Custom «Factors Affecting the Auditor’s Independence» Essay Paper Sample
Many difficulties and controversies lie in determining and evaluating whether an auditor should be viewed as truly independent since there are two significant approaches to audit independence that focus on real and perceived forms of it. The current paper aims to shed light on the main factors that affect and shape the auditor’s independence.
According to the estimations of the researchers in the sphere of accounting, independence is considered to be one of the most important and influential auditing standards because objective opinion of the auditor contributes to the justification, validity, and finally credibility of financial statements (Muqattash, 2013). Since credibility and reliability are the main characteristics describing financial information, the role of audit independence is enormous because it excludes the external influence, pressure, persuasion, and biased attitudes (Muqattash, 2013). Moreover, absence of independence negatively influences the value and quality of audit services because compromised independence is associated with very low levels of audit quality. In addition, auditor’s independence is one of the main components that contribute to the auditor’s credibility and effectiveness. In general, in case audit independence is great, the quality and credibility of audit are considered to be higher. The concept of audit independence foresees that an auditor is responsible for doing work not only freely but also in a clear, accurate, and objective manner (Muqattash, 2013).
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The Federal Law No. 22 of 1995 regulates the profession and responsibilities of auditors. In addition, this document identifies and describes the appointment as well as conditions of the company’s auditor and their main duties (Westlaw Gulf, 2015). According to the information provided in the law that regulates the auditor profession in the UAE, there are numerous determinants that shape auditor’s independence (Westlaw Gulf, 2015).
To begin with, client’s financial condition is considered to be one of the most important factors that impact auditor’s independence (Digabriele & Ojo, 2014). However, such determinants as the tenure of the audit firm, increased competition in the market that provides audit services, audit fees, and finally audit committee are no less significant because all these factors usually influence audit independence (Digabriele & Ojo, 2014). Size of the audit firm is often viewed as the most influential factor that affects audit independence. In general, larger firms and companies usually have more strengths and opportunities to succeed in the competitive environment. Numerous empirical studies provide evidence that small audit practices are vulnerable to the increased danger of impairment of audit independence (Digabriele & Ojo, 2014). However, researchers agree that it would be a great mistake to assume that large accounting firms are immune to numerous pressures from clients (Digabriele & Ojo, 2014).
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The level of competition in the market that provides audit services is the second important factor that influences auditor’s independence. It is important to note that large audit services are often believed to deliver higher quality than small services (Digabriele & Ojo, 2014). In addition, companies and firms that work in an extremely competitive environment usually face numerous difficulties remaining independent as the client always has an opportunity to use services provided by many other auditors. However, many researchers are proponents of the idea that existence of competition does not violate the auditor’s independence. On the contrary, it motivates auditors to be more independent in order to improve their reputation and create a favorable overall image of audit services that will give the chance to maintain a clientele and increase the amount of potential clients (Digabriele & Ojo, 2014).
Third important factor that affects the auditor’s independence is closely associated with an audit firm’s tenure (Digabriele & Ojo, 2014). The majority of the researchers who explore the interrelationships between an audit firm’s tenure and audit independence claim that lengthy tenure may have detrimental consequences for the audit independence. It is explained by the fact that it violates audit independence and leads to numerous threatening effects including less rigorous audit procedures, lost confidence of customers, disrepute of the company or firm, etc. (Digabriele & Ojo, 2014). In addition, personal relationships with clients may put at risk auditor’s independence because it may shape auditors’ mental attitudes, behaviors, and opinions (Digabriele & Ojo, 2014). In addition, involvement in personal relationships with clients is one of the main factors that promotes lengthy tenure and spoils audit independence. Close relationships with clientele and over-familiarity that promote strong loyalty as well as emotional relationships deprive auditors of the opportunity to evaluate evidence in a fair and objective manner (Digabriele & Ojo, 2014). Thus, many researchers consider excessive familiarity, high dependence on clients, and personal relationships with clientele to be the most significant threats that put at risk auditor’s independence (Digabriele & Ojo, 2014).
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Finally, considerably large size of audit fees is one more influential factor that is directly linked to the risks of losing independence among auditors (Muqattash, 2013). In addition, absence of effective audit committees that involve a selected number of experts whose primary responsibility is associated with providing auditors with opportunities to remain independent is one more factor that threatens auditors’ independence. On the contrary, existence and formation of professional audit committees drastically increases the confidence of the public in independence of auditors (Muqattash, 2013).
Thus, having reviewed the notion of auditor’s independence and described main factors that influence and shape it, it is possible to come to conclusion that auditor’s independence is a critical issue associated with public confidence. In general, the most common factors that shape auditor’s independence are directly linked to the level of competitive environment that affects the work of auditors, lack of effective audit committees responsible for controlling audit independence, etc. Thus, understanding auditor’s independence and its determinants is essential because it enables one to develop efficient ways and strategies that will contribute to confidence in financial reporting and enhance the credibility and quality of auditing profession.