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Auditing Theory

Notes directors in preparing the financial statements and concluding whether the result gives a true
and fair view. The auditor’s objectivity requires that an impartial opinion is expressed in the
light of all the available audit evidence and the auditor’s professional judgment. Objectivity
also requires that the auditor adopts a rigorous and robust approach and is prepared to disagree,
where necessary, with the directors’ judgments.

3.1.3 Independence

Independence is freedom from situations and relationships which make it probable that a
reasonable and informed third party would conclude that objectivity either is impaired or could
be impaired. Independence is related to and underpins objectivity. However, whereas objectivity
is a personal behavioral characteristic concerning the auditor’s state of mind, independence
relates to the circumstances surrounding the audit, including the financial, employment, business
and personal relationships between the auditor and the audited entity. The need for independence
arises because, in most cases, users of the financial statements and other third parties do not have
all the information necessary for judging whether the auditor is, in fact, objective. Although the
auditor may be satisfied that its objectivity is not impaired by a particular situation, a third
party may reach a different conclusion. For example, if a third party were aware that the auditor
had certain financial, employment, business or personal relationships with the audited entity, that
individual might reasonably conclude that the auditor could be subject to undue influence from
the directors or would not be impartial or unbiased. Public confidence in the auditor’s objectivity
could therefore suffer as a result of this perception, irrespective of whether there is any actual
impairment. Accordingly, in evaluating the likely consequences of such situations and relationships,
the test to be applied is not whether the auditor considers that the auditor’s objectivity is impaired
but whether it is probable that a reasonable and informed third party would conclude that the
auditor’s objectivity either is impaired or is likely to be impaired. There are inherent threats to the
level of independence (both actual and perceived) that the auditor can achieve as a result of the
influence that the board of directors and management have over the appointment and remuneration
of the auditor. The audit engagement partner considers the application of safeguards where there
are threats to auditor independence (both actual and perceived).

In Brief

Keeping What Works

Several articles on the subject of audit independence have appeared in the CPA Journal. In the
December 1998 issue, Robert K. Elliott and Peter D. Jacobson presented their versions of the
objective, definition, and principles of audit independence. The author presents contrary views
on the following points raised by Elliott and Jacobson:

1. The objective of an audit,
2. The effect of appearance of independence on information risk,
3. The appropriateness of regulating the appearance of independence, and
4. The wisdom of viewing integrity, objectivity, and independence as mutually exclusive
qualities.
At the close of “Audit Independence Concepts,” Robert K. Elliott and Peter D. Jacobson throw
out a challenge to those unwilling to engage in wholesale abandonment of existing concepts of
audit independence. They state: It is unlikely that a conceptual framework worthy of the
profession’s heritage will emerge without a frank admission that past independence concepts—
to the extent they existed at all—left much to be desired. Those who revere the profession’s

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