What must occur for independence to be maintained when a CPA firm has a loan guarantee from an audit client?

For independence to be maintained in the context of a CPA firm having a loan guarantee from an audit client, the guarantee must be removed before any engagement. This is crucial because the existence of a loan guarantee creates a financial relationship that can threaten the auditor's objectivity and impartiality in the audit process.

Independence is a foundational principle in auditing; it ensures that auditors carry out their work without any influence from external relationships that could compromise their professional judgment. A loan guarantee indicates a potential financial interest in the client, which presents a conflict of interest. If the guarantee is in place, the auditor's independence could be perceived as impaired, which undermines the integrity of the audit.

Thus, removing the guarantee prior to any engagement restores the objectivity required for the audit, allowing the CPA firm to operate without the conflict of interest created by the financial arrangement with the client. This maintains the essential ethical standards expected in the accounting profession and ensures the results of the audit can be trusted by stakeholders.