagement team for Whillikers Manufacturing Corporation (WMC).
Lynn loans $2,000 to Gonzo, an investor who owns 22% of WMC's outstanding shares.
Lynn borrows $5,000 from WMC. Lynn considers asking WMC's CEO for a loan, but decides not to. Lynn borrows $1,000 from Sam, an officer of WMC.
Answer:
The financial arrangement that would not create an independence problem for Lynn is when Lynn borrows $5,000 from WMC.
Lynn is part of the attest engagement team for Whillikers Manufacturing Corporation (WMC). As an auditor, maintaining independence is crucial to ensure the integrity and objectivity of the audit process. In this scenario, Lynn has different financial arrangements that could potentially impact her independence.
When Lynn borrows $5,000 from WMC, it does not create an independence problem because borrowing from the company itself is generally acceptable as long as it is within the materiality threshold and the loan is not from a person who can influence the company's operations significantly.
Although Lynn considers asking WMC's CEO for a loan, she decides not to proceed with it. This decision is essential to maintain independence, as borrowing from the CEO could compromise objectivity due to the influence the CEO holds within the organization.
Moreover, borrowing $1,000 from Sam, an officer of WMC, does not violate independence rules as long as the borrowed amount is below the materiality threshold. The key factor in determining independence in loan arrangements is the level of influence the lender has on the company. As long as Lynn follows ethical standards and guidelines, her independence should remain intact.
It is essential for auditors like Lynn to adhere to ethical standards and guidelines to uphold independence and integrity while performing audit engagements. Maintaining independence ensures that audit reports are unbiased and reliable, ultimately contributing to the credibility of the auditing profession.