Importance of Auditor’s Independence and Professional Skepticism

Question: What is Importance of Auditors Independence and Professional Skepticism? Answer: Introduction The present report specifies the importance of independence and professional scepticism while planning and conducting an audit of an organisation. It is necessary that sufficient appropriate evidence should be attained by auditor so that a fair opinion can be presented relating to financial statements. The main objective of the external auditor is to apply professional standards conducting an audit and the same adhere the call for the appropriate application of professional scepticism and independence for the formation of appropriate opinion on the financial statement (Rahman, Moniruzzaman and Sharif, 2013). Scepticism is a required attitude for enhancing the auditors ability in exercising professional judgment is ascertaining and responding to circumstances which indicate the possibility of material misstatements in financial statements. Further potential threats relating to same have also been discussed in the report with appropriate safeguards relating to them. Literature review The importance of independent audit is heightened as the same increase the degree of user confidence in financial statements and other documents. Various organisations have to face difficult economic conditions which give rise to financial reporting challenges like the existence of going concern assumption, evaluation of fair value and policies adopted for selecting appropriate accounting policies for the preparation of financial statements (Nickell and Roberts, 2014). Australian Securities and Investment Commission have also presented concern regarding the application of professional scepticism in auditing. In order to enact a measure of appropriate scepticism it is necessary that there must be enough understanding of concepts and the factors which underlie at different structural levels which influence it. U.S. and international standard stress on questioning the critical assessment of audit evidence and a varied interpretation are available relating to it. The factors which enhance the application of appropriate professional scepticism assist organisation in avoiding alleged audit deficiencies. It has been analysed that unless all the parties completely understand all the factors which affect the professional scepticism; the solutions will be not to assess completely for the same and cost would overweighs benefit. For the purpose of enhancing the application of proposed solutions must consider the manner in which it affects each structural level and mitigates factors which are already in place (Libby and Emmett, 2014). External auditors already know the responsibility relating to appropriate professional scepticism throughout the audit. Auditors independence requires a free state of mind which permits the provision of opinion not being influenced or compromise the professional judgment and allow the allow the auditor to take a decision with integrity, objectivity and professional scepticism. The International Federation of Accountants has specified a framework of principles which provide assurance to team members, and it used for identifying threat for independence and measuring the significance of that threat. In case the threat is clearly insignificant and in such state, then safeguards are being applied for reducing them to an acceptable level such that independence of appearance, as well as the independence of mind, is not compromised. Auditors Independence Auditors independence requires independence of mind as well as the independence of appearance. In accordance with the Singapore Standard on Auditing (SSA) Auditor is allow to act with integrity and exercise professional scepticism while conducting and planning audit. Independence of appearance means the state of mind which allow the auditor to provide opinion without being affected or compromise in terms of professional judgment is known as the independence of mind (Soliman and Ragab, 2014). This standard ensures that all facts and circumstances are avoided; knowledge is availed from third parties while forming an opinion or conducting an audit. Independence word itself lead to suppose that professional judgment is to be applied and the same ought to be free from all the economic, financial and other relationships. The same was concluded in a matter of Rosenberg Rich Baher Berman Co. et at and SEC Administrative Proceeding Release no. 34-69767,2013 that auditor independence is viola ted in case he provides prohibited non-audit services. Further in the case of LIAN BENG: DECONSTRUCTING REMUNERATION same judgment was provided. In this case intense scrutiny has been done by the Singapore Exchange (SGX), as well as experts. Auditor independence plays a pivotal role in providing unbiased and honest professional judgment which is the primary duty of auditor. It has been observed that doubt is expressed relating to the independence of the external auditor (Knechel and Salterio, 2016). At the same time, it is being argued that it is very necessary that corporate governance measures are in place for an auditor to providing an appropriate opinion regarding financial statements. In the case of Total Wealth Management Inc, SEC Administrative Proceeding, 2014 WL 3401161 it was concluded that auditor does not provide an independent opinion in case he assesses his own work. The significance of economic, financial and other relations are evaluated after considering the informa tion received from third parties and at the same can be attained only if independence is provided to the auditor. Professional Skepticism Professional scepticism can be said as an attitude for being alert for the circumstances which might indicate possible misstatements or contradict with available audit evidence. As per provisions of SSA 200 the independence of auditor is important so that the opinion which is formed on financial statements is not influenced by any relationship between them. Professional scepticism is important for enhancing the effectiveness