During the audit of an issuer, the engagement partner learns that the firm's tax partner, who provides 15 hours of tax services to the audit client annually, has a spouse who just purchased 50 shares of the client's stock. The stock is held in a blind trust. Under PCAOB and SEC independence rules, which of the following conclusions is CORRECT?

Answer options:

Independence is NOT impaired because the tax partner is not a 'covered person' as they provided fewer than 10 hours of non-audit services.

Independence is NOT impaired because the financial interest is held in a blind trust, which exempts it from direct financial interest rules.

Independence is impaired because the tax partner is a covered person and their spouse's direct financial interest is attributed to them.

Independence is impaired only if the stock ownership exceeds 5% of the client's total outstanding shares.

How to approach this question

Step 1: Determine if the tax partner is a 'covered person' (10-hour rule). Step 2: Determine if the spouse's interest is attributed to the partner. Step 3: Determine if a blind trust cures the issue.

Full Answer

C.Independence is impaired because the tax partner is a covered person and their spouse's direct financial interest is attributed to them.✓ Correct

Independence is impaired.

Under SEC Rule 2-01 (incorporated by PCAOB), a 'covered person' includes partners who provide 10 or more hours of non-audit services to the client. The tax partner (15 hours) is a covered person. The immediate family (spouse) of a covered person cannot have a direct financial interest in the client. Blind trusts are generally treated as direct financial interests because the beneficiary owns the underlying assets.

Common mistakes

Thinking the 10-hour threshold is higher; assuming blind trusts automatically resolve independence conflicts.

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