Auditor’s Independence – Application, Threats, And How to Improve it

Auditor’s independence refers to an independent working style of the auditor being unbiased, unfettered, uninfluenced, and being fully objective in performing audit responsibilities.

The concept of independence means that the auditor is working independently carrying out the objectivity of his audit performance.

Auditor’s independence refers to the state being of an auditor where he is fully free to exercise his professional competence and knowledge in the audit task.

There are two types of auditors: internal auditors and external auditors. The meaning of independence differs in both of these auditors.

Internal auditors are concurrent auditors and they work in tandem with the workflow of the enterprise. Independence here implies independence from parties whose status may be harmed by the outcome of an internal auditor.

The issues that internal auditors face is inadequate risk management, governance issues and so on.

External auditors are statutory auditors out of love for compliance with the regulations and in public sectors, hired by the public accounting bodies.

Independence here implies independence from parties that have an interest in results published in the financial statements of the entity.

Application of Independence

Independence has transformed and became a matter of compliance. Various regulations are developed to ensure independence from auditors such as regulations related to conflict of interest, compliance with non-audit services to clients which are taken on the record before the appointment of auditors, and so on.

There are regulations that prohibit auditors from auditing the financial statements of firms closely associated with their family members. The family is defined in such regulations. Independence is based on rules

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Threats to Independence

There are various imposing threats to both internal and external auditors as discussed below:

  1. The familiarity between the board and the incumbent auditor.
  2. The familiarity between audit committee board members and incumbent auditor.
  3. Findings with respect to ethical requirements.
  4. Audit tenure of the firm/individual auditor and the rotation history sheet

A short table of factors impairing the independence of auditors are given below:

Type of threat created (i.e. result of factors)Factors impairing independence
Self-interest threats and intimidationBusiness relationships
Self-interest threat, familiarity threat, and intimidation threatEmployment with audit client
Self-interest threat, familiarity threat and Self-review threatPrior work with audit client
Self-interest and familiarity threatGift and hospitality
Self-interest threat, familiarity threat and intimidation threatFamily and personal relationships
Self-review threatsAppointment of temporary staffs
Self-review threats and advocacy threatsNon-audit services to audit clients

Independence vs objectivity

Independence refers to the state of having a free mind to do tasks without being impacted. Independence is the freedom from the circumstances that could threaten the ability of audit work and senior auditors’ ability to complete the audit in an unbiased way.

To achieve independence, the senior auditor must have direct and unrestricted access to senior management and the board. The senior auditor must report to the authority that allows the internal audit to complete its responsibilities.

Objectivity on the other hand requires the internal auditors to make unbiased decisions to perform internal audits in the way the internal auditor believes that audit shall be conducted and no quality compromises are to be made.

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The foundation of objectivity also requires that internal auditors do not delegate their judgment on audit matters to others.

Improving auditor’s independence:

  • The organization shall hire audit-only firms i.e. those firms with experience and practice in large-scale auditing. This is meant to say, area of audit expertise may not develop well in non-audit firms. So, the audit only firms whose sole objective is to provide auditing services with ample experience in auditing shall be only appointed.
  • The tendering process shall be promoted in the appointment of audit firms. The tendering process means inviting applications from the group of auditors interested in auditing the entity. The auditor’s application shall be weighed based on merits and the firms having the most merits shall be appointed.
  • The organization can be subject to implement mandatory audit firm rotation. Further, the maximum period for which the audit firm can be appointed cannot exceed 5 years. After 5 years, the separate audit firm shall be hired with no relation to past audit firms in terms of relation or any interests. This will make sure that during each five-year block, new eyes will lay upon the books of accounts resulting in newer observations and assessing fraud risk and management.
  • The audit consignments requiring joint audit enhances the independence of the audit. A joint audit is an audit whereby two or more auditors share the auditing responsibility of an entity. The joint auditors divide the business aspects of the entity and provide opinions on the aspect they have audited. Joint auditors keep all auditors in check and enhance the performance level which in turn encourages the level of independence among them.
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