of audit procedure. Study of Ikechukwu (2013) shows that the same decreases the possibility of selecting inappropriate audit procedures, misapplication of inappropriate audit procedures; neglecting unusual transactions and misconstruing audit results. It provides assistance in taking a decision relating to nature, timing and selection of audit procedures; ascertains and evaluating sufficient appropriate evidence; assessing the managements results as well as judgment and concluding the base which is to be formed for the purpose of attaining audit evidence. Profess ional scepticism required to be applied at every level that is engagement level, planning and conducting an audit and forming an opinion on financial statements (Ikechukwu, 2013). In the case of James T Adams, CPA SEC Administrative Proceeding it was concluded that individual auditor and associate company is treated as one entity and as in this professional scepticism was not applied the same was concluded that auditors independent is impaired, and the penalty was charge from the claimant. At engagement level, it is necessary for ascertaining the integrity of owners as well as management. With this case, regulations regarding professional scepticism has been rigid for auditors as well as companies. Application of professional scepticism ascertains as well as assesses the risk of material misstatement and the same is done through performing risk assessment procedures and evaluating assessment of risk through modification of audit procedures. Same has been violated in the case of Wal- Mart and News Corp, FCPA due to which modification in regulation has been made. Analysis of potential threat to independence and Professional skepticism in planning and performing in audit A variety of threats have been recognised relating to auditor independence and professional scepticism such as self-interest threat; familiarity threat; self-review threat; intimidation threat; advocacy threat and the same have been specified with their safeguard: Self- Interest Threat: In case auditor is financially dependent on the audit client or in case he is closely associated with him due to any other interest; in that situations, circumstances exist for self-interest threat. The risk relating to this threat can be mitigated by making understand management the importance of auditors independence and its role in the formation of opinion (Tassadaq and Malik, 2015). Familiarity Threat: This threat exists when there is a relationship between auditor and the client or in case the auditor provides advice or acts in a management The safeguard that should be applied are: an independent individual can be appointed for overviewing the work and providing suggestion so that in case any material misstatement exist the same can be lowered to an acceptable level (Contessotto and Moroney, 2014). The same threat arose in the case of Scott London, CPA,SEC, 2013 in which partner provided inside information to his friend in exchange for jewellery and cash , and it was concluded that independence rules had been violated and audit is not done independently. Self Review Threat: This specific threat arises in circumstances when the auditor has to audit work done by a member of his audit team, colleague or partner. As a threat of biases arises in these situations that the transaction would have been entered appropriately or the work has been assessed in an appropriate manner, and no material misstatement exists (Weiss, 2014). For mitigating the risk relating to same threat independence issue should be discussed with management including audit committee so that the same is made available to the auditor and appropriate opinion is formed by the auditor. Another method which can be applied is a review of the accounts by a qualified and independent individual so that it can be appropriately assessed that whether any material misstatement exists or not. Intimidation threat: These threats arises in situation where auditor is in a position of being overtly or covertly compelled by managing authorities or by other interested parties. For example this threat arise, if an audit team is threatened with replacement if they made disagreement regarding the application of auditees regarding particular accounting principle, or if an auditor is forced to believe that that an expression of auditees of client dissatisfaction will impose significant threat to their career within the firm Inherent Biases: The brain quickly makes an unconscious decision in accordance with detail provided in first impressions. Thus the same as believing subsequent colour thinking in accordance to which the person thinks about further issues. Professional Scepticism can be said as a conscious tool for dealing the issue relating to biases while auditing (Abdullatif, 2013). It is true that safeguard requires time and continuous efforts and is successful only in case the same is implemented with diligence. Therefore the present threat can be mitigated with the application of professional scepticism while planning as well as conducting an audit. Other general safeguards which can be applied for mitigating the risk relating to independence and professional scepticism of auditor are to discuss with management regarding the importance of ethical behaviour and make them act in public interest. Policies and procedures relating to the identification of ethical threat should be in associate with the policies followed by the organisation (Young, 2013). Conclusion It can be concluded from above discussion that auditors independence and professional scepticism plays a pivotal role in forming an appropriate opinion on financial statements. Thus scepticism can be said as a necessary attitude which is to be applied by the auditor in all the stages while conducting an audit for attaining sufficient appropriate evidence. Therefore it can be said that consistent application of professional scepticism imperative auditor in the formation of opinion on financial statements. References Books and journals Abdullatif, M., 2013. 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