Reference no: EM132744312

Problem 1: Solomon & Saunders, CPA's prepared the audited financial statements of Hamilton Services for the year ended December 31, 20X1 with the report thereon issued on February 5, 20X2. The firm is now in the process of performing the audit for the year ended December 31, 20X2 and anticipates that its report thereon will be issued on February 15, 20X3. Due to some financial difficulties, Solomon & Saunders, CPA's allowed Hamilton Services to defer payment of billed fees for an extended period of time. In addition, the firm delayed the billing of some fees and had Hamilton Services sign a note for the oldest fees. The face value of the note is $50,000, the interest rate is 8%, and the due date is February 1, 20X3. The fees included in the note were for services provided between November 1, 20X1 and February 1, 20X2. Based on the above, which of the following situations would impair the firm's independence with respect to Hamilton Services for the December 31, 20X2 audit engagement?

a) Fees for the preparation of the Hamilton Services tax returns for the year ended December 31, 20X1 were paid on February 10, 20X3. The work on the tax return began on February 7, 20X2 and ended on February 9, 20X2.

b) Fees for services provided by the firm for the period July 1, 20X2 through December 31, 20X2 were billed to Hamilton Services on March 1, 20X3.

c) The $50,000 note was paid in full, including interest, on February 14, 20X3.

d) All of the above would impair the firm's independence

e) Neither a, b, nor c would impair the firm's independence