MSc Accounting & Finance: Auditor Independence and Assurance Report

This report delves into the critical topic of auditor independence within the context of audit and assurance. It begins by emphasizing the significance of auditor independence in maintaining the integrity of financial statements and the auditor-client relationship. The report explores the role of the International Ethics Standard Board for Accountants (IESBA) in setting ethical standards and promoting auditor independence, highlighting the benefits of a strong ethical framework, including a better professional environment, increased reputation, and decreased legal liability. Furthermore, the report outlines various approaches to enhance the independence of statutory audits, ensuring the reliability and credibility of financial reporting. Finally, the report underscores the importance of auditor independence in maintaining public trust and confidence in the financial reporting process, and in upholding the highest standards of professional conduct in the field of accountancy.

Running head: ADVANCED AUDIT AND ASSURANCE
ADVANCED AUDIT AND ASSURANCE
Name of Student
Name of University
Author’s Note

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Table of Contents
INTRODUCTION:..........................................................................................................................2
IMPORTANCE OF AUDITOR INDEPENDENCE IN THE AUDITOR-CLIENT
RELATIONSHIP.............................................................................................................................2
ROLE OF INTERNATIONAL ETHICS STANDARD BOARD FOR ACCOUNTANTS:..........5
Better Professional Environment:....................................................................................................7
Increased Reputation:......................................................................................................................7
Standards for Employee Discipline:................................................................................................8
Decreased Legal Liability:...............................................................................................................8
AAPROCHES TO INCREASE THE INDEPENDENCE OF THE STAUTORY AUDIT:...........8
PART B:........................................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCE................................................................................................................................13

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INTRODUCTION:
This report states the auditor independence and also the relationship between the audit
client and auditor independence. The report also reflects the role of the international Ethics
Standard Boards for Accountants and the approaches, which need to be considered for the
independence of the statutory auditor (Eshleman and Guo 2014). The last part of the report
identifies the issues from the case study and to mitigate the issues the recommendation are
provided.
IMPORTANCE OF AUDITOR INDEPENDENCE IN THE AUDITOR-CLIENT
RELATIONSHIP
To provide a clear view about the financial statements for the users of the annual report is
the primary objective of audit. The responsible for auditor is to inspect whether the company
prepared the financial statement of the company following the standards mentioned in the
country's accounting board (González-Díaz, García-Fernández and López-Díaz 2015). The
auditor also determines whether the company has expressed the books of accounts is factual and
fair value.
The importance of audit quality determines the country's economy. As per the analysis,
the audit quality gets hampered more if the auditor holds any relations with the client and it
stayed for a longer period of time. On the contrary, it can also be observed that the relationships
between the auditor and its client helped to improve the audit quality. Auditor’s independence
plays a crucial role in increasing the confidence of the financial statements users (Okere et al
2018). Auditor's independence enables the auditor to identify and deduce the error in the
financial statement of the company. Auditor's independence also allows the auditor to ensure

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whether the financial statements are formed following the accounting board of the country. If the
financial statements of the company show any material misstatement, then it is mostly observed
that the audit quality of the company reaches its helm.
The auditor should not hold a long relationship with the client company. If the auditor
holds a relationship with the client company, then the report of the auditor in the annual report of
the company will be influenced (Krauß, Pronobis and Zülch 2015). As per the ethical standard,
the auditor needs to inspect the financial statement of the company, and the decision of the
auditor needs to unbiased.
The relationship between the auditor and client company should be shorter because the
audit quality of the company may get compromised (Khasharmeh and Desoky 2018). It can also
be said that the auditor independence of the company are also compromised if the relationship
between the auditor and its client stays for a longer period of time.
The problem in auditor independence may also occur when the corporate governance of
the company is not in place. Due to the lack of proper corporate governance, the judgments
provide by the auditor on the real and fair nature of the financial statements of the company may
be influenced by the company's management. The reason behind such a problem is due to the
excellent relationship between the auditor and the client company (Lamoreaux 2016). Thus, in
this case, the opinion of the auditor will no longer be independent, and the users of the annual
report, specially the shareholder of the company cannot rely on the opinion of the auditor.
In some cases the auditor charges less audit fees from the client and on behalf of that the
auditor tends to provide advice to the company regarding tax and other services. The auditor also
tends to provide consultancy for the company (Kleinman, Lin and Palmon 2014). Thus, the

