Auditor Independence Revisited

Questions: 1.Discuss the importance of maintaining the independence in conducting an audit? 2.Identify the threats to the auditors independence in the above case and suggest how these threats might be mitigated? Answers: 1. The main rationale of an audit is to offer company shareholders with a proficient, self-sufficient view regarding if the yearly accounts of the corporation reveal a correct and reasonable view of the fiscal situation of the corporation and if they can be trusted. Independence is the major way through which an auditor shows that he can carry out his job in an objective way (Reynold, Deis, and Francis, 2014). The auditor has to be independent from the customer corporation, in order that the audit estimation will not be persuaded by any link among them (Umar and Anandarajan, 2014). The necessity for independence comes up because in a lot of cases consumers of financial reports and different third parties do not have adequate details or understanding to know what is enclosed in a companys yearly reports. Therefore, they trust the auditors independent review (Gul, Jaggi and Krishnan, 2010). By Sally becoming the CFO, she can influence the opinion of auditors on whether the financial reports of the corporation are properly made or not. As Sally hosted the dinner, there has been non-appearance of independent acts. It is necessary that the auditor not only performs independently, however appears independent also. In case an auditor is actually independent, however one or additional aspects propose otherwise, this could possibly bring about the ending that the audit report does not signify an accurate and reasonable analysis. Independence in appearances will lessen the chance for an auditor to proceed otherwise than independently, which finally attaches trustworthiness to the audit report (Paterson and Valencia, 2011). 2. Since Sally has taken the post of Financial Controller in this year at Madeira 3 of the threats, are: Self-interest hazard: This is a hazard due to a monetary or different self-interest clash, together with a straight or oblique monetary interest in the customer, reliance on the customers audit or non-audit charge, and inspiration to keep hold of the customer. So as to safeguard its future earnings, Madeira audit team will attempt to keep hold of their customers. Instinctively, the more the earnings, the further reliant will the auditors are on the customers, and the more will be the requirement to hold on to them. To keep hold of these clients, the auditing team of Madeira will be hesitant to act in a manner that would harmfully influence the clients interest, although this might mean sacrifice of their own independence. Support and acquaintance threat: This means a threat mostly caused by continuous successive auditing jobs, specifically, auditor term, with the single client. As per Blay and Geiger (2012), the more period of time the auditors carry out auditing for the single clients, the further impairment is to auditors independence. This impairment is because of below reasons: Eventually, an auditor is prone to recognize and perform like the managements believer for the consumers situation more willingly than as an exterior auditor necessary to keep up a sceptical viewpoint. Eventually, an auditor will face a conviction determination condition, that is, a propensity to adhere to one's preliminary conviction even if he gets latest information that opposes or de-validates the source of that trust. An auditor will attempt to keep hold of a business for the continuing task to cover the auditors start-up expenses spent throughout the primary-year job. Therefore, the auditor might be easygoing with the client (Anandarajan, Kleinman and Palmon, 2008). Intimidation threat: This is usually set as per the type of the auditing procedure, wherein the client chooses the auditor and decides the extent of the audit. References Anandarajan, A., Kleinman, G. and Palmon, D. (2008). Auditor independence revisited: The effects of SOX on auditor independence. International Journal of Disclosure and Governance, 5(2), pp.112-125. Blay, A. and Geiger, M. (2012). Auditor Fees and Auditor Independence: Evidence from Going Concern Reporting Decisions*. Contemporary Accounting Research, 30(2), pp.579-606. Gul, F., Jaggi, B.L. and Krishnan, G.V. (2010). Auditor independence: evidence on the joint effects of auditor tenure and nonaudit fees. Auditing: A Journal of Practice Theory, 26 (2), 117142. Paterson, J.S. and Valencia, A. (2011). The effects of recurring and nonrecurring tax, audit-related, and other nonaudit services on auditor independence. Contemporary Accounting Research, 28 (5), 1510-1536. Reynold, J.K., Deis, D.R. and Francis, J.R. (2014). Professional service fees and auditor objectivity. Auditing: A Journal of Practice Theory, 23 (1), 2952. Umar, A. and Anandarajan, A. (2014). Dimensions of pressures faced by auditors and its impact on auditors independence. Managerial Auditing Journal, 19 (1), 99-116.