This report provides an identification and explanation of threats to auditors’ independence and the legal and ethical requirements to minimise and eliminate the threats. The primary aim of the report is to understand auditors’ independence, what affects the independence, the safeguards available and the legal requirements, such as the Companies Act 2006.
Auditors have a role to report an independent opinion regarding the truth and fairness of financial information presented to them by management which enhances the financial reporting system. The need for independence arises because, generally, users of financial statements do not have all the information necessary to judge the objectivity of the auditor. Auditors must not only be independent but they must be seen to be independent from their client company.
Four different threats were identified and assessed. Close auditor-client relationship, long association with the audit engagement, high audit fees and the provision of non-audit services poses a threat for auditors’ independence, therefore objectivity. Corporate scandals such as Enron and Tesco were used as an example to support the findings in this report. Safeguards, found in the Ethical Standard for Auditors are applicable for each of the threat to help eliminate the threat, if not, reduce it to an acceptable level.
It is recommended that if safeguards cannot be implemented to reduce or eliminate the threat, the auditor must withdraw from their position and not stand for reappointment to ensure that auditors’ always remain independent and objective despite the circumstances although absolute independence cannot be achieved or maintained.
Section 1212 of the Companies ...
... middle of paper ...
...ersen, where the auditors were regarded to be Enron’s employees, the Act has been breached.
2.3 Ethical requirements
Under paragraphs 44 and 45 of the ES 2 (2010), where a partner leaves the audit firm and joins the client as a director or someone of key management position after being engaged as an audit partner for that client at any time in the two years prior to this appointment, the audit firm should resign as an auditor and not stand for reappointment until a two year period has elapsed.
The standard also states that where an individual who is in position to influence the conduct and outcome of the audit opinion becomes aware that an immediate family member has entered into a business relationship of commercial interest, for example, a joint venture, that individual must report the matter to the audit engagement partner so they can take appropriate actions.
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