What should a CPA do if they have a direct financial interest in an audit client?

When a CPA has a direct financial interest in an audit client, the most appropriate action is to decline the audit engagement. This principle is rooted in the fundamental ethical standards of the auditing profession, which emphasize independence and objectivity. A direct financial interest creates a conflict between the auditor's personal financial interests and their professional responsibilities, potentially impairing their ability to remain impartial during the audit process.

Maintaining independence is paramount to preserving the credibility of the audit findings. If an auditor has a financial stake in the client, there is a significant risk that their judgments and opinions may be influenced by their personal interests, undermining the integrity of the audit. Thus, the ethical guidelines and regulations prohibit CPAs from accepting an audit engagement in such situations.

While the other options may seem viable in specific contexts, they do not align with the fundamental requirement for auditors to maintain independence. Trying to disclose the interest or seeking waivers would not adequately address the core issue of objectivity being compromised by the financial interest. As such, declining the audit engagement is clearly the most ethical course of action.