Auditor Independence Analysis: A 3102AFE Auditing Group Assignment

This report analyzes the concept of auditor independence within the context of a group assignment. It examines a case where an audit firm, MRF, provides both auditing and consulting services to a client, and discusses how the firm's objectivity and independence may be compromised due to the high proportion of revenue derived from consulting services. The report identifies and explains the threats to auditor independence, including self-review, advocacy, and self-interest threats. It also explores the implementation of safeguards to reduce these threats to an acceptable level, such as considering the public interest, providing staff training, and avoiding conflicts of interest. Furthermore, the report addresses the failure to act in accordance with the public interest principle, highlighting the importance of full financial disclosure and the proper handling of audit working papers. The analysis is supported by references to relevant ethical standards and academic literature.

Subject Code: 3102AFE
Subject Name: Auditing
Assessment Title: Group Assignment: Auditor Independence

Table of Contents
Part A...............................................................................................................................................3
Independence of the auditor.........................................................................................................3
Part B...............................................................................................................................................5
Implementation of the safeguard for the reduction of threat to an acceptable level....................5
Part C...............................................................................................................................................6
Failure to act according with the public interest principle..........................................................6
References........................................................................................................................................7

PART A
Independence of the auditor
In the present case, the MRF partners have provided the traditional auditing services to the client.
Along with this, they also provided the consulting services. The company increased the fee
charged from the consulting services, which reflects more than 50% of the total income of
partners. It has been seen that, by providing consulting service the objectivity and the
independence of the auditor affected.
The requirement of objectivity is very essential at the time, when auditor is providing other
services along with audit. It is essential for exercising the professional judgment (Hossain et al.
2016). This has been supported by APES 110 Code of Ethics for Professional Accountants
issued by Accounting Professional & Ethical Standards Board Limited (APESB) (APESB,
2010). As per APES 110, Objectivity refers as presence of mind, which has measured all
consideration connected with the activity (APESB, 2010). In the given case, auditor provides
traditional audit services, but mainly they are engaged in the consulting services. By this, the
objectivity of the auditor at the time of expressing their opinion on the financial statement got
impacted. There are numbers of ways by which threats to objectivity arise (Roy, and Saha,
2016).
Auditor independence means, independence of the external auditor from the clients that may
have the financial interest in the company being audited (Johari, Mohd‐Sanusi, and Chong,
2017). Auditor independence required the integrity and objectivity approach. Generally the
auditing company provides the consultancy services to its client. It is permissible that auditor can

provide other specific service along with auditor, but it may assist the impact on the
independence and the objective of the auditor (Tang, Ruan, and Yang, 2017). By providing the
traditional accounting service along with the consultation service, auditor might compromise the
objectivity function. The reason by which independence of the auditor by providing the
consulting service to an audit client affected, is describe below –
Self – review threat
Self-review threat occurs at the time when auditor has reassessed the work, which has been
performed by him (Siagian, 2018). For instance, if the auditor himself prepared the financial
statement and also performs the audit of the same financial statement, then it is difficult for the
auditor to find out shortcomings in their work. Along with this, finding out shortcomings from
their own work may also lead fear of penal provision to the auditor, therefore their independence
may compromise.
The Advocacy Threat
This threat occurs at the time, when the audit firm or the any partner of the firm, promote the
business of the client. The independence and the objectivity can be affected, if the auditor
become against the position of the client (Adelopo, 2016). Whenever, on the behalf of the client,
auditor takes any proactive stance, this may lead to the incompatibility of the objectivity and
independence of the auditor, which is required in the audit. In the present case, the MRF
Company provide the consulting service, therefore the independence of the auditor and
objectively influence as they cannot take any action against the client. The reason behind the
same is that, they himself engaged in the service, and how they advocate against the position of
client.

The Self-Interest Threat
This threat takes place at the time, when auditor obtains any financial or other interest. This may
be due to any direct or indirect interest in a client, or from an anxiety of dropping client. In this
case, the company increased their fee from consulting service and also from the total income of
the company, more than half percentage reflect the income generated from the consulting
service. Thus, due to the self-interest threat the objectivity and the independence of the auditor
impacted (Hartono et al. 2016).
By analyzing the above concept of objectivity and the independence, it is concluded that
provision of consulting services to an audit client may compromise the independence of the
auditor as described under APES 320 Quality Control for Firms (APESB, 2010).
PART B
Implementation of the safeguard for the reduction of threat to an acceptable level
Following are the safeguard that MRA Ltd might have employed to reduce the threat to an
acceptable level –
 The company should consider the public interest, all the activities conducted by them,
must be for the welfare of the public (Levy, 2018). Further, the same has been discussed
under APES 350 Participation by Members in Public Practice in Due Diligence
Committees in connection with a Public Document. For this, it is advisable that company
should not significantly engage in the consulting services only, they have to consider
their main activity that is expression the opinion on the financial statement. It should
establish the reliable procedure and ensures that all matters are properly addressed.

 The company should provide proper learning and training to its staff and communicate
about the importance of the objectivity, integrity, and independence standard at the time
of performing activity (Chiang, 2016).
 No officer or the employee of the audit firm should held significant position in the
operation of the business of client, by which the self-review or self–interest threat may
arise.
PART C
Failure to act according with the public interest principle
Every company has obligation to running its business in the public interest. It is the duty of the
auditor to carry out its activities for the public interest. Public interest means, the collective
welfare of the society, which consist of investors, clients, business, government and others (Bae,
& et.al 2016).
In the present case, it has been stated that MRA LLP did not fully disclose the financial position
to investors. Further, it also destroyed some key audit working paper and some important
documents related with audit. On the basis of this aspect, it can be said that MRA Ltd failed to
act according to public interest principle. It is the duty of the company to give the full disclosure
of all the information related with the financial position, because financial information influences
the decision of the investor. Therefore failure to disclose the financial position is against the
public interest (Jamal, Marshall, and Tan, 2015). Further, working papers are considered as a
property of the auditor and it must be protected by the auditor in safe custody. Failure to protect
the working paper and destruction of the important documents by the company, both are
regarded against the public interest. Along with this, the company also lost several important

client due to the loss of confidence, and employee, it leads to the negative impact on the
performance. On the basis of this, the activity carried out by the company is against the public
interest.

REFERENCES
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Confidence. Routledge.
APESB, 2010. APES 110 Code of Ethics for Professional Accountants. [PDF]. Available through
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March 2019].
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Levy, H.B., 2018. Maintaining Auditor Independence When Giving Accounting Assistance and
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