Essay on Audit Independence

The factor that plays the greatest role in determining auditor independence is independence in mind. Auditors may or may not appear to be independent, but if the auditor is truly independent in mind, then the auditor can remain objective and unbiased. The profession should consider tightening the Code of Professional Conduct to address the issue of an audit team member knowing a close friend that holds any position at the audit client. If this scenario arises, the firm can still audit the client, but the audit member with the close relationship won’t be able to be on the audit team.

Auditor Independence contains 9 parts which stablish standards for external auditor independence, so it will have limit conflicts of interest, also contains that an approval requirements for new auditor, audit partner rotation, and auditor reporting requirements. Also restrict auditing organization from providing non audit services for the same clients they audit.

The PCAOB is responsible for providing independent oversight for public accounting firms. Auditors independence job is to limit conflict of interest and monitor the requirements of new auditor approvals. Corporate responsibility require that senior executives take sole responsibility for completeness and accuracy of all corporate financial reports. Last but not least, enhance financial disclosures assures the accuracy of financial reports and

Legitimacy in accounting practices is ensured by the check and balance of having independent auditors from registered public accountant firms reviewing financial practices. The report features eleven sections and these sections pertain to accounting overview, independence of auditors to reduce interest conflicts, corporate responsibility, financial disclosures, tax returns, criminal fraud and various elements of white collar criminal activity (107th Congress

The swath of change brought about by Sarbanes-Oxley is wide and deep. The primary changes resulted in the creation of the Public Company Accounting Oversight Board, the assessment of personal liability to auditors, executives and board members and creation of the Section 404. That section refers to required internal control procedures, which did not exist before Sarbanes-Oxley. Public companies are now required to include an internal control report with their annual audit. The oversight board is responsible for monitoring public accounting companies, and works with the SEC. Based on size, accounting forms undergo reviews every one to three years. In addition to the board reviews, public accounting firms now carry personal liability for their

New levels of auditor independence and personal accountability for CEOs and CFOs are provided by the Act. Additional accountability for corporate Boards, as well as increased criminal and civil penalties for securities violations, increased disclosure regarding executive compensation, insider trading and financial statements are also presented under SOX. (The Institute of Internal Auditors: “The Sarbanes-Oxley Act of 2002: Effect on Audit Committees at Organization Not Publicly Traded.” January 2004. Accessed May 31, 2012 from: http://www.itaudit.org/)

This research paper analyzes the degree of an auditor's liability to clients and third parties under applicable law.

It highlights the importance of auditors applying sensitive and ethical judgments in all their engagements. Members have the responsibility to collaborate with each other to improve the art of accounting, as well as to maintain the public’s confidence. The auditor’s responsibilities are essential to an effective audit process because through planning, auditors should to communicate with each other, be very organized and discuss what and how to do things in order to serve the public. One of the most important parts in auditing is planning, for that reason responsibility is a must.

Title II of Sarbanes-Oxley covers Auditor independence, it contains nine sections all covering different aspects of auditors’ independence. Section 201, Services outside the Scope of Practice of Auditors, details what activities are not allowed to be performed by auditors for a client if they are to be performing an audit for that client. Detailed in section 201 as prohibited in order to maintain auditor independence are legal and expert services unrelated to the audit, any investment advisement, investment banking services, management or human resource functions, internal audit outsourcing services, actuarial services, appraisal or valuation services, financial

A company might decide to establish an internal audit department because an effective and independent internal audit department add values and improve effectiveness of risk management, control, and governance processes. It also helps prevent and detect the frauds.

According to ICAEW, auditor independence mainly refers to the independence of the external auditor from parties that have an interest in the financial statements of the business being audited. It requires having both integrity and an objective manner to the auditing process. In order for the concept to be deemed effective the auditor needs to carry out their work freely. One of the main purposes of auditing is to increase credibility of the entity’s’ financial statements, as they have expressed their own professional opinion on the truth and fair view in accordance with the proper accounting standards used. This is only possible if the audit is made with reasonable assurance that it has come from an independent source and has not been influenced by other parties, such as managers, directors or by conflict of interest.

Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become

The internal auditor have a several roles in the company which is the first one the audit committee need to discharge and restrict the governance responsibilities and the

The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.

This includes the indirect ability of management to influence the career prospects of internal auditors, as well as the budget and planning of the internal audit function. This is exacerbated by internal auditors themselves using the function as a stepping stone to advance their career objectives. It also can be argued that the independence theory may be lost in such a culture, especially if it is combined with people within the organization perceiving internal auditors as partners, thereby subjecting the internal audit function to pressures threatening its independence, rather than recognizing the internal audit function as an independent assurance function("A Critical Analysis Of The Independence Of The Internal Audit Function: Evidence From Australia: Accounting, Auditing & Accountability Journal: Vol 22, No