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Role Of Safeguards In Strengthening Independence - Essay Example

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The auditors commit and ensure that the independence is measured and only the acceptable level of dependency is executed. The paper "Role Of Safeguards In Strengthening Independence" discusses the independence of the auditors as one of the major concerns for ensuring quality audit services…
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Role Of Safeguards In Strengthening Independence
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Role of Safeguards In Strengthening Independence Introduction The independence of the auditors is one of the major concerns for ensuring quality audit services. The sovereignty of auditors are hampered by many of the factors against safeguards can be taken so that the audit performed is free from biasness. Audit independence is necessary for the auditors in order to ensure that the objectives of the auditors are satisfied. However as the client is paying the auditors, thus the sheer freedom of the auditors cannot be absolute. The importance of autonomy of auditors and the inherent risk of not being totally self-determining raises many of the issues where safeguards where suggested in order to minimize the threat to the sovereignty of the auditors. Although auditors cannot be completely liberated from the client however there are certain measures, which brings the dependency of the auditors to an acceptable level. Independence Independence of the auditors is compulsory in order to assure that the opinion that auditor provide is free from biases. Auditors provide reasonable assurance upon the financial statements of the company where the auditor expresses the opinion whether the financial statements are free from material misstatement and all applicable standards were followed[Cai97]. The assurance regarding the independence of auditors must be affirmed, though not completely but to an acceptable level[Sil10], by providing safeguards upon the issues that threatens the auditors’ independence. The auditors commit and ensure that the independence is measured and only the acceptable level of dependency is executed [Zai09]. Safeguards The Conceptual Framework defines independence risk as the probability that an auditor’s objectivity either would be compromised or reasonably would lookbargained to knowledgeable investors and other users[SEC00]. The safeguards provided in order to minimize the threat to the independence of the auditors are categorized differently. The safeguards provided ensure that the threats to the independence of auditors are minimized to the acceptable level. Absolute Prohibition The independence of the auditors is strengthen when there is complete prohibition is provided regarding the financial and non-financial interest of the auditor to the client. When the auditor is completely prohibited of possessing any type of interest in the client the independence increases[Pet04]. The framework completely restricts the client and auditor to possess any type of relation whether business or personal. The restriction is imposed upon activities that are to be carried out between the client and the auditor. Permitting But Restricting the Extent In several cases the framework permits the auditor to continue with the activity with the client but the extent of the activity and relationship with the client is limited[Ric12]. Financial restrictions are imposed where the auditor is not allowed to have material financial interests in client so the independence of the auditor is brought to an acceptable level. Permitting and Requiring Policies to Mitigate Threat The framework safeguards the independence of the auditors where the framework allows the auditor for the relationship and activity with the client as it shall be for the benefit of both the parties. The allowance of continuity of relationship and activity is followed by the policies, which are to be formed, implemented and followed in order to provide assurance that the auditors are independent from the client. The policies should be such formed so as to affirm the independence of the auditors with the client and that the auditors are not influenced by the client. The policies followed should denote the independence of auditors regarding audit procedures and opinion and the client shall not be able to influence the opinion of the auditor[Sri09]. Therefore in several cases the engagement partner of the firm is changed every year so as to mitigate the familiarity threat to the independence of the auditors. Permitting and Disclosing The conceptual framework of international standard board safeguards the independence of the auditors as by implementing the principal where the auditor and client are permitted to continue with the activities and relationships. The allowance of the relationship is followed by mandatory disclosures regarding the relation of the auditor and client. The threat to the independence of the auditor is minimized as when the statement of disclosure of the relation of auditor and client is disclosed so that the user is affirmed with the independence level of the auditor. Other Measures Using other measures such as peer review, enhancing internal control system and consolidation to the audit committee, protects audit independence. These are the controls that the audit firm and the client implements in order to enhance the quality of audit by minimizing the threats to the audit independence. Peer Review The peer review is such that before issuing the audit report, another team from the audit firm reviews the audit and forms a peer review. The peer review enhance the sovereignty of audit as the work is cross checked with another team which is totally independent from the working team and thus the independence of auditors in affirmed. Enhancing Internal Controls Internal control of the organization is one of the most important factors that determine the audit impendence. Where the internal controls is strong then the auditors shall be able to do their work independently as there shall be no interference from the client and/or another related party. Effective internal controls determine the sovereignty of audit when they are strong and do not allow any interference in the audit work. Internal Audit Committee The internal audit committee performs an internal audit in the company which is beneficial to the external auditors as the external auditors test on sample basis whereas internal auditors check on full basis. The strength of the internal audit committee is evaluated by measuring the reliability of the internal audit. The internal audit and the external audit when consolidated provides safeguards to the independence of the auditors as when the results are matched. Conclusion Independence of auditors is in much increased importance as after major corporate scandals, regulations were made in order to improve the quality of audit. The influential factor of the client depicts that the auditor shall not be able to provide quality audit service and thus bias the opinion. The independence of the auditor became much of the concern of the regulation bodies and thus they amended and issued new standards, techniques and guidelines where reasonable assurance of auditor independence can be made. Although the auditor cannot be completely independent from the client as there is a business relation between both the parties where the one provides services and other pays. The mitigation of fee dependency of the auditor minimizes this risk to the minimum. The framework has provided many of the safeguards, which are when followed, provide the strength to the independence of auditors. The independence is one of the major concern for the audit standard board and for the auditors thus with the collaboration of the auditors and the board various acceptable techniques and principals are applied to maximize auditor independence. References Cai97: , (Cai, 1997), Sil10: , (Silvia, 2010), Zai09: , (Zaini & Dennis, 2009), SEC00: , (SECURITIES AND EXCHANGE COMMISSION, 2000), Pet04: , (Peter, 2004), Ric12: , (Richard & Claude, 2012), Sri09: , (Srivastava, 2009), Read More
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