Such association may create or help in the longer audit tenure of the audit perform. This will in turn impact the audit independence and objectivity. The auditors are not to accept gifts, fees or anything from auditee. The internal auditors are also required to immediately report any such offer to their supervisors if any.
Such gift and hospitality ought to create familiarity and self-interest threats. There may exist family and personal relationships between member of audit team and audit client.
This creates self-interest and familiarity threats towards audit independence. Immediate family relationships contain direct linear relationship and direct vertical relationships like brothers, sisters and spouse. The regulations shall clearly put restrictions on the acceptance of such audit assignments. However, it would be difficult to impose restrictions on distant relationships and personal relationships. The regulations impose other tactics in reducing the influence of such relationships on audit independence.
Generally during the audit season, the work load increases and audit firm may be forced to hire some temporary help. There are also instances where the auditor has to take help of experts in the line of work. Although, these staff and experts ought to be professional as much as possible, they are temporary and may not understand the business of audit clients as much.
The work of theirs would be reviewed regularly so that the audit scope and performance of work is going as designed early in the appointment. Audit firms do provide non-audit services. Such restrictions and limitations would address self-interest conflicts and self-review threats to auditor independence inherent in the model of business of audit firms.
The careful restrictions imposed would also enhance the perception of auditor independence. This will result in trust in audit firms. There are various ways to impose restrictions and limitations. Non-audit services are therefore is to be kept in check like limiting the amount of revenue the auditors can generate from giving non-audit services to clients and pre-approval from the audit committee and so on.
What impairs the independence of an auditor? Independence of internal auditors Internal auditors are concurrent auditors and they work in tandem with the workflow of the enterprise.
Independence of external auditors Generally, external auditors are statutory auditors out of love for compliance with the regulations and in public sectors, hired by the public accounting bodies. The audit committee should also consider seeking guidance from legal counsel, the auditor and the Office of the Chief Accountant OCA. Search SEC. Securities and Exchange Commission. Audit Committees and Auditor Independence. Office of the Chief Accountant The U. Introduction The Sarbanes-Oxley Act of mandates that audit committees be directly responsible for the oversight of the engagement of the company's independent auditor, and the Securities and Exchange Commission the Commission rules are designed to ensure that auditors are independent of their audit clients.
General Standard of Auditor Independence The Commission's general standard of auditor independence is that an auditor's independence is impaired if the auditor is not, or a reasonable investor with knowledge of all the facts and circumstances would conclude that the auditor is not, capable of exercising objective and impartial judgment on all issues encompassed within the audit engagement.
The audit committee should consider whether a relationship with or service provided by an auditor: a creates a mutual or conflicting interest with their audit client; b places them in the position of auditing their own work; c results in their acting as management or an employee of the audit client; or d places them in a position of being an advocate for the audit client.
The Commission rules also address specific auditor independence issues, some of which are: Specific Prohibited Non-audit Services The auditor is prohibited from providing the following non-audit services to an audit client including its affiliates: Bookkeeping Financial information systems design and implementation Appraisal or valuation services, fairness opinions, or contribution-in-kind reports Actuarial services Internal audit outsourcing services Management functions or human resources Broker-dealer, investment adviser, or investment banking services Legal services and expert services unrelated to the audit In addition to the specific prohibited services, audit committees should consider whether any service provided by the audit firm may impair the firm's independence in fact or appearance.
Pre-approval of Permitted Services Subject to certain limited exceptions, the audit committee must pre-approve all permitted services provided by the independent auditor i. Prohibited Relationships Certain relationships between audit firms and the companies they audit are not permitted.
These include: Employment relationships. A one-year cooling off period is required before a company can hire certain individuals formerly employed by its auditor in a financial reporting oversight role. The audit committee should also consider whether the hiring of personnel that are or were formerly employed by the audit firm might affect the audit firm's independence. Contingent Fees. Audit committees should not approve engagements that remunerate an independent auditor on a contingent fee or a commission basis.
Such remuneration is considered to impair the auditor's independence. Direct or material indirect business relationships. Audit firms may not have any direct or material indirect business relationships with the company, its officers, directors or significant shareholders. Thus, audit committees should consider whether the company has implemented processes that identify such prohibited relationships. Certain Financial Relationships. Audit committees should be aware that certain financial relationships between the company and the independent auditor are prohibited.
The audit committee should consider discussing the following issues with the auditor in regards to the firm's independence disclosure: Processes the audit firm uses to ensure complete disclosure of all relationships with the company and its affiliates Relationships the audit firm may have with officers, board members and significant shareholders Relationships not included in the communication because they were deemed immaterial Change of Independent Auditors The auditor generally must be independent for the entire engagement period and the period covered by the financial statements being audited.
Once this relationship is terminated, there is no continuing requirement for the auditor to remain independent. The auditor may generally re-issue its former opinions on the company's financial statements. However, if a restatement of the financial statements becomes necessary, the auditor must be independent to audit the restatement adjustments and re-issue its opinion.
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