Before issuing the report, the Widgets audit partner should also discuss Marker’s independence assessment and the safeguards applied with the Widgets board. The advocacy threat: The auditor becomes involved in actively promoting or defending the client’s interests. Sign up to our email programme to hear about our latest news and service offers. The auditor independence is measured by how honest an auditor … Sometimes the problem is not about the member being unethical, but it was about the situation where members were not informed or properly trained about the policies and procedures. The code of Ethics classified safeguards in two categories i.e. This audit rotation is the rotation of the audit firm and from the client point of view when you rotate the audit firm, it involves huge cost implication to the client. Paragraph 290.152 of the Code of Ethics, Principle 7 of NZX Corporate Governance Code, and FMA Act, lead auditor and review partner be rotated every seven year and in case of NZX listed company, it is 5 years (Financial Markets Authority Corporate Governance in New Zealand, 2014) (NZX Corporate Governance Code 2017, 2017). Code of Ethics requires the auditor preforming audit must maintain independence of mind and appearance both. This include cost, but it can be very useful, if the audit firm is the sole practitioner. Also, according to the Company Act 1993 and section 290 of the Code of Ethics, an auditor cannot have any employment relationship with the client company or related company such as director, employee, liquidator or receiver. This created requirements for auditor to be and appear to be independence of those influences that could override his professional judgement. If the firm find a member or staff breach the policies and procedures, the firm should first find out if the staff breach the policies and procedure because they did not know about the policies and procedures. •Investigative independence: no legitimate source of information is closed to auditors, requiring that auditors have freedom to examine information that auditors Auditors must be able to review material objectively and come up with a neutral, accurate, and honest report on the outcome of their investigations. Doubts are sometimes expressed regarding the independence of external auditors. So if the period of audit to the client is just few years, the risk is quite low so as a safeguards, audit firm can simply let the another partner to review the audit but if the audit period is longer such as 10 years, then the risk is significantly high so audit rotation (rotation of audit partner or even audit manager in some cases) would be better as the safeguard. If an auditor has any financial interest or employment with a client company, the auditor’s ability to make independent evaluations of the fair presentation of financial statements could easily be affected (Arens, 2013). New Zealand Institute of Chartered Accountants has been granted accreditation under the section 50 of Auditor Regulation Act 2011 (Auditor Regulation Act 2011, 2017) but FMA must monitor the audit regulatory systems of each accredited body to the extent that it is adequate and effective and if the body are failed to comply with it, they may considered as committed an offence and is liable for fine not exceeding NZ$100,000.00 (Auditor Regulation Act 2011, 2017). Auditor independence refers to the independence of the external auditor. Basing any fees on the outcome of an audit engagement (contingent fees) is prohibited by the subs. It was the auditor to avoid the case where there is financial involvement of family members or involvement of personal relationship etc. The external auditor may however, have a commercial interest too. (b) Safeguards within the firm’s own systems and procedures. Auditor independence tends to be an extremely important component across the audit process, because of the reason that it directly influences the judgment that is put forth by the auditor. Independence in auditing 1. Auditing 1 Assignment 2. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. Under this section, the company can only replace the auditor by providing 20 working days written notice to the auditor or by giving reasonable opportunity to make representations to the shareholders on the appointment of another person either in writing or by the auditor or the auditor’s representative speaking at a shareholders’ meeting. Preparing accounting records and financial statements for audit clients poses a substantial self-review threat. These are safeguards attributable to: (a) Safeguards created by the assurance practitioner’s profession, legislation or regulation; and. If the company failed to comply with this section, it considers as an offence and is liable for penalty (Company Act 1993, 2018). Enron is the another classic case for the corporate collapse due to the lack of audit independence as one of the major reason along with the objectivity by the auditors, series of accounting fraud, failure of the board and poor corporate ethics (Tom Campbell, 2005). The client has competent employees with experience and seniority to make managerial decisions. Free resources to assist you with your university studies! *You can also browse our support articles here >. The corporate law reform in Australia, The Sarbanes-Oxley Act ion the US and CA ANZ was start reviewing their standards. As corporate governance has emerged as a hot topic in the US and Europe, a recent study from Ecole hôtelière de Lausanne analyses how independent committees members have an impact on the credibility of earnings. It is characterised by integrity and requires the auditor to carry out his or her work freely and in an objective manner. Investors could lose money which would affect pension funds, the economy could therefore suffer leading to a financial crisis (especially if huge corporations collapse) and this would lead to a reduction in the welfare of the public. The activities such as unapproved employee bonuses paid to managers and executives, manipulation of the financial statement to present the favourable financial position, wrong accounting treatment despite of the auditor’s involvement were highlighted in the report. Using different partners and teams for the provision of non-audit services to assurance clients. Familiarity—when an auditor becomes too sympathetic to the interests of another party because of a close relationship. Under this section, Equity investment (including options) in clients is specifically prohibited. So, the member must get the proper training about the policies and procedure and the disciplinary procedures within it so that if somebody breaches it then they will be discipline accordingly. The auditors must opine on financial statements as per his capability and within the boundaries of the code of conduct which protects his independent state of mind. Registered Data Controller No: Z1821391. As per the section 207W of the Company Act 1993 and principle 7.2 of NZX Corporate Governance Code, the board of directors must involve the auditor in the meeting of the shareholders and the auditors are free to communicate the concern of the auditor as auditor (NZX Corporate Governance Code 2017, 2017) (Companies Act 1993, 2018). Being independent is about preserving “Independent of mind” which is about the capability to maintain profession objective while exercising professional judgement which is important to preserve quality of auditor’s judgement. Familiarity threat: The relationship between the auditor and client is long-standing or otherwise is so familiar that the auditor becomes involved in advising the client or acting in a management role. 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