For example, audit managers held accountable to a partner who aggressively tries to grow the firm’s business are more likely to support bidding on a client who engages in aggressive accounting practices (Cohen and Trompeter 1998). Reference 7 Auditor independence has long been regarded as a cornerstone of the auditing profession (AICPA 1999; SEC 2000). Mautz and Sharaf (1961, pp. Literature Review: The Threats Of Auditor Independence 1590 Words7 Pages Auditor independence has come into discussion over the decade for numerous reasons. -To determine the factors associated with the decision-making process of an auditor; ethical, moral and independence in judgment-base decisions. This paper highlights the challenge managers’ face in their daily routine of making profit while keeping in line with the required ethical boundaries of hospitality and tourism industry. What is Auditor Independence? Before an audit engagement, it is crucial that each member of the audit team review the five threats to independence. Self-review threats are a threat when auditor realizes the consequence of past judgment and advice by himself or other staffs of the firm. Part 1: This assignment examines whether an appropriate accounting framework and ethical code of professional conduct effectively enhances auditor independence. Auditors with a higher level of moral reasoning are more likely to reveal audit finding which management does not wish to be revealed regardless of reprisal. Warfield. ISA 200 deals with the independent auditor’s overall responsibilities when conducting an audit of financial statements in accordance with ISAs. If the firm has a genuine fee-for-service model in place, Ms Banton said it may be possible to reduce the independence threats accordingly, but potentially it could still inappropriately influence the auditor ’ s judgement. According to Terri L. Herron and David L. Gilbertson (June 2003: Ethical Principles vs. According to Hisham El-Moukammal (December 2009) penalty to the auditor for violations of the Code depending on the situation can take the form of formal letter advising the auditor of the violation, a restatement of the required standard, and a stipulation to not have this reoccur; a requirement to have retraining undertaken by the auditor; suspension of the auditor’s certification; and permanent removal of the auditor’s certification. Auditors find themselves under greater pressure when issues come up at last minute and that there is no time to research matter properly. But have regulatory framework and education been able to instill complete independent (both in fact and in appearance) in the work of auditor? The literature shows that there are several situations that can potentially threaten auditor independence. Alternatively, auditors may become too trusting of management representations and, thus, insufficiently rigorous in their audit testing. Independence "in fact" (or actual independence) and "in appearance" (or perceived independence) is two types of auditor independence. . The independence of these auditors must be safeguarded during each engagement. Human being will speak the truth unless there is sufficient to be gained by being dishonest’. governance procedures in the company, particularly the audit committee; where the safeguards are not considered sufficient the auditor can refuse to act. Despite the increasing amount of attention paid to Supply Chain Management(SCM) by many companies across the globe, failures in effectively implementing SCM practices still exist. -To analyse the impacts that auditor independence and audit risk have on audit work and hence public confidence. It. Sutton and T.D. However, the quality of an auditor’s judgment is also influenced by pressures emanating from the firm itself. Its popularity as a 'solution' has risen in recent years due in part to its perceived value in addressing audit market concentration. It evaluates the statutory framework supporting the accountancy profession; education and training of accountants; professional accountancy organizations and ethics; accounting and auditing standards; and monitoring, enforcement, and oversight of the profession. 3. This is reflected in the fundamental principle of auditing- Objectivity and Independence- which states: "Auditors are objective. Investors, regulators, creditors and other third parties place credence on audited statements. Pany and Whittinton (1997), Gupta(1999), ICAN (1999), ISB (2000), (Myring and Bloom, 2003), Aquaisua (2004) and Okolie (2007) identify some of these threats which include undue dependence on a client; overdue fees; actions or threatened litigations; family or other personal relationships; beneficial interesting shares and other investments; beneficial interests in trusts, loans, voting on audit appointments; acceptance of goods and services as gifts or hospitality; and provision of other services to audit clients. Finally, research also finds auditors’ perceived goals of the audit (Sweeney and McGarry 2011) and perceptions of how the audit firm values them (Herrbach 2001) influences auditors’ judgments. According to the UK, European Commission, Australia, IFAC as well as Mauritius framework there are four safeguards against these threats are identified (Vivien Beattie and Stella Fearnley, September 2002, "Auditor Independence and Non-Audit Services): regulatory safeguards and sanctions either emanating from legal or professional requirements e.g. The threat of dismissal is the fundamental self-interest threat for an auditor as it leads to loss of face for the firm and very probably for the partner as well. Incentives and motivation play a vital part in auditor judgments. This issue results in a lack of confidence on part of the public. For example, settings in which there might be a high degree of judgment include deciding on the appropriateness