Independence and objectivity lay the foundation for audit performance. It provides audit credibility and trust it deserves. A coin has two sides. Just like that audit has two sides: independence and objectivity. Without one, the other would not be complete.
However, just like sides in coin, independence, and objectivity aspects work differently. ICAEW however in its definition of independence mentions objectivity as part of independence. It defines independence as an attitude of mind characterized by integrity and objective approach.
However, the latest definitions by various regulatory bodies define independence as the independence of mind and appearance and characterized by integrity.
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.
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 the audit performance tasks. It requires auditors to make effective communication as and when required by it as per legal compliance or otherwise.
When the auditor finds something that may impact his opinion or other people involved in the audit, this creates a hindrance to audit and impairs objectivity.
Application of Independence and Objectivity in real life
Over the years, independence has transformed and became a matter of compliance. Various regulations are developed to ensure independence from auditors such 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
On the other hand, objectivity has become a way how the auditor conducts himself. It is associated with the reasons and motivations of auditors and their certain decisions and behaviors.
It is concerned with processes and principles behind the workings or audit plan being conducted. Both independence and objectivity go hand in hand however.
Since the regulations cannot make all the rules to ensure independence which in itself is not practical, auditors’ objectivity becomes a focal point in that scenario.
Let’s take an example, Mr. Cristiano Rodriguez took an audit of Rodriguez Ltd where Adriano Rodriguez is the chairman, he is also the second cousin of Mr. Cristiano. Now, there seems to be a relation between the auditor and the client. However, they are distant relations.
The regulations cannot exclude all the family members from not to take audit rules. So, the auditor is assumed to be independent here and the professional work and approach towards audit specifically the objectivity will define how much the independently the auditor has gone through the work.
Are internal auditors independent?
This question clarifies and goes in depth to explain the difference between independence and objectivity.
If you asked stakeholders of the company, that if the internal auditors are hired by the entity and their appointment is subject to ratification by the board of directors, would they be considered independent or objective in their auditing?
As quasi-employee of the entity, the senior auditors and nor the staff can be technically independent of the entity.
Yet, it is required that internal audit activity shall be free to perform its responsibilities. The board of directors shall also make sure that the efforts of internal auditors are not influenced by the decisions of one or more senior executives of the organization.
The internal auditors can show their independence through their objectivity i.e. the process that goes behind performing their audit tasks. The internal audit shall be independent and must be objective in performing their work is the main foundation on which audit is based upon.
Independence is the freedom from the circumstances that could threaten ability of audit work and senior auditors’ ability to complete audit in 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 authority that allows internal audit to complete its responsibilities.
Objectivity requires the internal auditors to make unbiased decisions to perform an internal audit in the way the internal auditor believes that audit shall be conducted and no quality compromises are to be made. The foundation of objectivity also requires that internal auditors do not delegate their judgment on audit matters to others.
With regards to external auditors, they come with much more restrictions and prohibitions to ensure the highest level of independence remains with them right from the appointment.
Most countries have regulations that they cannot do an audit of relatives, interested firms, or the firm where they provide non-audit services. This also ensures the highest level of professionalism and objectivity is being met.
Written by hdadarkpassenger