importance of independent auditor

I have been asked to address the importance of the role of the auditor to the capital markets; the role of the PCAOB in investor protection; and to highlight a few issues that the Board is considering. Doubts are sometimes expressed regarding the independence of external auditors. Auditor independence tends to be an extremely important component across the audit process, because of the reason that it directly influences the judgment that is put forth by the auditor. Types of Audits: 14 Types of Audits and Level of Assurance. The auditors are highly regarded in the money world conserving and protecting the interests of all stakeholders involved in the entity. The primary function of the auditor is to provide opinion on the financial statements in an unbiased manner and not to detect frauds. There are numerous different reasons as to why auditor independence tends to be pivotal for the audit process, to say the least. (Definition, Explanation, Journal Entry, and Example). When faced with a perceived independence issue, an appropriate consideration is materiality. They may not have sufficient knowledge of financial shenanigans. 1213 Words 5 Pages. The Independent auditor’s report is the general statement from the auditor stating that whether the financial records are in maintenance according to the standards of the Generally Accepted Accounting Principles (GAAP). Role of the Independent Auditor. The auditor’s opinion creates the relationship of trust between the auditor and the stakeholders which leads to the credibility of financial statements. As a matter of fact, the audit process is supposed to be taken seriously by the organizations because of the high level of dependence it holds for other relevant stakeholders that are involved in the accounting process. However, when circumstances lead to frauds, the auditors must investigate that scenario thoroughly. Every certification that the auditor does perform requires him to be objective. It requires auditors to make effective communication as and when required by it as per legal compliance or otherwise. Twitter. … This video is unavailable. Why is the independence of an auditor important? The short- and long-term effects of independence violations to the auditor and the audit firm are quite obvious: sanctions from the SEC and professional organizations, lost revenues, lost opportunities to cross-sell nonaudit services, damaged … Importance of audit independence: Auditors need to be unbiased due to the nature of the work it imparts. Auditor independence directly impacts the decision that is issued by the auditors. •To understand the difference between practitioner and profession independence. Therefore, independent auditors examine the financial records of a company that he/she is not affiliated with. In this regard, it is important for them to stay open to possibilities of fraud, and improper reporting, that can deliver the required results. Additionally, there is no doubt to the fact that the Audit Report is supposed to be used by numerous stakeholders around the organization. Your input on these issues is extremely important to the Board. Therefore, this causes them to suffer significant financial losses, because of the lack of independence of the auditor.eval(ez_write_tag([[580,400],'wikiaccounting_com-box-4','ezslot_10',105,'0','0'])); Therefore, in order to keep the interests of the shareholders and investors intact, it is quite important for auditors to maintain an independent approach. An independent auditor is a person with an accounting credential who does not have any affiliations with the company upon which he or she offers an opinion. Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the public's trust in the accounting profession. Consequently, it is very important for auditors to remain independence in body and mind when conducting an audit based on a public limited company. Objective of audit is to pursue and attain its various corporate objectives. Linkedin. There are numerous different reasons as to why auditor independence tends to be pivotal for the audit process, to say the least. Importance of the Opinion of Independent External Auditor. It gives him the ability to base his opinions without any biases, or external pressures. In recent months, there have been plenty of service “hiccups.” In one example, WageWorks’ audit committee in October 2018 fired KPMG as its auditor following an independent investigation of WageWorks’ accounting practices, financial statement reporting, and internal control over financial reporting for fiscal years 2016 and 2017. Importance of Audit Evidence. Independent auditors are often used for audits to increase the integrity of the audit by ensuring that conflicts of interest do not taint it. Auditor independence ensures an unbiased perspective and allows financial statements to be more reliable. In other words, are the statements reasonably accurate. • Assurance provided by Auditors is a key quality control on the reliability of information. Independent auditors serve their clients in numerous ways one of which is to render an opinion on whether or not the financial statements prepared by a client are fairly stated. With each new fraud and ‘audit failure’ divulged in the financial press, more pointed questions are being asked about the value of the independent audit. Auditor independence allows the auditor to adopt an integral approach, and question anything and everything that he believes should be scrutinized within the company. An independent auditor is a certified public accountant (CPA) or chartered accountant (CA) who examines the financial records and business transactions of a company with which he is not affiliated. (2) Credibility of financial information • An unqualified report by independent external auditors on the account should give credibility and enhance the appeal of the company to investors. Although many recognize that the audit profession plays an essential role in the functioning of the global capital markets and adds value to the roles played by other stakeholders in the financial reporting process, … This restores their confidence, and therefore, gives them a reason to invest in the company. ” According to Wikipedia (2011a), auditor independence refers to “an attitude of mind characterized by integrity and an objective approach to the audit process”. Auditors need to be unbiased due to the nature of the work it imparts. An independent auditor is typically used to avoid conflicts of interest and to ensure the integrity of performing an audit. Watch Queue Queue. The threats to audit independence arises from the following sources : The importance of audit independence is enhanced due to the existence of various threats as mentioned above. 