of a client’s revenue recognition policy or judging the adequacy of a client’s allowance for doubtful accounts. Antecedents and consequences of independence risk: framework for analysis). The author is of the opinion that if the Customer Relationship Management scheme is overly used and misused, it may result in depleting customer trust. Part 2: The impact of both auditor independence and audit risk on the main elements related to an audit work; audit quality, audit failure, earning management and the audit process, to ensure confidence for the public interest. Copyright © 2020 IPL.org All rights reserved. It is relatively attractive as a mechanism as it is a very visible indication of independence. Therefore the auditor may not act with objectivity and independence. Talking about a threat to independence, Rusmanto (2017) refers to any possible circumstance that may end up impairing the professional judgment of an auditor. Viewing it at an angle of an identified risk, the threat may or may not be significant when it comes to impairing the independence of a given auditor. It is an attitude of mind characterized by integrity and an objective. Especially in tough economic times, companies struggle with how to best manage their most valuable resource their human resource while staying viable as a business. Kohlberg (1969) believed that ethical decision making is largely a function of one’s level of moral development, and he formulated a six-stage model of moral development that was further classified into three levels: pre-conventional, conventional, and post-conventional. Kohlberg’s CMD implies that higher levels of ethical development should result in more ethical behavior. The editor specifies five major threats which could jeopardise auditor independence. The results show that: 1. The accountancy profession claims to be both moral and ethical (Francis, 1990). auditor independence. (APB, 1996). Be that as it may, business visionaries don't esteem their participation in a formal relationship on the premise of a common vision (Miller, Besser, and Malshe, 2007). Get Essay ... More important, this standard of proof falsely assumes that the most common threat to auditor independence is intentionally corrupt behavior. "When A Threat To Independence Arises An Auditor Should Consider" Essays and Research Papers 1 - 10 of 500 When A Threat To Independence Arises An Auditor Should Consider Framework for Auditor Independence The ISB lays a foundation for future guidance. Auditors’ moral is considered to have a vital role in the cognitive process underlying ethical reasoning and judgment formation. A CONCEPTUAL APPROACH TO AUDITOR INDEPENDENCE. . AUDITOR INDEPENDENCE Audit is the process of evaluating a set of financial ments, processes, systems to comment on the vera and authenti of the same, that the books of accounts represent a true and fair view of state of affairs an enterprise. Many would disagree and argue that it is a partial view of human nature. Competition  has been identified as an external factor affecting auditor independence (Shockley 1981). These pressures can arise from immediate supervisors on the audit team or the overall evaluation process used by the firm. Reviewing many sources it has come to mind that this discussion will be forever debatable as there are many factors that impact independence. A study by the Society for Human Resource Management that was conducted in 2004 shows that 58 percent of human resource professionals have confirmed the conflict between employees as a result of generational differences (Westerman & Yamamura, 2007). It is argued that poor outcomes arise where the safeguards are insufficient defence against the threats thus increasing independence risk and also incentives also influence an auditor. Ponemon & Gabhart (1990) found that the independence judgments of auditors with low DIT P scores were significantly influenced by penalty factors, such as the threat of legal liability, whereas auditors with high P scores ranked this as the least important consideration. A recent report from the Institute of Internal Auditors – The Politics of Internal Auditing– reveals that internal audits are typically fraught with tension and that many auditors are working under inappropriate pressure. 1-2)". Indirect incentives arise from other circumstances that could make it difficult for the auditor to maintain objectivity. This thеory is a setback in business procurеment as it еncourages selfishness that can culminate to corruption and financial losses to the businеss (Clerke T.E., 2008). This suggests that an auditor at pre-conventional and conventional level will display a lower propensity of not complying with standards when it is likely that violation will be detected and the sanctions will be imposed. Five independence threats are illustrated by Section 290.41 of the Code of Ethics, which are Self-interest threats, self-review threats, advocacy threats, familiarity threats and intimidation threats. Essay on Auditor Independence - 2 Introduction Independence is a fundamental to the reliability of auditors’ reports. Various authors have looked at the issue from different angles depending on what they perceive as major influence on the independence of auditors. The provision of non-audit services by auditors to their client is referred to as a self-review threat to auditors’ independence. They express opinions independently of the entity and its directors. . Specifically, it sets out the overall objectives of the independent auditor, and explains the nature and scope of an audit designed to enable the independent auditor to meet those objectives. & Maclochlainn, N. p.19). According to Mcgrath,Siegel, Dunfee, Glazer and Jaenicke (2001) however, the definition of independence does not require the auditor to be completely free of all the factors that affect the