January 29, 2022

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Auditors Independence Meaning and Key Explanations

Auditors Independence Meaning and Key Explanations
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Auditors can give biased, audit reports if their independence is in jeopardy. This is true mostly for external audit firms who give reports that are relied on by external bodies. Internal auditors also face this issue. In this article, let’s introduce the topic.

Definition of Auditor’s Independence

1. Auditor’s independence is the freedom of the auditor to give an unqualified audit report without being affected by individuals with a financial interest in the company.
2. It can also be defined as audit reports provided by the internal and external auditors that are characterized by integrity, objectivity, and not being influenced by parties having financial interests in the entity being examined.

Key Explanations of Auditors Independence 

Freedom of the auditor. Every auditor must be free to carry out their job. When there is a threat, he or she may lose the freedom to give an audit report that is true and fair. Internal auditors must be free from their fellow employees on the job. Also, external auditors must be given free will and should not be allowed to have an intimate relationship with any individuals in the company.

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Unqualified report. Auditors are expected to give unqualified reports. This report means that there is nothing wrong with the entity’s financial data during inspection. A lack of independence can impair this report. If there is a threat to independence, then the report may be qualified or disclaimed.

Individuals with a financial interest. These are individuals that work with the company and have a material interest in it. A chief executive officer has a financial interest. A shareholder who is also a member of the board of directors has a financial interest. Audit partners should avoid interest with persons in the firm they audit. Individuals having financial interests might be a wife, a husband, a formal colleague, and friends. It could be the spouse’s brother, uncle, or cousin. Such relationships affect independence.

Importance of the independence of Auditors

It is paramount for auditors to be independent in carrying out their duties. When they lack this quality, it may impair their integrity and objectivity. They are unbiased. That is, providing a true and fair view of the examination of the firm’s financial statements. When an auditor lacks this quality, they may end up giving reports that favor a party with a financial interest in the company.

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Auditors should not use their knowledge of the company to buy its shares. Thereby outperforming the market. They are prevented from acquiring 25 percent of the company’s shares. Doing so could affect their independence. As they may give reports that will benefit the company.

Conclusion

Independence of the auditors means providing reports that are free from bias and are objective. This can only be possible if there is no threat to independence. One way to protect this is by avoiding relationships with people with a financial interest in the entity under examination.

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