On July 1, 20X8, a CPA obtained a $100,000 personal loan (payable with interest after 18 months) from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full (alongwith accrued interest) on December 31, 20X9. On April 3, 20X9, the client asked the CPA to audit the client’s financial statements for the year ended December 31, 20X9. Is the CPA considered independent with respect to the audit of the client’s December 31, 20X9, financial statements?
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While loan to/from an audit/attest client generally impairs independence. loans taken from a financial institution prior to the inception of auditor/client relationship (that needs independence) is acceptable if (i) obtained under normal lending practices; (ii) remain current on all payments due (iii) the terms and conditions are as per original agreement. Such loans are called grandfathered loans.
The CPA had obtained the $100,000 loan on July 1, 20X8, when there was no auditor/client relationship (only compilation services) and had repaid the loan on the due date after 18 months i.e. December 31, 20X9. The CPA is considered to be independent with respect to the audit of the financial statements because the outstanding loan was taken prior to the audit engagement and the auditor repaid the loan as per the terms of the original agreement.