Threats and safeguards in the determination of auditor. Aqis are meant to provide a basis for comparison across different audits and audit firms. The research recommendations focused on the importance of overseeing the audit firms and accounting professionals through the formation of an independent. This research is expected to serve as a guide in understanding the importance of auditor independence and the challenges auditors face. The importance of auditor independence standards that are reasonable and yet comprehensive, rigorous, robust and enforceable has been underlined by several significant corporate failures in which questions have been raised about the quality of financial reporting and, in particular, the independence of the auditor.
The definition bears the marks of statistical concepts. An evergrowing number of stakeholders, both inside and outside an organization, continue to demand. This study investigated the relationship between audit independence. The debate surrounding the role of external auditors focuses in particular on auditor independence.
To identify factors that can affect the respective power of auditor and client and perceptions of auditor independence. This resulted in stricter guidelines on how the financial statements should be prepared, for example the sarbanesoxely act which was a. Doubts are sometimes expressed regarding the independence of external auditors. To comply with the standard, internal auditors must understand what independence and objectivity are and what is required in practice.
The auditor independence is measured by how honest an auditor is in reporting the material misstatements found in the financial statements by managers. Isa 200, overall objective of the independent auditor, and. Cathy allen, cpa consults on auditor independence and professional ethics and is owner of audit conduct llc, rocky point, n. The role of auditing in public sector governance this practice guide presents information on the importance of the public sector audit activity to effective governance and defines the key elements needed to maximize the value the public sector audit activity provides to all levels of government. Moreover, lacking of audit independence would influence government indirectly. It is vital that external auditors are independent of their clients, that internal auditors are. Principles of auditor independence and the role of.
Auditor independence its importance to the external. International standard on auditing 200 overall objectives of the independent auditor and the conduct of an au dit in accordance with international standards on auditing effective for audits of financial statements for periods beginning on or after december 15, 2009 contents paragraph introduction. In short, independence and objectivity means that internal auditors and the internal audit activity have, and maintain, the ability to make unbiased judgement and decisions based on the audit activities and. The importance of the auditor s independence and impartiality has been controversial in recent years when several auditing scandals were revealed. With regard to the supply of audit assurance, limperg 1932 suggests that the auditor should always strive to meet the public expectations. This paper aims to consider the importance of auditor independence in. A theoretical examination of the role of auditing and the. The importance of external auditor s independence according to gillespie, lewis and hamilton 2004. Auditor independence is important because it has an impact on audit quality. Agency theory watts and zimmerman 1978, 1986a, 1986b suggests that the auditor is appointed in the interests of both. For an audit report to be worth its salt, the auditor who prepared it must be seen to be, and actually be, truly independent. The topics we examine are the organizational status of internal audit, the internal auditor s dual role as a provider of assurance and consulting activities, internal audit s involvement in risk management, outsourcing and cosourcing of internal audit. For an audit report to be worth its salt, the auditor who prepared it must be seen to be, and actually be, truly independent and free of any undue influence.
The concept and notion of auditor independence has been of key importance to the audit profession, and to the variety of stakeholders who rely upon the work of auditors, for more than one hundred and fifty years. This paper aims to consider the importance of auditor independence in the external auditor s role in banking regulation and supervision. Agency theory watts and zimmerman 1978, 1986a, 1986b suggests that the auditor is appointed in the interests of both the third parties as well as the management. This contribution seeks to bring forward a number of the issues which underpin the concept together. Oversight of internal audit other interactions with management and the board audit committee external communications. Audit committee institute foreword 5 the audit committee handbook is intended to be a practical, userfriendly reference for both new and seasoned audit committee members, and for management and audit teams that work with the audit committee. In doing so, it also considers factors which may threaten independence and efforts which have been introduced to act as safeguards to the auditor s independence. Auditor independence and audit quality semantic scholar. Non audit services one of the most common and potentially most significant threats to auditor independence comes in the form of non audit services. From the literature above, the importance of audit independence can be categorized into four reasons. It is important for external auditors to be independent because external auditors act on behalf of the owners of the business, normally the shareholder, and report on the financial statements prepared by management for the benefit of shareholders. The role of the audit committee center for april 2018. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders.
