Which of the following circumstances impairs an auditor's independence?
I. Litigation by a client against an audit firm claiming a deficiency in the previous audit
II. Litigation by a client against an audit firm for a material amount related to tax services
III. Litigation by an audit firm against a client claiming management fraud or deceit
A) I and II
B) I and III
C) II and III
D) I, II, and III

Question

Quizplus · Accepted Answer

I impairs an auditor's independence because it creates a threat that the auditor's judgment may be biased in favor of the client to avoid litigation. II impairs an auditor's independence because it creates a financial self-interest threat that the auditor may be more concerned with the outcome of the litigation than the objectivity of the audit. III does not impair an auditor's independence because it is the audit firm that is initiating legal action to protect the interests of its shareholders and the public, not in response to any pressure or influence from the client.

Which of the Following Circumstances Impairs an Auditor's Independence