Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Which of the following activities is considered a non-audit service that can impair independence?

1. Preparing tax returns for an audit client

2. Reviewing financial statements for compliance

3. Providing consulting on internal controls

4. Performing an audit of employee benefit plans

The correct answer is: Preparing tax returns for an audit client

Preparing tax returns for an audit client is considered a non-audit service that can impair independence because it creates a potential conflict of interest. When a CPA firm is engaged in both auditing and preparing tax returns for the same client, it raises questions about objectivity. The auditor's responsibility is to provide an unbiased opinion on the financial statements, and being involved in preparing the tax return can lead to concerns that the accountant may not remain wholly independent when assessing the accuracy of financial statements that may influence tax outcomes. This independence issue is particularly pronounced because the auditor could be placed in a position where they are evaluating their own work or the implications of their tax services on the financial statements, creating a self-review threat. Auditing standards emphasize the necessity for auditors to maintain independence from their clients, and engaging in tax preparation services could compromise that independence significantly. The other activities listed do not inherently impair independence in the same way. Reviewing financial statements for compliance generally aligns more closely with auditing activities, provided it adheres to the relevant ethical guidelines. Consulting on internal controls, while it can raise issues, can be structured to maintain independence if not coupled with an audit engagement. Performing an audit of employee benefit plans is itself an audit activity, thus not a non-audit