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auditor tends to shift the interests from safeguarding the shareholder's interests to commercial
interests. This makes the shareholder's interests and the commercial interests coincide, and the
job of the auditor to protect the shareholder's interests faces a threat.
The relationship with the client company and the auditor holds more threat in respect to
the familiarity. In some cases, it can be seen that the auditor tends to gets so much familiar with
the company that the company's corporate governance gets a threat. The auditor usually tends to
involve in the management decision of the company and hence, the corporate governance of the
company comes at a risk.
The longer relationship between the client company and the auditor can also affect the
authenticity of the financial statements of the company. The auditor holds so much trust on the
directors or the management of the company that the auditor forgets to run proper testing. Thus,
the director and the management of the company gets open space for fraudulency, and
shareholder's interests get compromised.
In some cases, it can also be observed that the auditor sometimes tries to promote or
defend the client interests. Thus, auditors tend to sacrifice the auditor's importance. In some
cases, the auditor of the company gets intimated due to the pressure imposed by the client
company or from another external part (Zhang, Hay and Holm 2016). It is also one of the
important reason due to which the audit quality of the company gets compromised.
The best example, which can be determined, is the relationship between the auditor,
Arthur Andersen and its client company Enron. During the year 2000, the auditing company
received $25m audit service in comparison to the $27m for non-audit service. After the demise
of Enron, the auditing company is being blamed. The Arthur Andersen was convict for not

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providing the auditing views indecently and thus, and it became the reason for the demise of the
client company, Enron. The auditing company was also accused of not providing proper auditing
views because of the auditing company's non-audit service interests.
ROLE OF INTERNATIONAL ETHICS STANDARD BOARD FOR ACCOUNTANTS:
The International Ethics Standard Board for Accountants is an independent ethical
standard setting board for professional accountants. The board provides or sets the standard in
the form of International Independence Standards or Code. The main objective of the board is to
serve the interests of the users of the financial statements and annual report of the company. The
board usually create and implement the code and ethics for the professional accountants. The
long-term objective of the International Ethics Standards Boards for Accountants is to implement
code of ethics not only for professional accountants, but also for auditors by safeguarding the
auditor’s independence. The board expects that the code of ethics will increase the quality of the
service that is provided by the professional accountants (Langli and Svanström 2014). These on
the other hand will increase the efficiency of the capital market of the world. The role of
International Ethics Standards Board also includes being transparent. The standards developed
by International Ethics Standard Board are scrutinized by Consultative Advisory Group, so that
the International Ethics Standard Board can safeguard the public interest.
International Ethics Standards Boards for Accountants are headed by International
Federation of Accountants. The IFAC serves the users of the financial statement of the company
or the annual report of the company by improving the sustainable and strong markets, economies
and markets. The transparency in the financial statements, accountability and compatibility of the
books of accounts are guided by IFAC. They are also helps to develop the accountancy
profession. IFAC tries to communicate the value and importance of the global financial structure.

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The International Ethics Standard Boards for Accountants initiate the principles of ethics
for recognition of the public interests for professionals. The standard states the behaviour of the
ethics that are implemented for professional accountant. The principle of ethics includes
professional ability, objectivity, integrity and professional behaviour (Campa and Donnelly
2016). The conceptual framework that develops for the professional accountants sets
requirements and application for the various topics. In case of audit and its related threat, the
International Ethics Standard Board for Accountants developed different sets of principles.
The professional accountants need to follow the principles of ethics to identify address
that evaluate the threat, which is lingering around the whole accountancy professionals. In this
report there are five potential principles that are developed for professional accountants. They are
as follows:
 Integrity: The accounting professionals need to be honest and straightforward in the
approach. They also liable to maintain the business relationship with utmost honesty.
 Objectivity: The accounting professionals need not to compromise the professionalism
due to any kind of conflict in interests. The professionals also required not to take any
business judgement on the basis of any undue influence.
 Professional Competence: The professionals are expected to present the service as per
the client requirement. Moreover, the service quality of the person needs to be at the top
so that the individual client or the client organization’s requirement met (Crawford et al
2014). The professionals are also expected to be updated in terms of the skills and
knowledge. The professional are also expected to maintain the business standards.
 Confidentiality: The professional needs to keep the received information confidential as
it assists in increasing the professional and business relationship.

