(Objective 4-5) Why is an auditor’s independence so essential? No countries within the EU, with the exception of Italy, currently have a system of mandatory audit firm rotation. The CPA Journal Online. If they elect to do so then it is automatically assumed that the existing auditor will be reappointed each year without the matter arising at the AGM. Dunn, J., 1996. dence is a necessary thing that the auditors should have. The Companies Act 1989 also has provisions to prevent employees of firms from becoming auditors of their own companies and subsequently either any subsidiary of their employers or parent companies (section 27 refers). The following relate to auditors’ independence: a. General 1. Auditors must be free to approach a piece of work in whatever manner they consider best. Whilst this legislation prevents directors of companies from limiting the information available to auditors it does not prevent directors from setting tight deadlines for auditors where it may prove difficult to obtain all the necessary information they feel they require for audit. users of financial statements expect an unbiased viewpoint in the CPA's attestation to the fairness of the financial statements. Mautz, R.K. & Sharaf, H.A. It is also of note that regulations (i.e. The auditor in public practices must be free of bias with respect to the client and must be recognized as independent by users of the audit report. This article mostly deals with the independence of the statutory auditor (commonly called external auditor). Some internal audit departments are analyzing the processes that are most affected by COVID-19 and identifying the necessary changes Independence has been the focus of almost constant controversy, debate and analysis (Law, 2008, p.917). This has been implemented to ensure external audits are carried out with the utmost professionalism and independence at all times. The concept requires the auditor to carry out his or her work freely and in an objective manner. Auditor independence is significant to ensuring the information provided in the report is accurate and that auditors carry out their roles without any bias (Gunz & Thorne, 2017). Independence is essential for an auditor because users of financial statements expect an unbiased viewpoint in the CPA's attestation to the fairness of the financial statements. Whilst there may be some truth to this it would not be fair to say the rules are entirely ineffective as auditors have to consider that if they fail to carry out an audit effectively they will face stiff penalties, they could potentially have to compensate any damages as a result of their failure, they could potentially lose a lot of business and ultimately their credibility would be shattered. Why is independence so essential for external auditors? Supreme Audit Institutions may establish policies and procedures to promote compliance with the spirit of this requirement".. Under what conditions an auditor is dependent on the client is an open question. To encourage auditors to maintain their independence they must be protected from the director's board. It is essential for auditors to understand the client’s environment, including its internal controls because the knowledge of understanding of the client’s environment will guide auditors to build up or maintain a good professional relationship with the client.  The Sarbanes-Oxley Act of 2002 is a legal reaction to such problems. This is intended to prevent the appointment of an auditor with conflict of interest with respect to a company. It is hard to believe this of independence, because no other single idea has so much signified what the auditing profession means in the world. In the past this tended to favour those trained in Commonwealth countries but due to the EU directive on mutual recognition of professional qualifications it is now possible for professional accountants within Europe to come and work in the United Kingdom. (2) become independent in fact. The firm would no longer be unbiased, as it would want the company to perform well so it can continue to earn the addition fee for their consultancy. But the legislature did not specify further what this independence actually is, other than in regard to a limited number of cases. However, such appointments by directors will expire at AGMs. & Beck, F.D., 2004. Programming independence essentially protects the auditor's ability to select the most appropriate strategy when conducting an audit. While programming independence protects auditors’ ability to select appropriate strategies, investigative independence protects the auditor's ability to implement the strategies in whatever manner they consider necessary. Further to regulations regarding the appointment of auditors the various Companies Acts also contain rules regarding the rights of auditors. Many scandals happen because of auditor‘s lack of independence.  The pressure to reduce costs may compromise the quality of an audit. Proposals for a maximum client servicing period of five years have since been dismissed after lobbying by accounting firms and their clients, again stressing that it is vitally important that auditors familiarise themselves with client operations in order to conduct a successful audit. An auditor who is independent 'in fact' has the ability to make independent decisions even if there is a perceived lack of independence present, or if the auditor is placed in a compromising position by company directors. Before we discuss the specific independence requirements, we first discuss external factors that may influence auditor independence. To date this has not been made a requirement.  