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. •To explain importance of auditor independence and practical implications for auditor in meeting demands of audit role. 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.eval(ez_write_tag([[300,250],'wikiaccounting_com-banner-1','ezslot_1',106,'0','0'])); 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. Submitted. Such dependence on audit reports requires audit work to be independent of influences that can cloud his professional judgment. Consequently, shareholders have high demand for audit independence. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. Auditors contribute in Both internal as well as independent audit system in different but important ways. (Definition, Explanation, Journal Entry, and Example). The importance of audit independence is enhanced due to the existence of various threats as mentioned above. It provides the auditor’s expert opinion as to whether decision makers should feel safe in … Hence, it is vital for them to take this engagement seriously so that it does not cloud their judgment because of a lack of independence. First and foremost, auditors must appear independent in order for users of financial information to have confidence in the opinion given and the quality of the information audited. In the case where the auditor independence has been compromised upon, and they are not able to give a free and fair view regarding the company, it results in investors losing their money. It is important to note that independence of the auditor enables the users of the financial statements to trust the validity of the results of the financial audit. In this regard, it is also important for them to realize how crucial it is for the auditor to be independent and execute the process in an effective manner. Independence became an issue after corporate scandals such as Enron. In conclusion, auditor independence remains an important element when individuals are conducting an audit. Also, the … It is aimed at for-profit organizations, but public confidence in financial statements is important in all sectors. Objectivity requires auditors to be disciplined and have a balanced approach to all the audit performance tasks. The same thing happened in the case of Arthur Andersen handling Enron where it completely collapsed after the scandal. L'inscription et … Auditor independence simply means the ability of the auditor to adopt an approach with integrity and objectivity within the audit process. External auditors are preferred to internal auditors because they have no … The author Gupta (1999) is of opinion that is auditor is not independent of management; his opinion would mean nothing to shareholders, prospective investors, bankers, government agencies, and others who are concerned with the financial statements o… About this article -Written By: Jane. However, we shall discuss various bullet points in detail to know about when is independence in audit important. To achieve this, it is important for the public to trust and have confidence in the work of an auditor. Fall 2013 Section 04 September 17, 2013 – Case #1: The importance of being independent (by Deloitte) Discussion Questions One of the key roles of the external auditor is to protect the interest of the public. What is a prepayment? 20/11/2009 - 9:30am The economic meltdown of the past two years has seen unprecedented redemptions from funds and other investments and a rush to liquidity - bringing to light a string of scandals including frauds, Ponzi schemes and other types of embezzlement that had been hidden during the boom years. It is required that the auditor should be independent of their client. Back to … Auditor’s independence refers to the independent working style of the auditor being unbiased, unfettered, uninfluenced, and being fully objective in performing audit responsibilities. They rely on the auditor’s independence and objectivity to ensure that audit opinion has been expressed to reflect the books of account. Audit independence is important so that auditor’s opinion can be impartial, unbiased, free from any undue influence or conflict of interest to override the professional judgement of the professional accounting (Rutgers Accounting Web, 2015). Self-interest threats occur when the financial interest of the auditor and his relatives are involved. But sometimes the client may influence the auditor, which results in the issuance of the incorrect report by the auditor. •To define auditor independence. There is a strong statement included in almost all of the code of ethics issued by the auditing bodies over the world. This also includes obtaining reliable financial reporting on its operations, prevention of fraud and misappropriation of its assets, and minimizing its cost of capital. The concept of independence means that the auditor is working independently carrying out the objectivity of his audit performance. Therefore, all steps should be taken by the engagement partners, as well as the auditors to ensure that there is no event that hampers the ability of the auditors to give a free and fair view regarding the financial statements of the company. They do not have existing relationships with any other employees, do not have a feel for how things have always been done and do not have an interest in protecting Joe in accounting or Suzy in management. Besides checking financial statements for accuracy, an auditor reviews a company's accounting methods and procedures to substantiate that the company follows steps to prevent fraud. What is a prepayment? The monetary impact if presented is more appreciable by the stakeholderseval(ez_write_tag([[336,280],'wikiaccounting_com-medrectangle-4','ezslot_0',104,'0','0'])); 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. 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