Independence Flashcards
Why is independence significant? (4)
- It is the cornerstone of the profession
- Foundation for the public’s trust in audit function
- Adds credibility to financial statements
- If not independent, it adds nothing to financial statements
Consequences of Non-Independence (6)
- Disciplinary action
- Litigation and damages
- Loss of license
- Damage to reputation
- Damage to stakeholders
- Damage to public trust
Fundamental Principles (5)
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behaviour
What is Independence of Mind
Mentally free from influence and operates under professional skepticism (THE AUDITOR THINKS THEY’RE INDEPENDENT)
What is Independence in Appearance?
How independent the auditor appears for external parties. The avoidance of facts and circumstances to a level where it would compromise the independence of an audit. Independence in appearance is how the independence has been impacted by actions, such as accepting a gift.
What is Independence in Fact?
Auditor’s actual objectivity and integrity of an audit without being influenced by personal or financial relationships. Independence in fact refers to how the independence has actually been achieved, rather than perception. (THE AUDITOR IS ACTUALLY INDEPENDENT)
What are the two levels of independence?
- Practitioner-level independence (Independence in fact and appearance, a state of mind)
- Independence of the profession (Independence in appearance)
Possible ways to improve profession’s independence (3)
- Audit committee
- Audit fees paid by the state
- Mandatory auditor rotation
PES 1 Difficulties (3)
- Inability to segregate duties
- Inability to rotate staff
- Inability to access resources
PES 1 Identifies… (2)
- Threats to independence
- Safeguards to mitigate or eliminate threats
Possible Threats (5)
- Self interest threat
- Self review threat
- Advocacy threat
- Familiarity threat
- Intimidation threat
What is self interest threat?
Auditor has a financial or personal interest in the client, affecting objectivity.
What is self review threat?
An auditor reviews their own work, reducing professional skepticism. (Auditor has been an employee of the client or used to produce the work they are not auditing)
What is advocacy threat?
Auditor supports a client’s position, compromising independence. (dealing or promoting shares in a client)
What is familiarity threat?
Auditor becomes too close to the client, affecting objectivity. (Family, friends, gifts)
What is intimidation threat?
Auditor feels pressured by the client, risking impartiality.
Three safeguards to eliminate or reduce threats
- Safeguards created by the profession, legislation or regulation (Training, reviews)
- Safeguards within the client firm (Audit committees)
- Safeguards within audit firm (Rotation of duties, independent review of audit work)
Seven step decision making process for independence decisions
- Recognise issues and conflicts of interest
- Consider elements of independence in fact and appearance
- Think through circumstances, standards and requirements
- Consider the need for consultation
- Tentatively decide on action
- Test potential outcomes
- Reconsider fundamental elements of independence