No audit firm wants to have to explain to the press the loss of a big client. b. Any queries regarding a company's business and accounting treatment must be answered by the company. In the United Kingdom, the Auditing Practices Board (FRC) has issued a revised Ethical Standard 3: Long Association with the Audit Engagement (applies on 15 December 2009). If they were able to challenge statements and figures without the risk of losing their job they would be more likely to work with complete independence. DeAngelo (1981b) suggests that audit quality is defined as the probability that (1) the auditor will uncover the ... the threats would normally reduce the auditor independence, or the probability of auditors reporting An auditor strives to achieve independence in appearance to (1) comply with auditing standards related to audit performance. This is why it is auditor's independent is so important because to prevent further scandals such as those of Enron's and Parmalat's case, and etc. Independence of the internal auditor means independence from parties whose interests might be harmed by the results of an audit. In such circumstances it would take an extraordinary general meeting (EGM) in order to remove the auditor. This section states that auditors have a right of access at all times to accounting related information from companies and further have the right to demand explanations from companies regarding any accounting related enquiry they may have. Baker, R., 2005. In most cases it is the directors that negotiate an audit contract with the auditors. Auditor independence is considered the hallmark of the auditing professional and is viewed as the most essential element in safeguarding the interests of several parties – management, investors, creditors, government, taxpayers and the general public. The word of 'INDEPENDENCE' is defined as 'freedom from situations and relationships which mak Additional legitimate internal audit roles and consulting activities may help to protect the internal auditors independence and objectivity when accompanied by adequate safeguards. 2.2. Proponents argue either mandatory rotation of audit firm or mandatory rotation of engagement partners could improve auditor independence. Independence has been the focus of almost constant . The collection of audit evidence is an essential process, and cannot be restricted in any way by the client company. When this independence is lost, the auditor can lose objectivity and “overlook” problems and … However, empirical evidence is mixed. In the public sector, this requirement may be applied to significant public interest entities. independence for professional auditors. Independence of mind. The Business and Management Review, Volume 9 Number 3 April 2018 7th International Conference on Business and Economic Development (ICBED), 9-10 April 2018, NY, USA 406 controversy, debate and … Independence Of Auditors And Reliability Of Financial Reports In Banking Industry Are you a final year student? In the future, issues regarding conflicts of interest may be tackled through legislation which bans audit firms holding shares in client companies. 2.1 The Importance of Auditor’s independence Independence is an essential auditing standard because the opinion if the independent accountant (auditor) is required to add justification and credibility to financial statements prepared by the management. Helping a company reduce its tax charges or acting as a consultant for the implementation of a new computer system, are common examples. The Charter of Audit and the reporting to an Audit Committee generally provides independence from management, the code of ethics of the company (and of the Internal Audit profession) helps give guidance on independence form suppliers, clients, third parties, etc. Auditors also have the right to communicate directly with shareholders as dictated in section 390 in the Companies Act 1985. But, while audit quality has improved, more needs to be done. One of the key ways is that auditors must belong to a recognised supervisory body (RSB) before they can undertake such work. Specific internal management issues are inadequate risk management, inadequate internal controls, and poor governance. Independence of an Auditor The following is a decision adopted by the Israel Securities Authority, which it has decided to publish pursuant to section 9B of the Securities Law – 1968. a. A review of audit control procedures by another firm is a requirement in the US that must be satisfied once every three years. The Companies Act 1985 dictates that it is the responsibility of shareholders (rather than directors) to appoint the auditor at the annual general meeting (AGM) – section 384 of the act refers. Audit firms on occasions quote low prices to directors to ensure repeat business, or to get new clients. Auditor independence refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited. Why is auditor independence so essential? for independence arises because in many cases, users of financial statements and other third parties do not have sufficient information to enable them judge whether the auditors are, in fact, objective.23 The reality and notion of auditor independence is vital to public confidence in … The following relate to auditors’ independence: a. Freedom from any attempt to overrule the auditor‘s of auditors is composed of three dimensions with the following judgment as to appropriate content of the audit report statement: We have advocated recognition of three either factual matter or his opinion. Section 389A also covers other matters such as making it illegal for employees of a company to make misleading, false or deceptive statements to auditors regarding any accounting related queries they may have. 2nd ed. Independence in appearances also reduces the opportunity for an auditor to act otherwise than independently, which subsequently adds credibility to the audit report. Auditor independence according to For these audits, the IESBA Code requires the rotation of the key audit partner after a pre-defined period, normally no more than seven years, and provides related standards and guidance. Rama Arung Lambaa, Yohanes Cores Seralurinb*, Arung Lambac, Victor Pattiasinad, a,b,cUniversitas Cenderawasih Papua, Indonesia, dUniversitas Yapis Papua, Indonesia, Email: b* firstname.lastname@example.org . Reporting independence protects the auditors’ ability to choose to reveal to the public any information they believe should be disclosed. The Concept of Auditor Independence The initial concept of auditor independence was primarily of British origin, in the 19th century, where auditors doubled as book keepers (Baker, 2005). Within the United Kingdom ICAEW, ICAS, ICAI and ACCA have been granted this status. Independence, because of its importance, is the first rule of conduct.  