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 Professional Behaviour: The professional accountancy are required its practitioners t
maintain the professional behaviour. The professional behaviour may insist the
professional accountant to maintain the laws and regulations stated by the accounting
board of the country.
The advantage of ethics in accounting is immense as the professional accountings are
famous for access the financial transactions accurately and provide accurate financial
information to the business. Despite of standards and professional accountancy board, it is
observed that there are many highlighted scandals, which are related to accounting. These
scandals are the root cause for creating a need for ethical standards. The presence of ethics in
accounting also provides many advantages. They are as follows:\
Better Professional Environment:
The code of ethics that are related with accounting ensures the individual practitioners of
accounting dealing with the financial transactions provide their service with utmost honesty and
accuracy. It is usually seen that the ethical standards changes. These changes in ethics assist the
professionals to improve the service and hence the misrepresentation in the financial statements
can be reduced (Cameron and O'Leary 2015). The ethical standard board ensures that the
practitioners of accounting need to represent the ethical behaviour during the work.
Increased Reputation:
The code of ethics in accountancy assists to increase the reputation of the company in the
industry. The public companies needs to prioritize the shareholder’s interests. The other
stakeholders like customers and business partners are all improvised when the company

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maintains high level of professionalism and ethical values in the work culture. The increase in
reputation of the company is directly related with the rise in market share.
Standards for Employee Discipline:
The implication of ethics in the working culture of the company leads to increase high
level of discipline among the employees. This also helps the management of the company as they
can maintain high level of corporate governance (Kieso, Weygandt and Warfield 2019). It is seen
that the discipline employees of the company are directly related with performance of the
company.
Decreased Legal Liability:
The issues regarding the unethical practices can be reduced if the company adopt and
maintain the ethical standards. During the financial crisis the companies are condemned for not
practicing the ethical financial standard. Thus, the whole world suffered. To avoid such
situations the ethical principles need to maintain by the companies around the world (Carey
2015). Thus, it can be safely state that the ethical standard can decrease the legal liability of the
company.
AAPROCHES TO INCREASE THE INDEPENDENCE OF THE STAUTORY AUDIT:
To increase the independence of the statutory audit, the auditor independence needs
guidance that revolves around the framework of the principles mentioned by the auditing board
of the company. The importance of the non-audit service to audit clients is stated as unethical but
it necessarily does not affect the independence of the company.
The main principles of audit are mainly revolves around the integrity, particularly and
objectivity. These are three factors that ensure and increase the independence of the auditor. The

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auditor needs it continuously assesses the risk that mainly lingers around the financial statements
of the company. To determine the uncertainty in the financial statements of the company, there
are fundamental principles that assist the auditor (Kleinman, Lin and Palmon 2014). Thus, these
principles enhance independence. Whenever the threat is identified in the financial statements of
the company the auditor must reduce the risk so that they can safeguard the shareholder's
interests. The threats like self-review, self-interests, intimidation with the employee and over-
familiarity with the management of the company creates uproar in auditor's profession. The
principles that are provided by the board of audits and the ethical standard will safeguard the
auditor's impendence.
The auditor needs to safeguard the threats that arise from the financial statements of the
company. To increase the protection system, the ethical board apply three levels of protection.
The protection includes safeguarding the working environment, safeguarding from the detection
risk and some other specific safeguards (Simnett and Huggins 2014). If the principles cannot
guarantee the system, then the auditor should not proceed with the assigned work.
The relationships between the statutory auditor and the client company may lead to
threat. This threat mainly affects the independence of the auditor. During the dealing of the
securities of any audit client, the financial relationship may hamper and the shareholder's
interests may compromise. The transactions of loan between the auditor and its client increase
the client's risk. When this situation arises, the auditor tends to become bias while checking the
financial statements of the company. Thus, the economic relationships led to increasing the self-
interest threat that directly affects the decision making the process of the management and the
client company (Lins, Schneider and Sunyaev 2016). To increase the independence of the

