Two important foundations define auditors‘ work as credible: objectivity and independence. Here we will discuss audit objectivity and the situations where it can be impacted.
Meaning of Objectivity
The institute of internal auditors defines objectivity as an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made.
Every certification that the auditor does perform requires him to be objective. Objectivity means that the auditor shall perform a balanced assessment of all relevant circumstances.
Objectivity requires auditors to be disciplined and have a balanced approach to all audit performance tasks. It requires auditors to communicate effectively as and when required, be it per legal compliance or otherwise.
When the auditor finds something that may impact his opinion or other people involved in the audit, this hinders the audit and impairs objectivity.
Interpretation of Impairment
Impairment does not necessarily mean auditors are involved in fraud. Anything that impacts objectivity is termed as impairing. Auditors may have a conflict of interest in audit assignments impacting the audit’s objectivity.
Other aspects of impairment include the imposition of restrictions on access to records, personnel and resource limitations, and so on. These are discussed below:
Main nature of the impairment
- Conflict of interest: The auditors are not to accept gifts, fees, or anything from the auditee. The acceptance of such gifts may impair the auditor’s objectivity. Internal auditors must also report any such offer to their supervisors immediately. If friends and family are part of the auditee, this will impair the objectivity of the auditee, resulting in sometimes conflict of interest. Providing consultancy services to auditees also creates a conflict of interest
- Scope Limitation: This limitation stops the auditor from accomplishing its plan and schedule. Scope limitation includes a restriction to approved staffing plans, work schedules, and access to records and personnel, among other things.
Circumstances impairing objectivity
Situations other than relating to audit evidence can lead to impairment of objectivity. This would result in bad decision-making. There are various circumstances that can impair the objectivity of auditors as discussed below:
- Prior Work: The auditors may be hired from within the company for an internal auditor position. Such auditors have worked there for years, developed a good rapport with management, and made certain friends among the company personnel. This may bring a perfect understanding of the client’s business but comes with the fact that such friendliness would hamper his ability to perform audit tasks completely. Let’s take an instant where the internal auditor is doing an audit of the accounts receivable department, and he finds certain mistakes are made, which are big and are made by an employee who is his friend. The internal auditor has to follow audit guidelines here but this circumstance will certainly harm his objectivity. The possibility of letting the matter slide cannot be ruled out, which is not good for the audit itself.
- Temporary auditors: Internal auditors are not permanent but of a temporary nature. Company laws in various countries require the company to hire internal auditors for up to 5 years with ratification yearly by the board of directors and shareholders. This may hamper the internal auditor’s mindset in securing the premises of remaining the auditor for several years. There are also circumstances where subject matter specialists are used for a short period. Although professional as they would be, since they are temporary, they may not know the business aspects of the enterprise very well. Let’s take an instance, where the valuation report of the building is to be prepared by engineers. This is a temporary assignment. In the shortest duration, the engineer has to appraise the building per the local and statutory circle rates. However, due to timing constraints, he may not include all the building parts in his report. This is how the temporary appointments of subject matter experts may also hamper the internal auditors’ work as they would be relying on this report for their work as well.
- Self-interest threat: The auditor’s objectivity can be impaired by brewing self-interest. Such impairments occur out of direct or indirect interest in a client. The auditor’s fear of losing a client can also threaten self-interest.
- Self-review threat: Auditors face the most difficult work as they have to review their work by themselves. Peer reviewing in the audit industry is done on working papers and others and not directly on clients’ works. Peer review happens for a cluster of years and the internal auditor. The auditor has to however perform a self-review by himself at the spot of the client’s workplace. The auditor must also review previous audit or non-audit assignments and may come into a situation where he has to challenge such reports to arrive at audit conclusions.
Written by hdadarkpassenger