Auditors also evaluate the quality of recordkeeping procedures and can ferret out fraudulent events hidden in documents. If auditors provided fake financial reports, the pubic will be suffered. The fundamental importance of auditor independence. Importance of audit independence for stakeholders mba. The importance of external auditors independence essay. The external auditor may however, have a commercial interest too. The internal audit activity must be independent, and internal auditors must be objective in performing their work. Audit independence is an absence of interests that create an unacceptable risk of material bias with respect to the reliability of financial statements. In corporate governance, independence is therefore important in a number of contexts. Neither auditors nor our system of regulating their function has ever received the degree of public scrutiny and skepticism as that which followed the violent collapse of enron, and the sorry parade of. The importance of independence and objectivity, which has always been significant for internal auditors, continues to increase among the challenges facing internal audit activities in the constantly changing business environment. Selfinterest, where an auditor could benefit from a financial or other form of interest in or relationship with.
In addition to technical competence, auditor independence is the most important factor in establishing the credibility of the audit opinion. The iaasb considered it equally important that proposed isa 200 revised and redrafted contains an adequate discussion of the premises on which an audit is conducted consi stent with proposed isa 580 revised and redrafted, written representati ons, and a brief summary of the nature of an. To explain how various kinds of conflict and risk can affect the independence of the auditor. Thus, audit committees should consider whether the company. The importance of auditor independence pearse trust. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. The demand for independence and objectivity in professions as noted in independence and objectivity. Essays on auditor independence auditor independence is a cornerstone of the auditing profession and the basic principle that underpins the reputation of the auditing profession in the public eye. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. The importance of auditor independence on an audit bartleby. The audit profession has recognised the following threats to auditor independence, many of which are linked to the provision of nonaudit services. Previous research in accounting shows that client importance can affect sophisticated financial statement users perceptions of auditor independence. Pdf threats to auditors independence edwin c mbwambo.
Secondly, audit independence can help auditors to provide high quality financial report and avoid scandals like enron bomb. Maintaining auditor independence when giving accounting. Despite using the term some 85 times, gagas do not contain an official definition of. Auditor independence is a cornerstone of the auditing profession and the. Underlying the positions historically taken by the sec and its staff is rule 201c4ib of its regulation sx, which prohibits an auditor of a client that is subject to the sec independence rules from preparing, or substantially assisting in the preparation of, the audit clients financial statements. Pdf on oct 1, 2014, lilin liu and others published client importance and auditor independence find, read and cite all the research you need. Auditors analyze a companys financial data to ensure that taxes are paid properly and procedures are maintained to protect the security of a companys financial data. A notion of auditor independence, envisaged as crucial to the credibility of the audit function, resides in professional codes of ethics in much of the western world. Chapter 3 the meaning and importance of auditor independence. The importance of auditor independence standards that are reasonable and yet. Internal audit unit should hold an adequately powerful position to be isolated from such influences.
To understand the difference between practitioner and profession independence. If not, the auditor should decline to perform the audit or terminate the audit, if already in progress. The importance of independence for external auditors. To achieve the degree of independence necessary to effectively. Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the publics trust in the accounting profession. Independence is one of the most important attributes of the accounting profession. Audit committees and auditor independence office of the chief accountant the u. Independence is the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner. This dissertation consists of four interrelated essays concerned with auditor independence and aims to contribute both theoretically to the literature and. They will have less confidence on the trueness of the operation of the company, and the stakeholders will feel betrayed. The auditor maintains hisher independence by not having any conflicts. Auditing is the process of investigating information thats prepared by someone else such as a companys financial statements to determine whether the information is fairly stated and free of material misstatement. Securities and exchange commission has not approved this pamphlet and has expressed no views on its contents.
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