Auditor Independence and its Importance

This assignment delves into the concept of auditor independence, highlighting its significance in ensuring the reliability and trustworthiness of financial statements. It examines factors that can threaten auditor independence, such as pressure from clients or other third parties, and discusses the standards established to safeguard against these threats. The analysis draws on various academic sources to shed light on the crucial role auditor independence plays in maintaining ethical and transparent accounting practices.

Running head: LITERATURE REVIEW
Literature Review
University Name
Student Name
Authors’ Note

1LITERATURE REVIEW
Literature Review
The theory of Auditor’s independence as stated by Roy (2015) refers to the keystone
of the profession of auditing because it is the basis of trust of the stakeholders and the public
in the field of accounting. Since the year of 2000, an upsurge of high-profile scandals and
frauds in accounting have been witnessed that cast the profession into the limelight,
negatively impacting the public perception of auditor’s independence.
The objective of auditing process is to develop the financial statement’s credibility
with the help of providing written sensible guarantee from a source that independent that the
statements of the company that is presented in the reports are true and fair and is in
accordance with the standards of accounting (Tepalagul and Lin 2015). The auditor checks
whether the statements have been influenced by other parties or not, especially by the
managers or directors for their own interests. Additionally, the audit process gives to
technical competence, independence of the auditor is the most necessary element in the
establishment of the audit opinion credibility.
As identified by Vanasco (1994) the auditor’s independence takes place both
internally and externally. He has said that the auditor’s independence that internally takes
place refers to the independence from the parties who are associated directly with the
business and whose interests might be harmed by the result of audit. The particular issues that
are attached with the in internal audit process are inadequate internal controls, inadequate risk
management and poor governance within the organisation (Roy 2015). There are the
Audit Charter and the reporting committee who are generally the body in the organisation
who provides the independence to the auditors from the company’s management, there is also
the code of ethics within the organization that guides the auditor independence from the third
parties.

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When it comes to external independence of the auditor as said by Page and Spira
(2005), it means the self-reliability from parties that have external importance in the results
that are reported in financial statements of the organization. In this regard there is the Audit
Committee support and the public standards of accounting that gives management
independence. The reputation of the organisation depends on the external auditing process as
the company’s performance are represented through the report that are verified by the auditor.
To sum up Auditor independence as a whole as said by Mutchler (2003) it refers to
the internal assessor independence or of the external assessor from parties who have a
monetary interest in the business being assessor. The process of freedom needs an objective
methodology and integrity in the audit process. This concept needs the assessor to carry out
their job in an objective manner without any hindrance.
The auditor’s independence is a standard of auditing that is necessary as the assessor
enhances his credibility as well as justification to the financial declaration even at the time
when there are not at all substantial omissions or misstatements in the pecuniary declarations
set by the organisation. Gay, Schelluch & Reid (1997) is of view that if the assessor is not
self-governing of organization, the judgement of the same in the audit report would lose its
value. The potential financiers, firm’s shareholders, agencies of different governing bodies,
bankers and many others are troubled and get affected by the company’s pecuniary
assertions. Essentially, these circumstances can easily come into the conclusion that the
report is manipulated. Moreover the audit may not efficiently do this job accurately and can
present an incorrect audit report.
As per Bernard & Graham (1994) has presented the theory of assessor’s self-
governance in three different ways:

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Reporting Independence: The reporting independence refers to the code of auditors where the
assessor must not let the outlooks of reliability towards the consumer to impact his work.
Therefore, the auditor need to fairly as well as fully reveal his responsibilities. The client
administration should not force or manipulate the assessor.
Programme individuality: At times the client management may have the intention to modify
or restrict the processes of the audit that the assessor want to execute. Hence the assessor
must always stay free from intervention of client (Tepalagul and Lin 2015).
Investigative Independence: The auditor who is the third party to the company must have
access to all required materials required on the content of an audit. For instance the auditor in
order to efficiently participate in his job must independently access all the records and books
and additionally need an active co-operation from management personnel during audit
examination (Knechel and Salterio 2016).
The theory stated by Ahlawat and Lowe (2004) the various factors have been
identified that can influence the auditors that includes the audit firm overall size that refers to
the vital characteristics, which effect the auditor freedom. The auditor reputation is directly
related with the audit value. The audit firms that are large will always ensure that they
provide an independent quality of service of audit as they would always want to develop their
research facilities and efficient financial resources (George and Konstantinos 2015). They
have a reputation with a large client portfolio as compare to the smaller firms. Therefore the
issue takes place in case of smaller firms, where firms that are small would experience more
difficulty in repelling pressures of the client conflict situations. As a result, the information
content of audit reports certified by large firms is considered to be more and reliable than
those of smaller audit firms. The second factor as per the author that has been pointed out is
the audit firm’s tenure that includes the period of time that is required to fill the audit needs

