The Issue The Categories Of Threat May Affect Auditor Independence

The factor that plays the greatest role in determining auditor independence is independence in mind. Auditors may or may not appear to be independent, but if the auditor is truly independent in mind, then the auditor can remain objective and unbiased. The profession should consider tightening the Code of Professional Conduct to address the issue of an audit team member knowing a close friend that holds any position at the audit client. If this scenario arises, the firm can still audit the client, but the audit member with the close relationship won’t be able to be on the audit team.

This post will discuss two ethical accounting dilemmas that could occur in the CPA profession. For each dilemma, it will explain how the dilemma could be resolved based on logic and reason. It will then support that proposed resolution through support from the American Institute of Certified Professional Accountants (AICPA) Code of Professional Conduct.

According to section 150.1: The principle of professional behavior imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession [ (Chan, 2004) ].

Sec. 206. Conflicts of interest, aims to protect clients by making it unlawful for their top management personnel (CEO, CFO, CAO or similar) to hire auditors which employed them in the year preceding the audit of the same client.

Fullerton and Durtschi, (2012) in their study found that internal auditors should adopt an elevated attitude of skepticism, as they are the first line of defense for finding fraud within a firm. Internal auditors, have an intimate knowledge of the workings of a firm, the corporate environment, as well as employee activities are in a unique position to spot many of the symptoms of fraud to which an external auditor may not be aware. Thus internal auditors should be more skeptical and use their knowledge to enhance their fraud detection in firms (Fullerton and Durtschi, 2012). This is one of the key inputs into the factors that drive audit quality as external auditors rely on inputs from internal auditors in obtaining the evidence they require to produce the audit report (Fullerton and Durtschi, 2012).

Furthermore, while maintaining professional skepticism is of significance to auditors, the close relationship built up is also critical to the audit process. Hence, auditor-client communication may suffer from mandatory auditor rotation due to time constraints (Arel et al., 2005). In terms of audit committees, the rotation would consume a significant amount of time due to a “getting to know each other” stage (Arel et al., 2005). As a result, “the frequency of audit firm changes will distract management and audit committees from their core responsibilities during the proposal and on-boarding process, potentially reducing their focus on the effectiveness of internal controls and the quality of financial information provided to investors” (PwC, 2012).

Independence is a fundamental to the reliability of auditors’ reports. It is an attitude of mind characterized by integrity and an objective approach to professional works. A professional auditor should work both independent and seen to be so. Nowadays, but, the trend of providing non-audit services to audit clients seem to be sweeping accounting firms all over the world; impacts of independence impairment caused by this trend should not be ignored.

One of the standards in Generally Accepted Auditing Standards is that the auditor must maintain independence in mental attitude in all matters relating to the audit. (AICPA, AU §150.09, para. 4) Independence is an essential standard for all auditors to maintain and when take on new roles. The public trusts the auditors with their proficiency and knowledge to bring more confidence to the public in reviewing companies’ financials. The accountants and auditors are consider trustworthy professionals. There are many studies that question accountants and auditors’ responsibility. Independence is one of the main challenges today and the second challenge is the inefficient functioning of account firms.

The ethics codes also provide categories of threats of independence. The first one is self-interest threat. This occurs when there is a conflicting between the auditor’s financial or other self-interest and the clients’. The financial or other interest will inappropriately influence the professional auditor’s judgment or behavior. For instance, if the auditor has close business relationship with the audit client, that is a self-interest threat. Furthermore, a potential engagement with an audit client and contingent fees relating to audit engagement are also the examples of self-interest threat.

Finally, C.I.M.A. code of ethics states that all professional accountants have to comply with relevant regulation and laws and are not allowed any actions that will risk the profession. (CIMA, 2015)

One way to do that is to reduce the risk of personal relationships between the client personnel and members of the audit engagement team. Close, personal relationships make it easier for the audit team to overlook areas that might need further investigation. Thankfully, the Sarbanes-Oxley Act and SEC Provisions have already addressed the issue of an accounting firm/auditor’s independence. As long as the firm adheres to these rules and requirements, their risk is minimized. Some of these measures include:

Independence is important when conducting an audit. However, the fact that the word “independence” already appears in the auditor’s report mean that the auditors should be independent. When the word “independence” is repeated later in the report, it does not add to investor’s confidence. The independent of an auditor is understood and should be stated once, therefore creating less clutter in the auditor’s report. Simply stating that an auditor is independent more often does not have significant changes in the auditor’s behavior.

This research paper is on Rules of Professional Ethics and Conduct of the American Institute of Certified Public Accountants. They will be four cases that will be discussed for violation for the following rules. They are Rule 102 – Integrity and Objectivity, Rule 201 – Professional Competence, Rule 202 – Compliance with Standards, and Rule 501- Acts Discreditable. They will be 4 main points that will be discussed on

Auditing is the efficient critical examination done by one person or group of people’s independent from the system audited. To do an audit, confirmed information must be present and some standards by which the auditor can evaluate the information. Another is gathering and evaluating any information to determine whether the information being audited is identified in accordance with establish criteria to satisfy the purpose of the audit and also auditors must be competent to identify the types and amount of evidence to accumulate to reach the correct conclusion after the evidence has been examined and finally the preparation of the audit report, which is the communication of the auditor’s findings

It is also widely asserted that skeptical mindset is critical to performing a rigorous and prudent auditing with due professional care (Holm and Zaman, 2012). In addition, the extent to which PS should be applied is vital for an auditor since it impacts both the accuracy and efficiency. Having too little of it will bias the accuracy while too much will lead to extra human effort and cost. The effective balance between risk and efficiency is the essence. In practice, there should be a limit on the level of details an auditor can possibly reach and on the extent the auditing should be conducted to.