Auditor Independence - Lecture 2

Question 1

What does ‘acting in the public interest’ mean?

Answer 1

.Having regard to the legitimate interests of all who rely on the objectivity and subjectivity of the accountancy profession
.It is crucial to support the orderly propriety and functioning of commerce

Question 2

What are the professional codes of ethics?

Answer 2

Fundamental principles: Integrity, Objectivity, Professional competence, Confidentiality and Professional behaviour

Question 3

The IFAC code of ethics requires two types of independence which are….

Answer 3

.Independence of mind
.Independence in appearance

Question 4

What is independence of mind?

Answer 4

The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, objectivity and integrity

Question 5

What is independence in appearance?

Answer 5

The avoidance of facts and circumstances that are so significant that an informed third party would conclude integrity, objectivity and professional scepticism had been compromised

Question 6

Auditability may be related to…

Answer 6

.Cultural contexts
.Economic dependency
.More likely to be independent if paid better

Question 7

What is informational independence?

Answer 7

.Ability to obtain evidence
.May be too dependent on management to provide evidence
.So difficult for auditors to be independent of managers beliefs

Question 8

What is Epistemic independence?

Answer 8

.Independent base of audit knowledge

Question 9

What are the provisions of non-audit services? (NAS)

Answer 9

When business clients require auditors to provide specialised advice

Question 10

Arguments in favour of Non-audit services (NAS) include….

Answer 10

.Speed of reporting
.Cost
.Knowledge
.Skills

Question 11

Arguments against the provision of non-audit services (NAS) include…

Answer 11

.Impairs auditor independence in fact
.Violates auditor independence in appearance
.Negative influence on perceptions of auditor independence

Question 12

Auditor independence may be compromised when there is an over reliance on…..

Answer 12

One or few clients for income

Question 13

Solutions for over reliance on clients include…

Answer 13

.Audit firm rotation
.Fixed term audit appointments
.Audit partner rotation

Question 14

What is audit low-balling?

Answer 14

.Financial need to retain client
.Charge low audit fees
.Affects quality of audit

Question 15

How does the unique nature of contract affect auditor independence?

Answer 15

.Suffers from ‘the dog will not bite the hand that feeds it’
.Hard to be truly independent of someone who can fire you

Question 16

How does the nature of auditor-client relationships affect independence?

Answer 16

.Trust and fear
.Familiarity and intimidation

Question 17

How do cultural practices and etiquette affect independence?

Answer 17

.Powerful social and economic forces intertwined with power conflicts that complicate the reciprocal relations

Question 18

How is the profession regulated by the profession?

Answer 18

.Professional institutions:
.Changing conceptions of their members
.Performing a monitoring role
.Appropriate disciplinary penalties

Question 19

How is the profession regulated by legislation?

Answer 19

.Enforceability
.Time taken to deal with violations
.Appropriate legal penalties must be in place