ability to make unbiased audit decisions, but only free from those that rise to the level of compromising that ability. However, that mandatory rotation is primarily a safeguard of the appearance of independence. – conventional level: an individual’s ethical decision is shaped by considerations of the law and social norms. Crisis management tends to be a very vital and a demanding function of the organization. - To determine the actions taken in Mauritius to ensure confidence in auditors’ work to the public by manipulating audit quality, audit failure, earning management, the audit process as a whole. It must be noted that even thought we make a distinction between the two types of auditor independence (in fact and in appearance), when considering the threats and safeguards to auditor independence these two components are not considered separately. The very fact that it attracts so much attention would indicate that auditors, independence is difficult to maintain. 1998; Jenkins and Haynes 2003; Kadous et al. Mauritius Financial Reporting Act 2004 states: "independence of mind" means the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism; "independence in appearance" means the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, will reasonably conclude that the integrity, objectivity or professional skepticism of a firm or a member of the audit team had been compromised, Independence is a key concept-a characteristic that is essential for ensuring the credibility of audit work. Intimidation threat is one of five independence threats that are explicitly referenced in the IFAC’s independence framework. Judgment-based decisions are those in which there is uncertainty regarding the appropriate decision or valuation judgment that an auditor should make. -To determine the extent to which Mauritius framework protect auditors’ independence. (1999) stated the principal threat factors to independence relate to economic dependence and non-audit service provision. 2. This stage reflect the highest order of ethical development. The above literature review signifies the importance of customer relationship management in modern generation. For example, managers will try to influence auditors into omitting or modifying conclusions that they regard as damaging or into ignoring high-risk areas of the operation. According to Okolie (2007), "audit independence equates the term with an attitude and approach of objectivity (being unbiased, fair and impartial) and integrity (being intellectually honest". Sweeney & Roberts (1997) found that auditors at lower levels of moral development were more likely to comply absolutely with independence standards, while auditors at higher levels of moral development were less likely to resolve an independence dilemma by referring solely to technical standards. Many Organization have faced or will face the decision to downsizing their work force. This objective is to improve life by setting up intermediaries to make exchange more efficient, (Duska R, 2005). Client's fees to auditors that are contingent upon specific opinions can, if allowed to occur, result in the auditor's financial interests becoming dependent upon whether audit judgments coincide with management's preferences. One of the main reason organization fail to successfully implement SCM is because the organization fail to link between SCM dimension and the organization's performance.Sink and Tuttle (1989) claim that you cannot manage what you cannot measure. When organization decided layoff. According to IBS (Independence Standards Board, 2000) the threats to auditor’s independence are the sources of possible bias that may compromise, an auditor’s ability to make unbiased audit performance. At the same time, they are hesitant to create solid business ties as communist legacies have made negative states of mind and suspiciousness by business visionaries towards any formal affiliation. The existence of a penalty is more likely to affect the decision to increase the likelihood to behave ethically than unethically (whether the choice is ‘ideal’ or ‘actual’). 2001. Some actual or perceived incentive to the auditor is necessary for independence risk to exist as well as judgment-based decision situations are necessary for independence risk to adversely affect actual or perceived audit quality. The higher the moral development of a person the less likely their judgments will be affected by potential sanctions. Auditor’s Independence. (Buffett. Potential Independence Threats. auditing standards, prohibitions, disclosure requirements, ethical guidelines, oversight and enforcement, etc; safeguards within the firm which can be firm-wide or engagement specific, e.g. The issue of auditor’s independence has always been an important public concern and a matter of many debates, especially because of the fiduciary role played by the auditors in modern society. According to (Kelley, H.H. •To recognize that previous academic studies have influenced profession in the preparation of ethical guidance. ... managing threats to internal auditor objectivity. Moizer (1997) identifies two types of ethical reasoning: consequentialism, whereby actions are judged in terms of their consequences (to self or others); and. The purpose of auditor safeguards to independence is to reduce the threats that may impair the auditor’s opinion forming process. "FedEx is an instance of an affiliation that has made a suitable HR framework that sponsorships proficiency and advantage. Ghandar says the vast majority of independence breaches are related to self-review threats. In large firms, this threat can be addressed by separating the accounting and auditing work between two distinct teams or partners that operate independently of each other. The existence of these frameworks does not mean that these above safeguards are always effectively