An auditor is a qualified person who carries out the audit assignment and reports on the ‘true and fair view’ of the client entity’s financial statements so that the users of financial statements can rely on the reliability and credibility of the financial statements. It was the auditor to avoid the case where there is financial involvement of family members or involvement of personal relationship etc. Thus, they rely on the auditor’s independent assessment and the auditor’s main objective is to express an audit opinion over financial statements (Corplaw Admin, 2014). The importance of auditor independence standards that are reasonable and yet comprehensive, rigorous, robust and enforceable has been underlined by several significant corporate failures in which questions have been raised about the quality of financial reporting and, in particular, the independence of the auditor. The recent developments have imposed higher responsibilities on auditors and wider the applicable standard of care, wider the definition of negligence and duty of care to owed to third party or in another word, we can say that the auditor’s responsibility has been increased with time and cases which demand for higher independence level in auditing. Audit independence is important so that auditor’s opinion can be impartial, unbiased, free from any undue influence or conflict of interest to override the professional judgement of the professional accounting (Rutgers Accounting Web, 2015). Policies and procedures to implement and monitor the quality of employee performance and quality control of engagements. Independence is the main means by which an auditor demonstrates that he can perform his task in an objective manner. Code of Ethics also include the threat and safeguard mode that have discussed below. Caparo Industries plc v. Dickman (1990) case made it more difficult for a third party to prove that the auditor owes the duty of care to them as the decision made on this case introduced the concept of reasonable proximity between auditor and third party. What are the SEC Auditor Independence Rules? For example, consider yourself a potential investor in ABC Company. Under the principle 7 of FMA act and NZX Corporate Governance Code 2017, The board should establish a framework that ensure that there is no relationship between the auditor and the entity or any other related person who can influence the auditor’s independence by obtaining confirmation through the external auditor in writing (Financial Markets Authority Corporate Governance in New Zealand, 2014). If the company failed to comply with this section, it considers as an offence and is liable for penalty (Company Act 1993, 2018). In short, independence and objectivity means that internal auditors and the internal audit activity have, and maintain, the ability to make unbiased judgement and decisions based on the audit activities and facts and that they are free from any internal or external interference or obstruction with functional accountability being to the board, either directly or through an audit committee. The need for independence arises because in many cases users of financial statements and other third parties do not have sufficient information or knowledge to understand what is contained in a company’s annual accounts. Actual independence is quite straightforward. In practice, audit rotation is not popular because of the high recurring costs of audits and loss of trust and experience built up. The structure of the audit committee is particularly important, both in terms of independence and the skills required(Financial Markets Authority Corporate Governance in New Zealand, 2014). Explain the measures that an auditor should place to safeguard his independence when providing other services to clients 3. Copyright © 2003 - 2021 - All Answers Ltd is a company registered in England and Wales. It is critical for an auditor to be independent of the firms they audit due to many reasons. The client requires persons other than management to ratify or approve the appointment of a firm to perform an engagement. Arthur Anderson, the auditor of HIH Royal Commission Report was not independent as there were lots of threats involved in it. Arthur Anderson was playing the role of external auditor and at the same time consultant on accounting, internal auditor, tax advisor and reviewer of financial disclosure due to which they earned US$25 million as an audit fees and US$27 million as other service fees from Enron. The importance of audit independence has been increased mainly due to the recent audit failures such as Enron, WorldCom, HIH Insurance, Feltex etc. Code of Ethics for Assurance Practitioners (PES 1) also contains many requirements about the independence. The Code of Ethics for Professional Accountants is in line with the conceptual approach to auditor independence (Ainul Islam, 2005) . 290.219–222 of the Code (Professional and Ethical Standard 1, 2016). Failure to oblige could lead to massive fines, expensive court cases, jail time and ultimately the collapse of the auditing firm (like in the case of Arthur Andersen). The independence of external auditors had been brought into question because of the potential influence the corporations had on its auditors. Paragraph 290.223 of the Code recommends that, in cases involving overdue fees, a professional accountant who is not a member of the audit team should review the audit work, and requires the audit firm to determine whether the overdue fees might be regarded as equivalent to a loan to the client and whether, because of the significance of the overdue fees, it is appropriate for the firm to be reappointed or continue the audit engagement (Professional and Ethical Standard 1, 2016). Accounting firms have incentives to avoid providing negative audit opinions to the managers who hire them and pay their auditing fees. 4 Independence in Fact Why independent audit committees matter? Auditors need to carefully and continually review the risk related with the financial engagement with client such as audit or non-audit fees and manage risk to their objectivity. It used to be the duty of the corporation’s CFO to employ an external auditor. Arthur Anderson was dealing with high profile clients such as Enron, WorldCom and HIH insurance in Australia. There are many users of financial statements who do not have sufficient knowledge to understand what is contained in a company’s annual accounts. The Code of Ethics permits a public accounting firm to do both bookkeeping and auditing for a client provided it is not a listed entity (or a ‘public interest entity’) and provided any self-review threat is reduced to an acceptable level (section 290.171) (Professional and Ethical Standard 1, 2016). • S/H and other stakeholders need a trustworthy record of directors’ stewardship to be able to take decision about company. 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