Question

1. The auditor is sued for audit failure. If it is discovered that the auditor was not independent and that the auditor knew about their lack of independence, what would be their most likely defense? Describe why

Please completely answer in 1-2 paragraphs.

Answer 1

It is assumed that the question is a full question, and apart from this there is no other part of the question which has not been mentioned here. So, based on this assumption of wholesomeness, the question is peculiar as it is asking us to defend the auditor who, it has been discovered, was not independent. That means the auditor did not carry out the audit with independence and thus, there is a possibilty of misstatements not pointed out by auditors. Although the case is not of a win worthy defence, however, on the following line the defence can be presented.

Auditor should prove that their lack of independence would not have affected the audit because of the robust safeguard framework for auditors being followed by the auditee. It can be shown that

• the auditee has the a policy of absolute prohibition—for example, barring auditors from having any direct financial investment in any auditees; or
• the auditee has a policy of permitting the activity or relationship but restricting its extent or form—for example, a restriction that auditors cannot have material indirect financial interests in auditees;or
• the auditee has the policy of permitting the activity or relationship but requiring other policies or procedures that eliminate or mitigate the threat—for example, the mandatory replacement of an engagement partner after the partner has spent a certain period of time on a specific audit engagement to mitigate a familiarity threat; or
• permitting the activity or relationship but requiring the auditor to disclose information about it to the audited client’s management, audit committee, board, or others—for example, disclosure to an auditee’s audit committee of the nature of all services provided by the auditor to the auditee and the fees received for such services.

The auditors can also provide that they were aware of the lack of independence; however, they had carefully calculated and analysed and came to the conclusion that their lack of independence would not have affected their audit reportings. Auditors had tried their best to mitigate risks and also have a policy of compulsory peer-review(that is, review of their work by other auditor peers) so as to not get the fairness of the audit compromised.