What impairs the independence of an auditor?

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 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 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.

Factors impairing the independence of auditors

Before we begin on details, here are what these factors actually create problem in in general

Factors impairing independenceType of threat created (i.e. result of factors)
Business relationshipsSelf-interest threats and intimidation
Employment with audit clientSelf interest threat, familiarity threat and intimidation threat
Prior work with audit clientSelf-interest threat, familiarity threat and Self-review threat
Gift and hospitalitySelf-interest and familiarity threat
Family and personal relationshipsSelf-interest threat, familiarity threat and intimidation threat
Appointment of temporary staffsSelf-review threats
Non-audit services to audit clientsSelf-review threats and advocacy threats

Business relationships

Business relationship involves common commercial or financial interest between the auditor and client. This shall create self-interest or advocacy threats towards audit independence. So, the business relationship shall be restricted as much as possible.

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Let’s take an example: The wife of auditor is the supplier of the client. The auditor here has indirectly created business relationship between him and the client.

Suppose, he comes to a finding of the client where he has been slowly increasing the dealings with other supply- a competitor of his wife while auditing the financial transactions. This shall clearly hinder his ability in auditing the books.

Employment with audit client

There are various firms of employment as employment of audit firm’s current and former members by the audit client, employment of close relatives of audit members and staff and employment of senior auditors by audit client.

These employment relationships give the impression that the audit is not performed independently. Such relationships create self-review threats, familiarity threats, and intimidation threats. So, the regulators shall impose certain restrictions on such employment relationships.

Prior work with audit client

The senior personnel may have had prior work experience with the audit client. This ought to create familiarity and self-interest threats if the work experience resulted in good relationships between them. Such association may create or help in the longer audit tenure of the audit perform. This will in turn impact the audit independence and objectivity.

Gift and hospitality

The auditors are not to accept gifts, fees or anything from auditee. The acceptance of such gifts may impair the auditor’s objectivity.

The internal auditors are also required to immediately report any such offer to their supervisors if any. Such gift and hospitality ought to create familiarity and self-interest threats.

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Family and personal relationships

There may exist family and personal relationships between member of audit team and audit client. This creates self-interest and familiarity threats towards audit independence. Immediate family relationships contain direct linear relationship and direct vertical relationships like brothers, sisters and spouse.

The regulations shall clearly put restrictions on the acceptance of such audit assignments. However, it would be difficult to impose restrictions on distant relationships and personal relationships. The regulations impose other tactics in reducing the influence of such relationships on audit independence.

Appointment of temporary staffs/experts

Generally during the audit season, the work load increases and audit firm may be forced to hire some temporary help. There are also instances where the auditor has to take help of experts in the line of work.

Although, these staff and experts ought to be professional as much as possible, they are temporary and may not understand the business of audit clients as much. The work of theirs would be reviewed regularly so that the audit scope and performance of work is going as designed early in the appointment.

Non-audit services to audit clients

Audit firms do provide non-audit services. 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. Non-audit services are therefore is to be kept in check like limiting the amount of revenue the auditors can generate from giving non-audit services to clients and pre-approval from the audit committee and so on.

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