Introduction and Motivation
The audit of financial statements is mandatory for publically listed entities throughout the world. The auditor conducts various tests and based on the results forms an opinion on the truthfulness and fairness of the financial statements of the company and whether or not they are prepared in accordance with the financial reporting standards and are free from any material misstatement (Freedman, 2013). The purpose of auditing is to enhance the confidence of investors and to add credibility to the truthfulness of company 's true financial performance. However, there are some dos ' and don 'ts that an auditor must take care of. For instance, anything that threatens the independence of the auditor must be avoided as it adversely affects the truthfulness and objectivity of the opinion formed.
History raised questions about Australian rules concerning the independence of auditors and its role in contributing to the corporate collapse and the collapse of HIH insurance ltd (Ramsay, 2001). It is believed that if auditors had been objective in formulating their opinion on the statements or highlighted the risk of going concern of the firms, situation could have been handled better. Possible reason for auditor being unable to detect future threats here might be lack of independence from the auditing client.
Independence of the auditor from the client means independence of mind and appearance. The five major threats to independence of an auditor include
The auditor must remember that all information collected during the audit needs to be sufficient enough to further the audit process. The information must not only possess the two qualities, relevance and reliability, but it should also test various assertions. For instance, in the audit of Walmart, the auditor should make an attempt to acquire information such as financial statements from the company’s bank, as opposed to acquiring the statements from Walmart’s management. Taking such crucial information from Walmart’s management will put the reliability of that information into question. It is possible that management may manipulate the financial statements, so that they are more appealing to the public and investors. Management may do things
An important decision for any shareholder is deciding whether or not to do business with that company. When a business is audited, the operations are reviewed to make sure that nothing is being hidden. An auditor will review the company’s financial statement and practices to confirm that each are direct and correct. The financial statements are the business’s way of representing them and showing that they are following the Generally Accepted Accounting Principles. The audit process is an important one because it provides a platform for the auditor’s opinion concerning the financial statements of the company. As part of the audit process the auditor will conduct an audit plan that outlines a number of actions that he or she will be perform while also detailing the reason for those actions. With every audit, the business’s management is in charge of handing over the financial statements that the auditor will review; while the auditor will review the statements for any material or immaterial misstatements.
An auditor’s role in an audit is very important. An auditor must be able to collect enough evidence to supports their finding, and also be on the lookout for fraud. Company’s may or may not know the law, but it is the job to know the law, and be able to educate and report findings properly. Since the Sarbanes-Oxley Act, there have been provisions that have directly affected auditors. This paper will include the details of the Sarbanes-Oxley Act, how ethics and independence have affected auditors, as well implementation of new standards based on the Sarbanes-Oxley Act.
There are numerous threats to the independence of auditors which have been identified in the multiple studies and discussions both in Australia (such as the Ramsay report, CLERP 9 Paper) and internationally by IFAC, the European Commission
For any audit engagement APES 110 section 100.5 sets out five fundamental principles that all audit members must abide by (Gay & Simnett 2012, p. 86). They must act with integrity, objectivity and not allow bias. They need to ensure professional competence, confidentiality and comply with the relevant legislation (Gay & Simnett 2012, p. 86). As such one of the principle requirements for auditors is auditor independence from their clients. In Harris-Scarfe’s case, this was not possible because the deputy chairman used to be a partner at Price Waterhouse, the firm’s auditors (Buchanan 2004, p. 69).
to tough, outside scrutiny and that the auditor-client relationship is free from commercial conflicts of
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.
The auditor independence is one of the important elements of quality audit. The independence safeguards auditor/client relationships, ensures fair disclosure, integrity and objectivity. The audit independence is a complex issue with threats to profession’s fundamental principles. The examples of Enron and Arthur Andersen, Ernst & Young and Lehman Brothers, Ernst & Young and PeopleSoft, and many others demonstrate the lack of auditor independence that led to fraudulent financial reporting of the audited entity. Therefore, regulators together with accounting firms should find ways to eliminate threats of auditor independence and prevent consequences of impairment of auditor independence.
The presence of an external auditor allows creditors, investors or bankers to use financial statements that have been prepared with confidence. Although it does not guarantee the accuracy of a financial statement, it provides users with some reassurance that a company’s financial statements give a true and fair view of its financial position and its business operations. It also provides credibility, where in business, is a major asset. With credibility, the willingness of investors, bankers and others to relate and undertake business projects with a company increases. Credibility is also important to build positive reputations.
An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide
Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).
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.
A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of
An audit is the examination and checking of financial statements by a professional auditor or accountant who has had no part in its preparation. The process involves an examination of the evidence from which the final revenue accounts and balance sheet, or other statements of an organization have been prepared, in order to ascertain that they present a true reflection of the summarized transactions for the period under review and of the financial state of the organization at the end date, so enabling the auditor to report thereon. The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion as to the fairness with which
1-30: It has been stated that auditors must be independent because audited financial statements must serve the needs of a wide variety of users. If the auditor were to favor one group, such as existing shareholders, there might be a bias against another group, such as prospective investors.