auditor independence

Topics: Audit, Auditing, External auditor Pages: 9 (2685 words) Published: October 24, 2013
Table of Contents
1.2nature of auditor independence
1.3 principle of auditor independence
2.0 The concept of auditor rotation
3.0The history and current debates concerning auditor rotation 4.0Different countries regimen should be considered
6.0List of references

1.1 Audit
Auditing is the analysis of the financial accounts or records, by a qualified accountant, and procedures of a firm or organisation. This is essential in order to gain a fair perspective on the company’s financial statement. With auditing, potential investors and creditors can look at the financial statement to decide whether to inverts in a business or not. Auditing is important as it also protects the public from scams and corrupt business procedures. The advantage of a Auditing is that it provides assurance to the third parties that the company's statements are fair, the investment decision of investors are based on this report, helps in detection of frauds, speedy processing of loans to the company , and Professional advice by the auditors.

The disadvantages of audit are It does not take into account the productivity and the skills of the employees of the business, the financial data is never current and does not reveal much about the present financial position of a company, different accountants use different techniques, therefore it would be hard to compare audits between companies who have used different accountants and for smaller companies, hiring an accountant/firm to carry out an audit can be costly.

1.2 Nature of Auditor Independence
The Companies Act 1985 and the ACCA Rules of Professional Conduct provide detailed guidelines to ensure that auditors are not only independent but are also “seen to be independent”. The Companies Act requirements for auditor independence have been developed by successive acts of legislation and cover the rules on appointment, removal, resignation and the rights of auditors. Independence of mind: The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional scepticism. Independence in appearance: The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firms, or a member of the assurance team’s, integrity, objectivity or professional scepticism had been compromised.(example-Appendices 1)

1.3Principles of Auditor Independence
The external auditor plays a critical role in lending independent credibility to published financial statements used by investors, creditors and other stakeholders as a basis for making capital allocation decisions. Indeed, the public’s perception of the credibility of financial reporting by listed entities is influenced significantly by the perceived effectiveness of external auditors in examining and reporting on financial statements. While any consideration of the effectiveness of external audits involves a wide variety of issues, it is fundamental to public confidence in the reliability of financial statements that external auditors operate, and are seen to operate, in an environment that supports objective decision-making on key issues having a material effect on financial statements. In other words, the auditor must be independent in both fact and appearance.

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.

2.0 The...

References: Vanstraelen, A. (2000), ‘Impact of renewable long-term audit mandates on audit quality’, The European Accounting Review, vol. 9, no. 3, pp. 419-442.
Deis, D. and Giroux, G. (1992), ‘Determinants of audit quality in the public sector’, The Accounting Review, July, pp. 462-479.
Jackson-Heard, M. F. (1987), The Effect of Audit Committee and Other Selected Factors on the Perception of Auditor Independence, New York University: PhD thesis (Unpublished).
Shockley, R. A. (1981), ‘Perceptions of auditors’ independence: an empirical analysis’, The Accounting Review, vol. 56, no. 4, pp. 785-800.
Bates, H. L., Ingram, R. W. and Reckers, P. M. J. (1982), ‘Auditor client affiliation: the impact on materiality’, Journal of Accountancy, April, pp. 60-63.
Arrunada, B. and Paz-Ares, C. (1997), ‘Mandatory rotation of company auditors: a critical examination’, International Review of Law and Economics, vol. 17, pp. 31-61.
Gietzmann, M. B. and P. K. Sen (2002), ‘Improving auditor independence through selective mandatory rotation’, International Journal of Auditing, vol. 6, pp. 183-210.
Beattie, V. and Fearnley, S. (1998), ‘Auditor changes and tendering’, Accounting, Auditing & Accountability Journal, vol. 11, no. 1, pp. 72-98.
General Accounting Office (GAO) (2003), Public accounting firms: required study on the potential effects of mandatory audit firm rotation. GAO Report No. GAO-04-216, [WWW] [accessed 01st October 2003].
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