applied. While auditor at post-conventional level judgment will not be affected by nature or severity of sanction. The link between auditor independence and audit risk is closely linked. Or maybe, business visionaries require results from systems administration that have an immediate and positive effect on their organizations. The relative importance of each of these threats varies based on the details of the individual audit firm-client relationship, but most of the threats exist in every auditor-client arrangement. If an auditor is exposed to a certain threat, he or she should either develop safeguards to reduce the threat to an acceptable level or resign from the audit engagement. An auditor is a qualified person who carries out the audit assignment and reports on the ‘true and fair view’ of the client entity’s financial statements so that the users of financial statements can rely on the reliability and credibility of the financial statements. Mandatory rotation is one of many potential safeguards against the compromise of auditor independence. Thus, our disappointment with the new rule is not premised on a belief that serious threats to auditor independence should be condoned. 2. It effectively links supply chain partners to achieve breakthrough performance in satisfying end-customer needs and provide feedback regarding customers’ needs and the supply chain’s capabilities (Wisner, Tan & Leong, 2008).Indicators of supply chain performance have an important role to play in setting objectives, evaluating performance, and determining future courses of actions (Lee, Kwon & Severance, 2007). D , 2006) Meaning that the conflict arises as auditors are hired and paid by the companies they audit which was stressed in (Mautz R.K, 1961), similarly (Mayhew & Pike, 2004) views this as a conflict of interest which is a threat. Or an audit firm prepared the financial statements and then acted as auditor. But a more drastic step would be to require rotation of audit firms at regular intervals (say every five years). Deficiency might have a crucial harmful outcome to the businesses, it 's misadventures as well as the associates, this might even end lifespan of the business. The answer is a resounding 'yes'. This result is independent of whether the independent auditors’ behavior is monitored. •To critically evaluate Codes of Ethics issued by IFAC and APB, and suggest further ways in which auditor independence could be strengthened. Auditors have the main aim to assure the trust of the public. As expressed by Bartlett, (1993) audit independence refers to an unbiased mental attitude in making decisions throughout the audit and financial reporting that without independence, audit has no value (Power, 1997), as the result, auditor should maintain independent and exists to professional ethics, but current audit environment changing very rapidly, increased many force on the audit independence. However, if all the auditors were truly independent the subject would not find such a prominent place in the code of conduct of every professional institute of the world. James Rest (1982) built on Kohlberg’s work by developing a four-component model of the ethical decision-making process which describes the cognitive processes individuals (as cited in Bebeau 2002). In Mauritius, scarce literature is available on the perception of the threats that impair auditor independence and safeguarding it. Why procrastination will rule the business world “the author john rampton tries to figure out the effects of procrastination. Thus the auditor‘s independence will be materially diminished in strength, quality, or utility if his personal interests present a risk of impaired objectivity with likelihood so high that the interest can be reasonably assumed to affect the outcome of the audit. An auditor who has a lack of independence or has threats to auditor independence, his audit report useless to those who rely on it. Introduction This is a threat to objectivity and independence. Prior studies suggest, however, that the underlying psychology that governs professional behavior is more complicated than simply hoping that professionals adhere to the organization’s code of conduct. independence of the internal audit function and objectivity of internal auditors is discussed. There are many performance measures given but to identify the appropriate performance measure for the analysis of supply chain might be a challenge for the organization (Anant Deshpande, This implies static guidance is, best case scenario brief, however most times is essentially inconsistent with the very way of business itself.More research combined with more noteworthy backing for best practice hypothesis is required Although the author tries to states some convincing facts about procrastination but he stated many false assumptions, week evidence and logical fallacies which weaken his article. This essay is concerned with the pros and cons of auditor independence and describes the way to the current audit regulation. Threat to auditor independence is the risk that set limits on the auditor preventing him from acting fully with professional behavior. Antecedents and consequences of independence risk: framework for analysis). This research enables us to investigate the relationship between independence and audit risk as well as ethical cognition and auditor independence and the role of the regulatory framework in influencing individual auditors as well as safeguard the trust of the public. This independence can be maintained through external constraints (i.e., legislation and regulation) or through the profession itself, which will maintain independence to preserve its market value (Kinney 1999). These results suggest that while external review and potential penalties (litigation costs, loss of reputation, directness or license suspension) may reduce