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Unit 3: Roles and Independence of Auditor

history may find the admission difficult, but it would be in the best traditions of independence. Notes
While reexamination of historically held views on any topic is usually necessary for progress, it
is important to make sure those views are understood before considering discarding them. To
that end, I accept Elliott and Jacobson’s challenge on behalf of all those who do revere the
profession’s history.

Elliott and Jacobson assert that there has never been an official definition of the term
independence and that there has never been a conceptual framework for audit independence.
There has been an official definition of audit independence since Generally Accepted Auditing
Standards were first proposed in 1947 (Tentative Statement of Auditing Standards—Their
Generally Accepted Significance and Scope). Essentially the same definition exists today in AU
section 220 of the AICPA’s codification of auditing standards. The second general standard on
independence requires that the auditor
“must be without bias with respect to the client since otherwise he [or she] would lack that impartiality
necessary for the dependability of his [or her] findings, however excellent his [or her] technical proficiency
may be.” AU section 220 also states that independence requires “intellectual honesty” and a
“judicial impartiality that recognizes an obligation for fairness not only to management and owners of a
business but also to creditors and those who may otherwise rely (in part, at least) upon the independent
auditor’s report, as in the case of prospective owners or creditors.”
The official definition of audit independence equates the term with an attitude and approach of
objectivity (being unbiased, fair, and impartial) and integrity (being intellectually honest).
There has also been an excellent foundation, at least for a conceptual framework, for several
decades.

The Audit should enhance Credibility of Financial Information

Elliott and Jacobson assert that the immediate objective of the audit is to improve the reliability
of information. They make passing mention of credibility, but relegate it to the periphery (not
the core contribution). A key distinction between credibility and reliability is whether the focus
is on the financial information or the user of that information. Financial information is made
more reliable by preventing, or detecting and correcting, material misstatements or omissions
in it. Financial information is made more credible by increasing users’ confidence that the
information is reliable.

!

Caution Independence is an essential auditing standard because the opinion of the
independent accountant is furnished for the purpose of adding justified credibility to
financial statements, which are primarily the representations of management.
The auditor can add justified credibility to financial statements even when no material
misstatements or omissions are detected by validating their absence. Reliability is a characteristic
of the financial information. The audit of the financial information adds significant assurance
that the information is reliable and thereby enhances its credibility.

No matter which view is taken, the audit objective is to improve the quality of the information.
The answer is found in the implication concerning the importance attached to the appearance of
independence. If the objective of an audit is merely to improve reliability, then the perceptions
of users about the independence of auditors can be regarded as irrelevant, or at least insignificant,
within a conceptual framework and principles of independence. Viewing the auditor’s role as
adding credibility increases the legitimacy of treating the appearance of independence as a
separate, self-sufficient cause for regulation.

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