Auditor’s Independence

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.

Independence of internal auditors

Internal auditors are concurrent auditors and they work in tandem with the workflow of enterprise. Independence here implies independence from parties whose status may be harmed by the outcome of internal auditor. The issues that internal auditors face are inadequate risk management, governance issues and so on.

Independence of external auditors

Generally, 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 financial statements of the entity.

Threats to Independence

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

  1. Familiarity between board and incumbent auditor.
  2. 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

Ways to improve auditor’s independence

After detailing background above, following are the ways by which auditor’s independence can be enhanced. These techniques ought to be mentioned in company laws or auditor’s ethics requirements and other regulations for strict adherence and improving independence.

  • Mandatory audit firm rotation

The requirement that each year appointment would be subject to ratification by shareholders and board of members shall be put on. Further, the maximum period for which the audit firm can be appointed can not exceed 5 years.

Related article  What are the audit assertions?

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.

  • Appointment of joint auditors.

A joint audit is audit whereby two or more auditors share the auditing responsibility of an entity. The joint auditors divide the business aspects of entity and provide opinions on the aspect they have audited.

However, there are certain aspects in conundrum meaning common in all, where they have to show more work and test more of internal control to conclude and perform the auditing objective. Joint auditors keep all auditors in check and enhance the performance level which in turn encourages the level of independence among them.

  • Appointment of audit only firms

The practicing firms have different avenue such as providing consultancy services, taxation services and non-audit services. This results in hiring of staff having knowledge in various subject matters. If the firm is not big, the employees tends to share the responsibilities and perform all these tasks.

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. They would provide better auditing services and well-equipped with all developing audit circumstances.

  • Requirement of tendering process

Tendering process shall be promoted in the appointment of audit firms. Tendering process means inviting applications from the group of auditors interested in auditing the entity.

Related article  Main Objective of Financial Statements Auditing

The auditor’s application shall be weighed based on merits and the firms having the most merits shall be appointed. Such processes are widely used in public sector entities where audit firms are invited to tender their bid showcasing their strength and abilities to take the audit.

To select the firm, the entity already has an audit committee that shall look onto all the applications. The due decision is made in consultation with the chairman of the company.

  • Restrictions and limitations on providing non-audit services

The problem remains that audit firms do provide non-audit services. However, further restrictions and limitations on providing non-audit services can reinforce auditor independence. Such restrictions and limitations would address self-interest conflicts and self-review threats to auditor independence inherent in the model of business of audit firms.

The careful restrictions imposed would also enhance the perception of auditor independence. This will result in trust in audit firms. There are various ways to impose restrictions and limitations. One way would be to take pre-approval on providing non-audit services from the audit committee.

For small companies, it is highly beneficial to hire audit firms to provide non-audit services rather than random advisors. Further, the regulations can be made to reflect that non-audit fees cannot exceed 20% of total fees including audit fees.

Written by hdadarkpassenger