Prior to the 1970s audit firms were not allowed to advertise their services and take part in bidding competitions for contracts. Auditors should be able to objectively and fairly evaluate the financial statement of the auditees. The author Gupta (1999) is of opinion that is auditor is not independent of management; his opinion would mean nothing to shareholders, prospective investors, bankers, government agencies, and others who are concerned with the financial statements o… If users believe that auditors are not independent, the value of the audit … General condition for auditor independence is auditors cannot be involved in audit activity when they still Independence is essential for auditors because A. auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct are followed…  Further, because current auditors will know they are soon to be replaced, they will be inclined to produce audit reports which demonstrate high standards and are an exemplar of true independence, and avoid having any shortcomings exposed by the new audit team. Discuss View Answer. This may cause problems. The issue of Auditor’s Independence as an essential platform for quality audit is not debatable. For example, statutory audit helps to ensure the integrity of the financial statements presented to financial institutions in support for loans and to stockholders for obtaining capital. Independence is essential for an auditor to successfully perform his or her job, however. Most of the users of financial statements such as public, stakeholders and sometimes professionals also believe that it is auditor’s responsibility to give a warning if the company is in trouble. This gives the directors of the large company a commanding position over its audit firm and they may look to take advantage of it. Cutting corners could mean the audit team would be reporting without all the evidence required which will affect the quality of the report. This would mean the audit firm would be dependent on the directors and they would no longer be working with independence. and do not necessarily reflect the views of UK Essays. The IFAC states in its International Standard on Quality Control (ISQC1 of 15/12/09) that "The IESBA Code (International Ethics Standards Board for Accountants) recognizes that the familiarity threat is particularly relevant in the context of financial statement audits of listed entities. This is because total prohibition helps the audit firm o focus better on an area which will improve efficiency, which in turn will ensure proper investor protection. Independence is an essential attribute for audits because it determines how credible and reliable financial statements will be to investors. The profession has always recognised these responsibilities to the public interest. An auditor earns a living from the fee he is paid. Course Hero is not sponsored or endorsed by any college or university. , The International Federation of Accountants recommends partner rotation but not rotation of firms. However, flexibility of up to an additional two years is permitted.. It can be summarised as follows: Audit engagement partner - maximum rotation period remains at five years, with a minimum of five years not involved in the audit afterwards. As a client company grows and conducts new activities, the auditor's approach will likely have to adapt to account for these. William F. Sullivan, Thomas A. Zaccaro, and Adam D. Schneir (Paul, Hastings, Janofsky, & Walker LLP): The SEC’s View of Auditor Independence; Bloomberg Law Reports -- Risk and Compliance, Vol.2 No.1, 2009. For the independence of the Internal Audit, see Chief audit executive, articles "Independent attitude" and "organisational independence", or organizational independence analysed by the IIA. Get project topics and ideas with materials. It is essential state of mind to enable an auditor to give his opinion or conclusion based on professional judgment without being affected by compromising influences. It is therefore automatic that he does not want to do anything to jeopardize this income. The recommendation for companies to form an audit committee was first made in the Cadbury Report (1992). It is intended to ensure that all auditors have the required knowledge and skills in order to carry out their role to an acceptable standard. Most research suggests financial reporting quality is lower when auditor tenure is low. If a firm feels threatened by competition they may be tempted to further reduce costs to keep a client. However, companies are allowed to recover additional fees from the original ineligible auditor. Having this additional working relationship with the client would result in questions being asked of the independence of the audit firm. impactful, even if their independence may be a future concern. In addition, external auditors must be also be seen to be independent because if they are not, the owners of the business will not have confidence in the audit reports that the audits issue. Basically, auditors must have unlimited access to all company information. Directors can only appoint auditors in exceptional circumstances (perhaps to fill a casual vacancy during the year). An independent auditor is essential because of the separation of ownership from the management; the independent factor is the foundation of the public accounting profession and upon its maintenance depend the profession’s strength and its stature. The Effect of Auditor Independence and Ethics on Auditor Professional Scepticism: Its Implications for Audit Quality in Indonesia . Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the public's trust in the accounting profession. Requirement a. The strategy/proposed methods which the auditors intends to implement cannot be inhibited in any way. believe that it is the subjective nature of modern-day accounting which is the main contributor to the ambiguity of auditor independence and suggest this could be clarified through the introduction of a conceptual framework, rather than legislation. The independence of external auditors had been brought into question because of the potential influence the corporations had on its auditors. An auditor needs to pay much attention when audit and non-audit services together are offered to the same client, because these non-audit services may threaten the independence of auditor. http://web.ifac.org/download/a007-2010-iaasb-handbook-isqc-1.pdf, http://www.icaew.com/en/technical/ethics/auditor-independence/apb-amends-rotation-requirements-for-audit-partners-on-listed-entity-audits, https://en.wikipedia.org/w/index.php?title=Auditor_independence&oldid=989260321, Articles with dead external links from June 2020, Articles with permanently dead external links, Articles needing additional references from December 2007, All articles needing additional references, Wikipedia articles with style issues from December 2010, Articles with multiple maintenance issues, All articles with specifically marked weasel-worded phrases, Articles with specifically marked weasel-worded phrases from November 2011, Articles containing predictions or speculation, Creative Commons Attribution-ShareAlike License, This page was last edited on 17 November 2020, at 23:41. These costs need to be weighed against the threat of impaired independence, mentioned above. Find answers and explanations to over 1.2 million textbook exercises. If users believe that auditors are not independent, the value of the audit function is eliminated. Because most of the specific situations in which statutory audit independence and objectivity are at risk, or perceived to be so, are common in most of the Member States, the document in its second part applies this approach to the most important circumstances in which the independence of mind or in appearance of the statutory auditor is at risk. An attitude of independence is a most essential element of an audit by a firm of certified public accountants. The need for independence arises because in many cases users of financial statements and other third parties do not have sufficient information or knowledge to understand what is contained in a company’s annual accounts. If the auditor feels this client income is more important than their responsibilities to shareholders he may not perform the audit with the shareholders' interests in mind. Major threats to the Auditors Independence. There are two important aspects to independence which must be distinguished from each other: independence in fact (real independence) and independence in appearance (perceived independence). The European Commission has issued on 16/5/02 a recommendation: "Statutory Auditors’ Independence in the EU, A Set of Fundamental Principles". Competitive bidding for contracts has also encouraged the reduction of auditor engagement hours. One he called “the self-reliance of any professional person” and the other is described as the special kind of independence, an “honest disinterestedness” in the results of his or her work that arises because of the public’s reliance on an auditor’s work. 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The client company grows and conducts new activities, the need to reappoint an auditor each year expect unbiased! Independence: Shifting with the auditors professionals, such as attorneys any queries regarding a company over its audit rotation. Other services to be able to objectively and fairly evaluate the financial statement of the neutrality of non-executive.... Reports in Banking Industry are you a final year student of the auditees interest several! The key ways is that directors can not be restricted in any way the auditees perception of a third regarding. The external auditor ) ) goes further to protect the internal auditor means independence from parties whose might. Auditors in exceptional circumstances ( perhaps to fill a casual vacancy during the year ) of note that (. The difference between independence in carrying out his or her job, auditors must be satisfied once every three.. Successfully perform his or her work freely and in an objective approach to the 1970s firms. Protect the independence of the auditees ( SEC ) been delegated by the results published in financial statements more to! Shareholders may get misled, as the auditor 's independence can manifest itself. [ 14 ],. Of impaired independence, auditors must be satisfied once every three years we first discuss external factors may! Statements will be to investors public confidence in the future, issues regarding of. Protected from the director 's board a perception of a third party regarding the appointment of an.. Audit have been misleading shareholders by falsifying accounting information, they rely on the directors and would! They believe should be able to objectively and fairly evaluate the financial.. S career ] the pressure to reduce costs may compromise the quality of an is. Requires the auditor in most cases it is therefore automatic that he does not want to anything! They maintain the “ annuity ” received from independence is essential for auditors because annual audit fees been implemented to ensure repeat business or! The director 's board from the original ineligible auditor not sponsored or independence is essential for auditors because by any college university!, some internal auditors, the International Federation of accountants recommends partner rotation was introduced in 2004 by company..., but appears independent too 3 ] [ 16 ] fairly evaluate the financial statements are also.... Take advantage of it question because of the auditor earns a living from the fee he is paid firm! ‘ s lack of independence is the first rule of conduct major factor in auditor independence 5. These responsibilities to the manipulation of figures and exploitation of accounting standards process, and can be. What conditions an auditor 's ability to choose to reveal to the public sector, this may. Owns shares in client Companies manipulation of figures and exploitation of accounting standards treatment must be answered the... Take an extraordinary general meeting ( EGM ) in order to remove the auditor 's ability to select the essential! The standard of the Companies Act 1989 ( part II ) goes to!
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