Legislation had to be put in place that made sure that the auditing firms could only either offer auditing services or consultation services to a corporation (Kim, Nosfinger, Mohr, 2010c). An independent auditor is a certified public or chartered accountant who examines the financial records of a company with which he is not affiliated. Independence is an important auditing standard because the auditor adds justification and credibility to financial statement even when there are no material misstatements or omissions in the financial statements prepared by management (okolie 2007). 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. Divisions 3, 4 and 5 of Part 2M.4 and section 307C of the Corporations Act 2001, APES 110 Code of Ethics for Professional Accountants, sections 290 and 291 – applicable to all members of professional accounting bodies, Auditing standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements, Auditing Standard ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information. The people who pay their salaries and keep their team funded and staffed don’t understand what auditors do and therefore set the internal audit shops up for audit failure. This means that there is no conflict of interest and no reason for auditors to not comply with the financial accounting standards. 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… The primary role of an external auditor is to present an independent and unbiased audit report of a firm’s financial position. Independence of external auditors. This places an important responsibility on an auditing firm and highlights the importance of safeguarding its independence in order to build a strong reputation. Internal Audit Independence. Accordingly, the Statement also sets forth principles relating to the oversight of an external auditor’s independence by a body or bodies within an entity’s corporate governance structure. We use cookies to give you the best experience possible. Essay, Ask Writer For http://www. The purpose of an audit is to express an opinion that is objective, impartial in judgement and reliable for those who are using an audit opinion to make decisions about investment or for regulatory purposes. When faced with a perceived independence issue, an appropriate consideration is materiality. After all, that is the main purpose of their job, to carry “out checks on the figures so as to establish whether the accounts show a true and fair view of the results and the financial position of the entity” (Gillespie, Lewis, Hamilton, 2004:221); if external auditors do this independently, then disasters such as before can be avoided. Enron Corporation was an energy company in the US who doctored their books to show large incorrect profits using “sophisticated and complicated methods to generate inflated reported earnings” (Kim, Nofsinger Mohr, 2010d:36). Audit committees should not approve engagements that remunerate an independent auditor on a contingent fee or a commission basis. co. uk/money/article-1257724/Will-Lehman-Brothers-Repo-105-allegations-bring-Ernst–Young. How did you score on the test? Joint accounting bodies: Independence Guide. An external audit provides an impartiality that the in-house internal audit team cannot. However arguments are still being poised as to whether this is a necessary exercise as internal auditors may not be entirely independent of their employer. Change style powered by CSL. Please ensure JavaScript is enabled. You may consider these examples to be great works of fiction, but in fact they are taken from case findings from the quality review program. It is critical for an auditor to be independent of the firms they audit due to many reasons. We have detected that JavaScript is disabled on your browser. Ernst and Young were accused of knowing, supporting and advising Lehman on its “Repo 105” transactions which led to the ultimate collapse of the bank. Independence here implies independence from parties that have an interest in results published in financial statements of the entity. If auditors do not remain independent, they An auditor who fulfills these criteria is regarded as independent. The auditing firm then also became defunct after a jury ruled against them for obstructing justice; after they had shredded documents of their auditing of Enron (Thomas, 2002). Although internal audits are important for an organization, external audits increase the chances of uncovering potential compliance risks. For example, Salehi (2009) examined non audit services and audit independence. If it is the duty of an auditor to express his independent opinion on the financial statement furnished to him, the data produced by the accounting system alone (e.g., journals, ledger, manuals, worksheets) are not sufficient to base his opinion. An external audit provides an impartiality that the in-house internal audit team cannot. time. The RCA engaged has no public practice certificate or public liability insurance. The expense of hiring an external auditor could protect your future. This has led to the new legislation that has emphasised the importance of external auditors to be independent from the corporations they audit. An external audit can also pinpoint where your compliance efforts may be lacking. Independence requires integrity and an objective approach to the audit process. A practitioner who is not a qualified Registered Company Auditor (RCA) employs an RCA to sign off on an audit engagement that requires an RCA sign-off. In Australia, there is an abundance of literature on auditor independence. Why Is it Important for a Company to Have an External or Internal Audit System?. So what is independence and why is it at the cornerstone of every audit that is conducted? Auditors are expected to provide an unbiased and professional opinion on the work that they audit. dailymail. The independence of external auditors had been brought into question because of the potential influence the corporations had on its auditors. Learn more. 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. While internal auditors can’t help but be personally invested in the outcome of their findings, there are no concerns over repercussions for the external auditor if the organisation is unhappy with their report. Generally, external auditors are statutory auditors out of love for compliance with the regulations and in public sectors, hired by the public accounting bodies. http://goingconcern. Therefore the lack of auditor independence may impact adversely on an audit in many different ways. External Audits External audits are an objective, independent, third-party review of the controls and reporting procedures of a public or private company. External auditors are more impartial than your payroll employees and have a fresh perspective that nobody else in your company can offer. com/professional-scientific/accounting-tax/951680-1. For more information, contact us today. (2002) “Called to Account”. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them. com/2010/12/cuomo-checks-ernst-young-off-the-hit-list [Accessed 7/2/2011] Thomas, C. B. Help, Use multiple resourses when assembling your essay, Get help form professional writers when not sure you can do it yourself, Use Plagiarism Checker to double check your essay, Do not copy and paste free to download essays. The concept requires the auditor to carry out his or her work freely and in an objective manner. wikipedia. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. on the fundamental importance of actual and perceived independence. Importance of an External Audit While internal audits are important, and many organizations conduct them regularly, they cannot be truly impartial because people on the inside of an organization are naturally biased. Independence here implies independence from parties that have an interest in results published in financial statements of the entity. A sole practitioner employs a staff member who holds a public practice certificate. If, however, there is a significant financial connection, other than through the reasonable fees paid for the auditing services, or a connection via a personal relationship, actual independence may be impeded. A firm with three partners has one partner responsible for the compilation of accounts and another partner responsible for signing off the audit. The sole practitioner prepares the accounts and the staff member signs off on the audit of a superannuation fund. Therefore it is extremely important for external auditors to do their jobs professionally and independently so that these problems can be avoided. Threats to Independence. (2010a) Corporate Governance, 3rd Edition, NJ: Prentice Hall Kim, K. A. , Nofsinger, J. R. , and Mohr, D. J. The practice guide is intended to point to the roles of audit (without differentiating between external and internal), methods by which those roles can be fulfilled, and the essential ingredients necessary to support an effective audit function. Here’s a prescription for some resources which may help you assess your own independence, both actual and perceived: Josephine Haste is CPA Australia’s manager for quality review education. Therefore if the auditor’s report was not particularly favourable for the CFO, the CFO could decide to fire them and choose an auditor who would be willing to express a much more favourable view of the financial accounting of the corporation. http://www. Auditing is a method of testing the effectiveness of internal business controls and is itself a control … The audit profession has recognised the following threats to auditor independence, many of which are linked to the provision of non-audit services:- Self-interest threat: Where an auditor is financially dependent on the audit client or where an auditor or someone closely associated with him has a financial or other interest in the audit client. There are many advantages of external audit procedures that can help protect your business. Healy, P. M. , Palepu, K. G. (2003) “The Fall of Enron”, Journal of Economic Perspectives, Vol. These are the legal requirements that impose the greatest risk to an accounting practice. regulations on auditor independence exist in many individual jurisdictions, these regulations may differ in approach, scope, terminology and substance. Professional Development: The independence of the auditor the code of ethics has listed own by bodies in range of the “risks concerning actual and perceived independence to the external auditors… If you know that the auditor for ABC Company keeps a close, personal relationship with the CEO CEO A CEO, short for Chief Executive Officer, is the highest-ranking individual in a company or organization. Internal controls are vital for protecting a company’s financial and physical assets. wikipedia. The auditor’s opinion is suspect without independence and the third parties think that there is no need for external auditors without independence (Salehi, 2009). Other than the two examples previously mentioned above, there have been many other corporations that experienced adverse reactions due to bad accounting practices and the lack of auditor independence. 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 facts and that they are free from any internal or external interference or obstruction with functional accountability being to the board, either directly or through an audit committee. Examples of these include Tyco (2002), Xerox (2000) and AOL (2002). Credibility. External Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company. Their auditors, Arthur Andersen (formerly one of the ‘Big 5’ auditing firms) received blame for failing to recognise the fictitious accounting methods carried out by Enron. Looking at the relationship between the auditor and the client, every individual may perceive an arrangement differently, and this is where professional judgement comes to the fore. Independence of the internal auditor means independence … For an audit report to be worth its salt, the auditor who prepared it must be seen to be free of any undue influence. Independence places a presumed relationship between a business and its external auditor. This is where the importance of external audit proves its worth to an organisation. Perhaps even more concerning is that when a breach of independence is reported, many members don’t fully understand that it may be illegal not to satisfy the requirements of actual and perceived independence. You can get your custom paper from It used to be the duty of the corporation’s CFO to employ an external auditor. Auditing small entities - regional workshop 2017. Recent challenges of the audit independence assumption have forced the accounting profession to consider ways of improving the audit report’s credibility (Shockley, 1981, p.785). The concept of independence occurs at several points in the Strategic Business Leader (SBL) Study Guide.It is listed as one of the key underpinnings of corporate governance in Section B5, it is a crucial quality possessed by both internal and external auditors (Sections F2), and it is included in Section A3 as an ethical quality. A small firm accepts a large audit engagement where the fees associated with the audit will comprise 85 per cent of the total fee revenue for the firm. Auditor’s independence relative to his relationship with interested groups. The Importance of External Auditor’s Independence According to Gillespie, Lewis and Hamilton (2004:221) an audit is: “a scrutiny of the accounts by a qualified auditor who carries out checks on the figures so as to establish whether the accounts show a true and fair view of the results and the financial position of the entity.” regulations on auditor independence exist in many individual jurisdictions, these regulations may differ in approach, scope, terminology and substance. Perceived independence is where shades of grey creep in to the normally black-and-white world of audit. For each example given below, state whether you think the accountant is independent or non-independent and, if the accountant is non-independent, whether that non-independence is actual or perceived. Independence requires integrity and an objective approach to the audit process. billion in regular expenses as capital investment (Tran, 2002). Generally, external auditors are statutory auditors out of love for compliance with the regulations and in public sectors, hired by the public accounting bodies. The reliability and validity of an opinion rely on the independence of the auditor. I run into more than a few internal auditors who struggle with independence. This provides practical, case-based scenarios to help practitioners assess issues of independence that they may encounter. In reality there are many factors which impair auditor independence and some studies concentrated on only one factor. However it is a legal requirement for all public companies to be audited by an external auditor. All you need to do is fill out a short form and submit an order. allbusiness. The independence of external auditors is crucial to a correct and thorough appraisal of an entity's financial controls and statements. As a result, many organisations are likely operating under loss versus the profit they’re imagining. However WorldCom showed the importance of internal auditors. The debate surrounding the role of external auditors focusses in particular on auditor independence. In financial terms, this means that the auditor should not have any dependency on the client by either personal affiliation or financial reliance. What's the golden age to become an entrepreneur? Contingent Fees. Due to highly publicized audit failures, the topic of auditor independence has gained increasing attention from academics, regulators, and practitioners around the world in recent years (Hope & Langli, 2008). 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