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of the given client. A long association between a company and an accounting firm is likely to
result a close identification of the firm with the interests of its clients, thus an independent
action by the firm of accounting becomes problematic (Tepalagul and Lin 2015). There may
be a tendency for manipulation. Thirdly, it can be said about the competition extent on the
audit service market that has been recognised as an external factor that affects the auditor’s
independence. There are many organisations that operates in an environment that is
intensively competitive may this may lead to difficulty in the independence of the auditor as
the client can easily acquire services of another auditor, there exists a risk. B.K.W. and Davis
(1989) in this journal has affirms that there are excessive competitions among public
accounting firms and this excessive competition among different firms has been consistently
identified as an element that threatens the auditor independence. Lastly the factor identified
is the audit committee has several number of members of the board of directors of the
company who help auditors to remain independent of the manipulation of the management.
The committee supports the auditor in different audit disputes. Sustained that audit
committees could supervise the process of financial reporting and provide recommendations
in the auditor’s selection, fees negotiation and external auditor’s termination, which would
ultimately diminish power of the management over the auditor (Tepalagul and Lin 2015).
Thus, the audit committee is expected to make sure that the firm has sufficient internal
controls, proper accounting policies, and independent external auditors that will promote
timely and high quality financial statements and prevent the incidence of fraud.
As argued by Tepalagul and Lin (2015) there are several failures in the auditing
process as described previously have impacted auditor profession globally as the interests
outside stakeholders have not been safeguarded. This issue has led the rise of the provision of
non-audit services (Al Nawaiseh, and Alnawaiseh 2015). The services can be any kind of

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service other than theprocess of audit that the auditor provides to its clients. This can be
stated as the limitation of the research.
The discussion deals with the issue of the independence of the auditor, which has
identified to be a vital factor for the profession of audit. The idea has been widely described
and various explanations have been collaborated in works for the analysis. As per the authors
the freedom, it refers to the ability of the auditor to deliver his opinion about the
trustworthiness of financial statement so that the report is made fairly and neutrally away
from other third party interest or the client’s pressure. The Literatures that have been
analysed have contemplated the standards for the assessment auditor independence which
states the importance of the auditor’s independence to avoid misinterpretation and fraud in
the audit report. Moreover, it can be concluded that the independence of the auditors is the
assertiveness of the auditor the considered by the truthfulness and the unbiasedness
methodology to the process of audit.

6LITERATURE REVIEW
References
Ahlawat, S.S. and Lowe, D.J., 2004. “An examination of internal auditor objectivity: in-
house versus outsourcing”, auditing: A Journal of Practice & Theory, Vol. 23 No. 2, pp. 147-
58.
Al Nawaiseh, M.A.L. and Alnawaiseh, M., 2015. The Effects of the Threats on the Auditor’s
Independence. International Business Research, 8(8), p.141.
Alzeban, A. and Gwilliam, D., 2014. Factors affecting the internal audit effectiveness: A
survey of the Saudi public sector. Journal of International Accounting, Auditing and
Taxation, 23(2), pp.74-86.
B.K.W. and Davis, F.G., 1989. “The impact of organizational structure on internal auditor
organizational-professional conflict and role stress: an exploration of linkages”, Auditing: A
Journal of Practice and Theory, No., Vol. 2, pp. 101-15.
Bernard, J C & L Graham, 1994. Auditors Knowledge organization Richard Irwin London.
Gay, G., Schelluch, P. & Reid, I. 1997. Users’ Perceptions of the Auditing Responsibilities
for the Prevention, Detection and Reporting of Fraud, other illegal acts and error. Australian
Accounting Review
George, D. and Konstantinos, A., 2015. Factors associated with internal audit effectiveness:
Evidence from Greece. Journal of Accounting and Taxation, 7(7), p.113.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Mutchler, J.F, 2003. Independence and Objectivity: A Framework for Research Opportunities
in Internal Auditing, the Institute of Internal Auditors, Altamonte Springs.

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Page, M. and Spira, L.F, 2005. “Ethical codes, independence and the conservation of
ambiguity”, Business Ethics: A European Review, Vol. 14 No. 3, pp. 301-16.
Roy, M.N., 2015. Statutory Auditors' Independence in the Context of Corporate Accounting
Scandal: A Comparative Study of Enron and Satyam. IUP Journal of Accounting Research &
Audit Practices, 14(2), p.7.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Vanasco, R.R., 1994. “The IIA code of ethics: an international perspective”, Managerial
Auditing Journal, Vol. 9 No. 1, pp. 12-22.