Auditing and why independence is important - Essay Example

Carey, P. & Simnett, R. (2001) stated that in auditing theory and practice, independence is a matter of intellectual honesty. Auditors are expected to be unbiased and impartial with respect to financial statements and other information they audit. They are expected to be fair to both the companies and executives who issue financial information and to the outside persons who use it. Independence is important enough to stand alone as a concept. The public will grant social recognition of professional status to auditors only so long as they are perceived to be independent.

The notion of individual independence is more specific in the conduct of each audit engagements. In essence, an individual auditor must not subordinate his or her judgment to others and must stay away from influences that might bias judgment.3 Loebbecke, A. (2000) argued that actual threats have to be considered on the situations that might be perceived as threats by a reasonable and informed observer. Where such threats exist, the auditor must put in place safeguards that eliminate them or reduce them to clearly insignificant levels.

Safeguards apply at three levels: safeguards in the work environment, safeguards that increase the risk of detection, and specific safeguards to deal with particular cases. If he is unable to implement fully adequate safeguards, the auditor must not carry out the work. Gupta, K., (2006) mentioned that ethical guidance based on this framework includes examples of threats that might arise and appropriate safeguards to deal with them. But these are illustrative and not comprehensive. The auditor must be able to demonstrate that, in the particular circumstances under consideration, the fundamental principles had in fact been observed - a far more rigorous test of compliance.

The framework approach is considered the most appropriate to adopt as:The aim of good guidance should be proactive, i.e. to require the auditor to identify and address risks, not merely passively obeying the letter of the code. A set of principles supported by reasoned guidance avoids the argument that any course of conduct that is not specifically prohibited is permissible, encouraging a search for ways around the rules. The approach recognizes the reality that the auditor is not wholly independent of his client, but that the threats to independence must be managed to clearly insignificant levels.

Although the basic principles of auditor independence are straightforward they may need to be applied to an almost infinite number of circumstances. The detailed rules-based approach will have to be incomprehensibly complex to cope with all possible circumstances, or will be a blunt instrument, sometimes imposing inappropriate solutions or completely missing the problem. The business environment and structure of audit firms and their clients are continually evolving particularly in an international context.

Clients and shareholders are generally allowed to choose the auditors to perform other work if they believe it is most efficient for them to do so, where adequate safeguards can be put in place. Nonetheless, where adequate s