Issues Related To The Auditor Independence - Research Paper Example

Issues Related To The Auditor Independence Introduction It is important to recognise that independence can never be absolute since the auditor is appointed, and paid by the client. The purpose of auditor safeguards to independence is to reduce the threats that may impair the auditor’s opinion forming process. Three are different threats that occasion impairment on auditor’s objectivity such as the self-interest threats that include financial and personal interests (Basu, 2009). Self-review threats also present threats to independence while advocacy threats may present unbiased opinions on the financial position of the firm. Intimidation threats such as coercion the owners of the firm will hinder the independence of the auditor. Auditor’s independence must be about integrity, objectivity and skepticism (Basu, 2009). The auditor is expected to monitor the integrity of the financial statements, review the internal financial controls, review the effectiveness of the internal audit department, and provide non-audit services while considering the ethical guidelines concerning the auditor’s work. Rotation of audit staff and partners will safeguard the familiarity threat and minimise self-interest threats to independence (Flood, 2012). In order to maintain independence, the auditors are required by law o maintain integrity, competence, objectivity, performance and courtesy. The auditor must safeguard himself or herself from self-interest threats by abstaining from any direct or indirect financial interest in the audit work (Flood, 2012). The auditor should not take any loan, guarantee of a loan from the client, or engage in undue dependence on the total fees paid by the client. The auditor should not have any close business relationship with the auditor in order to avoid instances of persuading the client to offer employment position to the auditor (Bode, 2008). The auditor has a responsibility of avoiding self-review threats that affect subsequent audit engagements and interfere with the preparation of records and financial statements that may be subject matter of the audit engagement (Basu, 2009). Basu (2009) asserts that the auditor must abstain from advocacy threats that pose risks to independence. In this case, the auditor should not be a promoter of the shares or securities of the client and should not act in litigation or solving of disputes with third parties. The auditors must avoid the familiarity threats and observe ethical guidelines that prohibit conflicts of interests such as abstaining from engaging in audit work if the client is a close family member (Adelopo, 2012). The auditor must not accept any hospitality or gifts from the client, the directors or employees of the client (Basu, 2009). Auditors may face intimidation threats such as threat of replacement due to disagreements on certain accounting principle, dominant personality of senior management, and pressures to reduce the amount of audit work in order to reduce the audit fees. However, the auditor should document and communicate such threats to the audit committee since his or her responsibility is to make informed judgment on the nature of financial statements (Flood, 2012). There are different safeguards to independence that have been created by the profession, legislation and regulations. In this case, auditors ensure independence through meeting the required training and experience and undertaking further courses in order to ensure continuous learning (Campbell & Houghton, 2005). The professional bodies have issued professional standards that guide the conduct of auditors in their work. Accordingly, auditors who engage in malpractices face severe disciplinary actions including heavy fines, revocation of audit licenses or jail terms (Adelopo, 2012). The audit client must have competent employees to make managerial decisions and policies that emphasise on the audit client’s commitment to fair reporting standards (Bode, 2008). The corporate governance mechanism of the client must have audit committee that provides communication and oversight on the work of the audit firm in order to safeguard auditor’s independence. The audit firm is expected to implement safeguards that include procedures that ensure quality control of audit engagements and disciplinary systems that ensure compliance with audit procedures (Brenkert, 2004). The auditor can involve additional accountants to review the work or consult third parties such as professional body and committee of independent directors. The purpose of safeguards approach is to enable the auditor identify potential risks that pose threat to independence as the basic principles of independence may not be straightforward in emerging and unique circumstances. Through use of safeguards, the auditor is able to gain more knowledge of the client and enhance the quality of audit services (Basu, 2009). The audit committee must consider the skills of the auditor before providing non-audit services and related fees relative to the audit fee. In this case, the safeguards should ensure that external auditors do not make managerial decisions for the firm, create mutual interest and performance a role of advocacy on behalf of the client firm (Brenkert, 2004). Accordingly, safeguards should eliminate self-review threats such as authorisation of transactions and preparation of original data including the decision on appropriate valuations. In this case, the auditor should not engage in the above services, but can ask for clarifications on accounting principles used in preparing financial statements and propose the adjustment of journal entries since this forms part of the normal audit work (Brenkert, 2004). Auditors earn a living from the fee from the client and the reliance on the fees may jeopardize his or her duties since he or she may not want anything to interfere with the duties. The more the fees, the more likely to auditor may be tempted to manipulate accounting figures and exploit accounting standards (Bode, 2008). The auditor is also involved in providing non-audit services such as taxation, implementation of accounting systems and insurance consultancy services that may limit auditor’s independence (Basu, 2009). In case of fee dependence, the audit fee should not form a substantial income for the audit firm. Auditors should not engage in audit work with an entity that provides the office or audit firm with unduly large proportion of gross practice income such as 15 percent. If the income exceeds 5 percent, the audit committee should be notified and such passed to the shareholders. The employment of partners and staff of formerly with the audit firm presents a significant threat to independence especially if employed in senior management positions in the company. The former partner or staff joining the client company should no longer derive benefits from the audit firm and such person should not be allowed to take part in further professional activities or business interests with the audit firm (Gray, 2007). Conclusion The standards of auditor independence should promote an environment that ensures auditors are free from any influence, interest or manipulation that might impair their professional judgment regarding the integrity, objectivity and fairness of the financial reports. The auditing standards must provide restrictions and safeguards that eliminate self-interest, advocacy, self-review, familiarity and intimidation threats that pose risk to auditor’s independence. The audit committee should be free from unreasonable restrictions and should regulate the circumstances that the auditor can be engaged in non-audit functions. Reference list: Adelopo, I. 2012. Auditor independence: auditing, corporate governance and market confidence. Surrey: Gower. Basu, S.K. 2009. Fundamentals of auditing. London: Pearson. Bode, S. 2008. Auditor independence and regulation. Munchen: GRIN Verlag. Brenkert, G.G. 2004. Corporate integrity and accountability. California: Sage Publications. Campbell, T & Houghton, K.A. 2005. Ethics and auditing. Canberra: ANU E Press. Flood, J. 2012. Wiley practitioner’s guide to GAAS 2013: covering all SASs, SSAEs, SSARSs, and interpretations. New Jersey: Wiley. Gray, I. 2007. The audit process: principles, practice and cases. London: Thompson Learning. Read More