Problem

You have landed your dream job at one of the "Big 4" Accounting firms. On your first audit of a large auto dealership, (you are not yet a partner) you encounter the following situations:

1. The sales manager tells you that there is a sale (at a substantial discount) on new cars that is limited to long-established customers of the dealership. Because your firm has been doing the audit for several years, the sales manager has decided that you should also be eligible for the discount.

2. The auto dealership has an executive lunchroom that is available for free to employees above a certain level. The controller informs you that you can also eat there for free at any time.

3. You are invited to the dealership's annual holiday party and you attend. When presents are handed out, you are surprised to learn that there is one there for you as well. The present has a value of about $200.

Using the three step process in the AICPA conceptual framework to assess whether or not your independence has been impaired.

Required:

a. Describe how each situation might impair your independence from the auto dealership.

b. Identify a safeguard that your CPA firm could impose that would eliminate or mitigate the threat of each situation to your independence.

c. Assume no safeguards are in place and that you accept the or gift in each situation. Discuss whether or not you violated the rules of conduct.