Question 1

Article IV of the AICPA code of conduct requires members of the public practice to be independent in appearance and fact when disseminating their services.

Independence in appearance means that an auditor should not have any interests or obligations in the client, its owners or management that would lead others to believe the auditor is biased. Independence in fact means that an auditor ought to have a character of intellectual honesty and candor, integrity and objectivity. An auditor also needs to have a state of mind of judicial impartiality that recognizes the obligation of fairness to the client, creditors and other stakeholders.

In this case, Yossi’s independence in appearance was impaired. His wife was the chief accounting officer for a business that he was auditing, and the company was not following the required accounting principles with regards to advertising costs.

Question 2

A cost should be capitalized when it has not expired, and it has a future economic value. When it comes to expensing, a cost should be expensed when it has already been used or has expired and contains no future economic value.

The club did not account for the advertising costs properly. The advertising costs should have been expensed since the cost had already been used or had already expired.

Question 3

Dina did not act in an ethical way. She only focused on pleasing the club’s president at the expense of acting ethical with regards to the prescribed professional conduct. She gave in to pressure, and this resulted in putting her husband in an awkward position. Dina ought to have stood firm and used the appropriate accounting treatment for the advertising costs.

If I were in Yossi’s positions, I would discuss with my wife the issue regarding the advertising costs. I would propose for the club to make an adjustment and expense the costs as it is required. If the club fails to make the necessary adjustments, I would go ahead and issue an adverse opinion since the financial statements do not offer a true and fair view. Dina is likely to respond that she knows that it was not the right thing to do, but she had to do it since her boss was insistent.

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