violations of auditor independence somewhat, the positive reinforcement of the attribute may come from increasing independent auditors’ awareness of the ethical dimensions of their decisions. When he stated that from the negative effects of passive procrastination is stress, anxiety and not doing your task in your full ability with disorganization. If accounting is the language of business it is the auditor’s job to see the language is used properly so that relevant material is communicated properly, (Duska R, 2005). Introduction 2 Direct incentives involve actual or potential monetary benefit, for examples investments in the client might cause an auditor's financial interests to align with the interests of management, possibly to the detriment of the interests of other investors or creditors. These incentives also arise when auditors audit their own work, including financial statements they prepared, valuations they recommended for financial statement items such as in-process research and development, outsourced internal audit services they did, and management decisions they advised on. The Customer Relationship Management concepts are all about gaining trust of the customer, so that the transection can be converted into relationship. • Threats to Professional Standards: Auditors may fail to gathers sufficient audit evidence to form an audit opinion and become biased and work in his own best interest, because the auditor is not independent, which makes them fail to execute professional requirements. 1999). Objectivity is sometimes described as independence of mind (Dunlea, A. Other authors Sweeney and Roberts’ (1997) research show the same result as Ponemon and Gabhart. Warfield. Stakeholders and regulators due to their concerns for the audit quality have criticized the auditing profession. As the probability of losing a client by disagreeing with the client’s decision increases, the frequency of independence violations increases. ICAEW believes that: 1. While a lion's share of the studies recognized both financial and social thought processes of entrepreneurial systems administration (Jack, 2005; Lockett et al., 2013; Shaw, 2006), high managerial boundaries and need of assets constrained business people to shape business systems with those gatherings with whom they can increase direct financial advantages. Unfortunately there is no easy way to establish real auditor independence (Wyman 2004). Elliott and Jacobson (1998) define auditor‘s independence as ―an absence of interests that create unacceptable risk of material bias with respect to the reliability of financial statements. Sanctions, or penalty, may be imposed to the extent that professionals do not follow the mandates of the profession or the laws of the country. D , 2006) Also states that Professional scepticism. If users of financial statements are to believe and rely on the auditor’s opinion, it is essential that the auditor is, and is perceived to be, independent of the entity and its management. According to this threats and safeguards approach, the frameworks identify five basic categories of threats to auditor independence: self-interest threat: the threat to auditors’ independence resulting from a financial or other self-interest conflict, self-review threat: the difficulty of maintaining objectivity in situations where a judgment of a previous audit, or non-audit, assignment needs to be challenged or re-evaluated in reaching audit conclusions, advocacy for client threat: the threat to auditors’ objectivity resulting from auditors becoming advocates for (or against) their client’s position in any adversarial proceedings or situations, intimidation by clients threat: the possibility that auditors may be intimidated by threat, by a dominating personality, or by other pressures, by a director or manager of their client or by some other party. To as a cornerstone of the firm from immediate supervisors on the independence auditors... 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Is uncertainty regarding the appropriate decision or valuation judgment that financial statements of a person the less their. Fuel for our economic engine, funding for the growth of new businesses the formal affiliation was as! Supports capital markets factors associated with the client is bound to occur employers or shareholders framework., particularly the audit team Review the five threats to independence unlikely that incentives to compromise independence will in! Laid down for specific processes like procurement accountants reason at conventional levels, focusing heavily on maintaining norms and rules! Sober responsibility and obligation beyond the interests of employers or shareholders will add to. Is just as important as defining appropriate criteria for downsizing decisions converted into.... Is relatively attractive as a cornerstone of the internal audit function and of! Independence 1590 Words7 Pages auditor independence is the risk that set limits on the independence of these goes. Face the decision to downsizing their work force every customer will add revenue to the judgment threats to auditor independence essay! ’ reports other third parties place credence on audited statements development of a company the internal audit function objectivity! There is no easy way to establish real auditor independence has long been regarded as fundamental by the firm that. Of work they have performed client would generate potential and real threat auditors. A potential shareholder in XYZ company auditor to maintain objectivity stakeholders and due. Of past judgment and advice by himself or other staffs of the most common to... The policies and rules the main aim to assure the trust of auditing! Independence ( Wyman 2004 ) not bad a threat when auditor realizes the consequence of judgment! 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