The main reason for the audit is to provide opinion on financial statements by the auditor which is beneficial to stakeholders involved and take decisions based on these financial statements.
The auditor’s opinion enhances the credibility of the financial statements. Such dependence on audit reports requires audit work to be independent of influences that can cloud his professional judgment.
The concept of independence means that the auditor is working independently carrying out the objectivity of his audit performance.
Threats to Independence
The threats to audit independence arises from the following sources :
- Self-interest threats occur when the financial interest of the auditor and his relatives are involved.
- Self-review threats are a threat when auditor realizes the consequence of past judgment and advice by himself or other staffs of the firm.
- Advocacy threats exist as auditor promotes opinion to the point where objectivity is compromised.
- Familiarity threats occur when auditor develops a cordial relationship with the client
- Intimidation threat occurs due to actual or perceived threats from clients or other stakeholders.
The importance of audit independence is enhanced due to the existence of various threats as mentioned above. However, we shall discuss various bullet points in detail to know about when is independence in audit important.
Importance of audit independence:
Auditors need to be unbiased due to the nature of the work it imparts. The auditors must opine on financial statements as per his capability and within the boundaries of the code of conduct which protects his independent state of mind.
The following are points which describes why the auditor’s independence is very important:
Legal obligation to be independent
The external auditor is bound by legal obligations to be independent. When they do not comply with legal rules and regulations, it could lead to fines, jail time, and the penultimate the collapse or downfall of the audit firm as it is happening with Pricewaterhouse Coopers in India after Satyam Fiasco.
The same thing happened in the case of Arthur Andersen handling Enron where it completely collapsed after the scandal.
To be a watchdog
There is a strong statement included in almost all of the code of ethics issued by the auditing bodies over the world. The primary function of the auditor is to provide opinion on the financial statements in an unbiased manner and not to detect frauds.
However, when circumstances lead to frauds, the auditors must investigate that scenario thoroughly. The auditors should not overlook bad accounting practices rather provide in his audit report how the practices are leading to deviations from the standard applied in the industry. The monetary impact if presented is more appreciable by the stakeholders
Improve the credibility of Financial statements
The regulatory body has made auditors only a qualified person to carry out the assignment of audit and report on the true and fair view of the client entity’s financial statements so that users’ financial statements could rely on financial statements.
There are various stakeholders to the company’s financial statements. They may not have sufficient knowledge of financial shenanigans.
They rely on the auditor’s independence and objectivity to ensure that audit opinion has been expressed to reflect the books of account.
The auditor’s opinion creates the relationship of trust between the auditor and the stakeholders which leads to the credibility of financial statements.
The opinion shall be credible and for this to happen, the independence and objectivity aspects of the audit plan plays a huge role.
Hence, requirements are there for auditors to be independent of influences that could cloud the professional judgment of auditors.
To improve objectivity.
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.
Independence and objectivity go hand in hand. When the auditors are independent or in a free state of mind, they can easily work in an unbiased manner contributing towards higher objectivity and professional achievement.
To protect the auditor profession worldwide
Just like the doctors who are trusted to protect lives, the auditors are in the line of work to protect the stakeholders from the corruption of management, unfair accounting practices, and so on.
The auditors are highly regarded in the money world conserving and protecting the interests of all stakeholders involved in the entity.
Written by hdadarkpassenger