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auditor, the auditing company should not hold any financial relationships with the client
company.
Employment relationships between the company and the auditor give rise to the threat.
The client company mostly absorbs the audit professionals around the world as the internal
auditor. In this case, the client company receives every bit of private information from the client
company. The objectivity of the audit firm reporting to the client company may come under risk.
This participation of the employees from the audit firm led to increasing in the level of thereat.
Thus, the auditor's independence may come under threat. There should be no employment
relationships between the auditor and the client company of the auditor.
The sufficient kind of risk happens when the management of the audit client company
also holds a position in the auditing firm. If the individual happens to be the director of the
company, then the auditor independence comes under threat. The director of the company is the
one who selects the statutory auditor. The involvement of the director of the client company in
the audit firm is of high level threat (Donovan et al 2014). These affects directly in the decision
making process of the company. This is the reason in most of the company this practice is
banned. The involvement of the director in a client company may affect the self-review and self-
interests principles of ethics for the auditor.
When the auditor and the client company hold any business relationships, then the users
of the financial statements' interests are compromised. The business relationships can be stated as
any commercial relationships (Zhai et al 2014). The business relationships between the auditor
and the client company may lead to a rise in over-familiarity threat. Thus, the auditor's
independence will come under threat. Therefore, the auditor firm should not hold any business

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relationships with client company. These will help to increase the independence of the statutory
auditor.
PART B:
In the following case study it can be observed that the involvement of the management of
the company in the audit process and impairment in the value of the premises. These are the
following issue, which can be highlighted. The reasons mentioned above are the ones, which
tempted the auditor to issue qualified audit report.
After analysing the issues it can be stated that Megaladon indicating the reasons for the
trading problems is the impairment in the value of the company’s premises. However, in this
case the auditor disagrees with the company’s reasoning behind the trading problems.
The impairment in the value of premises may affect the income statement of the company
and the balance sheet of the company. This may led to the loss for the company but it has no
proper relationship with the trading problems. The reasons for trading problems may include
different trade patterns, irregularity of measures, economic problems of the company, national
policy of the country, different legal norms in different countries, language barrier and many
other problems.
The company need to identify the problem related with the impairment of the assets, the
company needs to conduct impairment test on a regular basis. The company need to assess the
amount of cash that can be generated from the assets. In this way the company can identify the
value of the assets and determine if any kind of impairment risk are associated with the assets.
The impairment of intangible assets is hard to value because the valuation of the goodwill or

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other intangible assets is tough to calculate. As per the accounting standard the goodwill can be
valued at fair value. In this way the impairment of the value of intangible assets can be gauged.
As per the analysis of the case study it can be observed that there is an involvement of the
management of the company in the auditing process of the company (Dowling and Leech 2014).
The management of the company tries to seek for second opinion if the auditor of the company
passes the qualified audit report upon the disagreement on the annual report of the company.
Megaladon should hire internal auditor for reviewing the financial statements of the
company and also investigating the reasons behind the trading problems. The internal auditor
also needs to review the report of the external auditor, so that the shareholder’s interests can
remain intact.
CONCLUSION
As per the above discussion the conclusion can be drawn that the importance of the
auditor independence in the audit client relationship is immense. The auditor independence gets
impact if there is a association between the auditor and the client company. The role of the
International Ethics Standard Board for Accountants in the profession of the accounts is
immense. The ethical principles and framework assist the accountants to complete the work with
full knowledge and skill. To increase the independence of the statutory auditor the company
should not hold any commercial relationship with the auditing company, employment
relationship with the auditing company and even any kind of financial relationship with the
auditing company.

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As per the analysis of the case study it can be determined that the company need to
recruit an internal auditor in the company, so that the books of accounts of the company and the
qualified report of the external auditor can be reviewed.

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