What is the impact on independence if a retired partner owns 1 percent of the stock in an audit client and is inactive for five years?

The correct interpretation is that independence is not impaired due to the inactivity of a retired partner who owns a minimal 1 percent of stock in an audit client after being inactive for five years.

Under the AICPA Code of Professional Conduct, independence is crucial for auditors to maintain objectivity and impartiality while auditing a client. Generally, ownership of stock in a client can create a conflict of interest. However, if the individual in question has been inactive for a significant period, such as five years, this diminishes the potential for influence over the audit process. Moreover, a 1 percent ownership is generally considered a low enough stake that it might not present a significant threat to independence, particularly if the partner is no longer involved in the day-to-day operations or decision-making processes of the firm or the client.

Thus, the combination of the minimal ownership stake and the extensive period of inactivity supports the conclusion that independence remains intact in such circumstances. This understanding is important for ensuring that auditors can perform their work without conflicts that could compromise their judgment.