Question

The significance of economic, financial or other relationships in determining independence in appearance is evaluated by:

		what a reasonable and informed third party would conclude as unacceptable.
		what the auditor general decides is significant.
		what the auditor believes is unacceptable.
		what the company deems to be unacceptable.

M&N partners are the auditors of A&C Company. A&C’s CFO used to be a senior auditor at M&N a year ago. Which threat to the auditor’s independence would be created by this situation?

		Advocacy
		Self-interest
		Self-review
		Familiarity

Which of these is not an ethical consideration for the auditor in deciding whether to accept an audit engagement?

		Identifying intended users of the audited financial statements.
		Evaluating circumstances that would compromise their independence.
		Assessing their competence to perform the audit.
		Determining their ability to use due care in performing the audit.

Answer 1

AUDITING and AUDITOR -MEANING

Audit is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organisation.

An auditor is a person authorized to review and verify the accuracy of financial records and ensure that companies comply with tax laws. They protect businesses from fraud, point out discrepancies in accounting methods and, on occasion, work on a consultancy basis, helping organizations to spot ways to boost operational efficiency. Auditors work in various capacities within different industries.

• The Characteristics of an Auditor

The work of an auditor is to check the financial records of a company and ensure all cash related operations are running smoothly. Auditing can be done by an internal auditor, external or independent auditor. The internal auditor is an employee of the company who on a regular basis checks cash activities in the firm. An independent auditor works for a company he does not have any personal attachment. Here are five characteristics of an auditor that are vital in the trade.

1. Have the Required Experience

Certifications are key academic qualifications for an auditor. An auditor should have the required knowledge on accounting, business and taxation law. It is also necessary that he or she has computer operation skills because most of the operations will require one. Knowledge of management systems will also be an added advantage. Skills are not enough because experience is what makes one knowledgeable in the field. The more audits he has completed, the sharper he gets in the field.

2. Ability to Make Independent Decisions

An auditor’s decision should not be wavered or influenced by anyone. Their actions, decisions, and reports should be as a result of careful analysis of the company’s operations. They should not have any personal interests or favoritism. Even when he or she has to unearth sensitive information, they should do this and table the results confidently without fear. When some findings are not clear, they should not settle until they gets to the bottom of the issue. Where they need to ask questions or have points clarified, they can face the authorities without shame. This is a key characteristic of an auditor.

3. Auditors Have the Ability to Understand Different Business Needs

Another characteristic of an auditor is the ability to work with different company setups. To come up with a successful audit, they must first understand what the business entails. An auditor can the auditor keep to the designated schedule? Can they attend meetings on time and offer prompt feedback on the work progress? These are important auditor characteristics to look for. The work of the auditor may affect some inside operations, therefore, following the set guidelines and ensuring the work is complete on time is important. On the same note, an auditor should be trustworthy and decisive. They should not share company information with third parties. Sometimes, auditors come across sensitive information. They should only disclose this to the concerned parties.

5. Effective Communication Skills

An auditor cannot be effective if they have not mastered excellent communication skills. They should be assertive and at the same time have people skills. They can be a skilled auditor when it comes to compiling reports, but if they cannot convincingly communicate when called upon to present their work, the effort will be futile. They should be patient and have skills to elaborate points to the satisfaction of the auditee.

AUDITOR INDEPENDENCE

refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited. Independence requires integrity and an objective approach to the audit process. The concept requires the auditor to carry out his or her work freely and in an objective manner.

• Independence of the internal auditor means independence from parties whose interests might be harmed by the results of an audit. Specific internal management issues are inadequate risk management, inadequate internal controls, and poor governance. The Charter of Audit and the reporting to an Audit Committee generally provides independence from management, the code of ethics of the company (and of the Internal Audit profession) helps give guidance on independence form suppliers, clients, third parties, etc.
• Independence of the external auditor means independence from parties that have an interest in the results published in financial statements of an entity. The support from and relation to the Audit Committee of the client company, the contract and the contractual reference to public accounting standards/codes generally provides independence from management, the code of ethics of the Public Accountant profession) helps give guidance on independence form suppliers, clients, third parties...

Internal and external concerns are convoluted when nominally independent divisions of a firm provide auditing and consulting services.^[1] The Sarbanes-Oxley Act of 2002 is a legal reaction to such problems.

This article mostly deals with the independence of the statutory auditor (commonly called external auditor). For the independence of the Internal Audit, see Chief audit executive, articles "Independent attitude" and "organisational independence", or organizational independence analysed by the IIA.

The purpose of an audit is to enhance the credibility of financial statements by providing written reasonable assurance from an independent source that they present a true and fair view in accordance with an accounting standard. This objective will not be met if users of the audit report believe that the auditor may have been influenced by other parties, more specifically company managers/directors or by conflicting interests (e.g. if the auditor owns shares in the company to be audited). In addition to technical competence, auditor independence is the most important factor in establishing the credibility of the audit opinion.

Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the public's trust in the accounting profession.^[2] Since 2000, a wave of high-profile accounting scandals have cast the profession into the limelight, negatively affecting the public perception of auditor independence.

AUDIT ENGAGEMENT

An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client's accounting records and financial statements. The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client. The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated. This letter is useful for setting the expectations of both parties to the arrangement.

The term may also indicate all of the work performed by an auditor for a client under the terms of an engagement letter. In this case, an audit engagement spans the full range of audit procedures that may be used, including the examination of the client's financial statements and the preparation of an audit report.

Here, A&C Company, the company deems to be unacceptable and the auditor believes is unacceptable are the threat to the auditor’s independence.

Self-interest is not an ethical consideration for the auditor in deciding whether to accept an audit engagement.

Familiarity is the control feature of an Auditor. It helps to Identifying intended users of the audited financial statements,Evaluating circumstances that would compromise their independence,Assessing their competence to perform the audit and Determining their ability to use due care in performing the audit.