The Independence Of Internal Audit

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.

The company should hire it’s own internal auditor’s to ensure that the staff understand the company’s accounting procedures. This also helps the external auditor as it give the external auditor another viewpoint when assessing fraud risks. The internal auditors are apart of those charged with governance and that helps take the pressure off of the external auditor if a fraud should be discovered.

The point in which an auditor violates the independence rules and guidelines would primarily be conflicts of interests and can be broken down to smaller issues like financial involvement and family members. Any conflict of interest should question the auditor’s independence and the conflict should be reviewed to insure continued independence. In reviewing the code of conducts for the Big 4, three of the companies explicitly cover conflicts of interest and the third has a portion of their website covering the issue. If a member of the audit team has a conflict of interest it should be brought up, and if the firm is too small hiring a contractor to serve as the audit partner might be allow some degree of arms length. The AICPA has a

Ethical standards, issued by the Auditing Practices Board (APB), is a framework for auditor independence. The objective of Ethical standards is to assure the auditors remain independent during the auditing process. It provides a series of basic principles and essential procedures to constrain the auditor’s behavior. It mandates the auditor to comply with the rules when conducting audit engagements. Ethical standards identified potential threats to objectivity, independence analysis and provided safeguards and procedures to mitigate the impact of these threats. (Frc.org.uk, 2015) The first standard is about the basic principles and procedures relating to auditor independence that must be applied when conducting audit engagements. Ethical Standards 2 - 5 concern how these principles apply to particular relationships, normal services and non-audit services with the client. Ethical standards ensure the independence of auditors by prohibiting auditors from the circumstance that is not allowed or acceptable by the application of safeguards and some specific situations that are only acceptable with application of safeguards.

One of the standards in Generally Accepted Auditing Standards is that the auditor must maintain independence in mental attitude in all matters relating to the audit. (AICPA, AU §150.09, para. 4) Independence is an essential standard for all auditors to maintain and when take on new roles. The public trusts the auditors with their proficiency and knowledge to bring more confidence to the public in reviewing companies’ financials. The accountants and auditors are consider trustworthy professionals. There are many studies that question accountants and auditors’ responsibility. Independence is one of the main challenges today and the second challenge is the inefficient functioning of account firms.

It’s trust-worthy and reliable to have independent and unbiased auditors confirm that an organization’s claims about its financial position and the process behind these claims are true and independent. The most important element for the audit report and opinion should be free bias. In order to achieve this goal, auditors need to be objective. Auditor, as one part of the professional accountancy bodies, is required to obey the ethics codes, which ensure the auditor to be independent.

In the past few years, there has been a growing trend towards the audit liability, but the fact remains that lots of works and improvements on audit independence have been carried out over the years. In addition, there should be a continuous procedure of criticism and further efforts aimed at the improvements of audit independence. For this reason, independence has been a quite important field, more than audit liability (Ojo, 2006).

Independence is important when conducting an audit. However, the fact that the word “independence” already appears in the auditor’s report mean that the auditors should be independent. When the word “independence” is repeated later in the report, it does not add to investor’s confidence. The independent of an auditor is understood and should be stated once, therefore creating less clutter in the auditor’s report. Simply stating that an auditor is independent more often does not have significant changes in the auditor’s behavior.

Furthermore, the ASX (ASIC 2015) stated that it is important to be independent, due to it affects the audit committee abilities to exercise independent judgement as the crucial factor in company management, operations, and decision making. Independent audit committee will promote and support higher audit quality, both internally

3 pillars of effective internal audit services- independence and objectivitiy, proficiency, and due professional care.

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

According to the Institute of Internal Auditors (IIA), (2011), the internal auditing is a team of consultants, a department and a division or other practitioner which independent, have objective assurance and conduct a consulting activity which is designed to add value and improve the organization operations. The internal auditor can help an organization in achieving its objectives by bringing a discipline and systematic approach in order to improve and evaluate the effectiveness of risk management, control and governance process.

The aim of this essay is to study the function of external auditors in order to analyze why it is important to be independent. The primary mission of external auditors is to review and evaluate all the financial records of a company or corporation. They provide an objective opinion on the organization’s financial statement and effectiveness of the accounting polices in order to help management to make decisions. If the independence of the external auditors is impaired, the public will doubt the quality of professional auditing services, and the consequence would be very serious, just like the bankruptcy of Enron led to the disorganization of Arthur Andersen, once a giant accounting company in the world. In order to maintain and increase

Internal auditing is an independent, objective assurance and consulting function intended to add value and improve an organization’s operations. The audit function can help an organization to achieve objectives by evaluating an organizations risk management, control and governance processes to help improve them.

This paper critically analyses the independence of the internal audit function through its relationship with management and the audit committee. Given the growing role of internal auditing in contemporary corporate governance and independence has gained renewed attention.