Question

What is auditor independence, and what is its significance to the audit profession?

Answer 1

Solution

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. Independence requires integrity and an objective approach to the audit process. The concept requires the auditor to carry out his or her work freely and in an objective manner.

Independence of the internal auditor means independence from parties whose interests might be harmed by the results of an audit. Specific internal management issues are inadequate risk management, inadequate internal controls, and poor governance. 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.

Independence of the external auditor means independence from parties that have an interest in the results published in financial statements of an entity. The support from and relation to the Audit Committee of the client company, the contract and the contractual reference to public accounting standards/codes generally provides independence from management, the code of ethics of the Public Accountant profession) helps give guidance on independence form suppliers, clients, third parties.

The fact is that auditors who lack independence compromise the integrity of financial markets and the reliability of information. Investors would not be willing to extend capital to companies, knowing that the audited information was performed by an auditor who is not independent. Furthermore, banks would not be willing to issue a loan for fear that the auditor might’ve provided a biased audit report.

Significance in Audit Profession

The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them.

Audit independence is important so that auditor’s opinion can be impartial, unbiased, free from any undue influence or conflict of interest to override the professional judgement of the professional accounting.

An audit is basically an examination of a set of records, both financial and non-financial, to ensure that they can be relied upon in terms of accuracy and completeness. An auditor is a qualified person who carries out the audit assignment and reports on the ‘true and fair view’ of the client entity’s financial statements so that the users of financial statements can rely on the reliability and credibility of the financial statements. There are many users of financial statements who do not have sufficient knowledge to understand what is contained in a company’s annual accounts. Thus, they rely on the auditor’s independent assessment and the auditor’s main objective is to express an audit opinion over financial statements (Corplaw Admin, 2014). This opinion intends to enhance credibility of the financial statement. The opinion itself shall be credible and for that the auditor’s objectivity shall be beyond question. This created requirements for auditor to be and appear to be independence of those influences that could override his professional judgement.

Being independent is about preserving “Independent of mind” which is about the capability to maintain profession objective while exercising professional judgement which is important to preserve quality of auditor’s judgement.

While appearing independent is about preserving “Independent of appearance” which is how public/users perceive auditor as being objective which is important to get users confidence over auditor’s judgement.