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Auditor indpendence - Coggle Diagram
Auditor indpendence
Threats to indpednence
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If the auditor has a mutual business interest with the company or any of its directors or senior management
If there is a close personal relationship between the auditor or audit firm and a employee of the company
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The audit profession has identified a number of potential threats that its members are required to watch out for when conducting audits. The CS should be aware of these and watch to make sure they are not happening within their company. Th audit committee should be made aware as soon as possible if one of these threats exists
Self interest: The threat that an auditor or audit firm is earning such a large amount of fee income from the audit and non audit work that its judgement will be affected by a desire to protect this income stream
Self review: This can arise when the audit firm does non-audit work for the company and the annual audit involves checking the work done by the firms own employees. The auditors may not be as critical of the work of prepared to challenged it because this would raise questions about the professional competence of the audit firm. For this reason the accountancy profession has an ethical rule that firms must not take on non audit work that may be subject of future audit by its staff
Advocacy: This can arise if the audit firm is asked to give its formal support to the company by providing public statements or supporting the company in a legal case. The accountancy profession therefore has an ethical rule that firms should not take on non-audit work in which they may be required to act as 'advocate' for the client as this means the auditor is being asked to take sides which will affect its indpendence
Familiarity When an auditor is familiar with a company or one of its directors or senior managers or becomes familiar with them through a working association over time. Familiarity leads to trust and a willingness to believe what the other person says without carrying out an investigation into its accuracy or honesty. The auditor will be unwilling to think that the other person if capable of making a serious error or committing fraud. May also occur through personal association and long association.
Intimidation: An auditor may feel threatened by the directors or senior management of a company. Both real and imagined threats can affect the auditors independence. A company may also threaten to take away the audit or stop giving the firm non-audit work unless the auditor accepts the opinions of management
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Should be independent from the organisation so that the audit is not influenced by the relationship between the external auditor and the organisation