Silvia Laras Avisha

143249024
PPAK Genap 2025
Auditor independence is essential for the reliability of financial statements and the public's
trust in the accounting profession. It ensures that auditors are objective and free from bias
when forming their opinions.
Importance of auditor independence
 Credibility of financial statements
Auditor independence is a key factor in the credibility of financial statements.
 Public trust
Auditor independence is the foundation of the public's trust in the accounting profession.
 Objective opinions
Auditor independence ensures that auditors can form objective opinions without being
influenced by conflicts of interest.
Practical implications for auditors
 Avoid conflicts of interest: Auditors must avoid any financial interest in the
companies they audit. They should also avoid relationships that create shared or
opposing interests with the client.
 Be objective: Auditors must be objective and free from bias in their work.
 Be honest: Auditors must be honest in reporting any material misstatements found in
the financial statements.
 Maintain independence: Auditors must maintain their independence in both fact and
perception.
Factors that can undermine auditor independence long audit tenure, client pressure, financial
significance of the client to the auditor, and provision of non-audit services.
Practitioner independence is a type of independence that is specific to a practitioner's role,
while professional independence is a more general concept that applies to all professionals.
Explanation
 Practitioner independence
This is when a practitioner is able to work independently without supervision, within the
scope of their license or certification. Practitioners should act impartially and objectively, and
avoid conflicts of interest.
 Professional independence
This is when a professional is able to make impartial decisions without being influenced by
external pressures. Professionals are expected to be competent, perform services with care,
and recognize their responsibility to clients.
Examples
 Independent practice
A practitioner who is responsible for their actions without direct supervision.
 Auditing
An auditor should be independent in fact and appearance, and provide an opinion that is true
and fair.
Factors that can affect auditor independence
 Self-interest
An auditor's personal financial interests can conflict with their professional responsibility.
 Familiarity
An auditor may be too close to the client company's employees, officers, or directors.
 Intimidation
An auditor may be deterred from acting objectively if they are threatened by management or
the client company's directors.
 Advocacy
An auditor may be involved in promoting the client company, which can compromise their
objectivity.
 Business relationships
An auditor may have a business relationship with the client company, such as a strategic
partnership.
 Audit fees
An auditor may request or demand high fees to perform their task.
 Gifts and hospitality
An auditor may receive gifts or hospitality from the client company, which can create a
closeness and personal interest.
Factors that can affect the power of an auditor and client, and the perception of auditor
independence, include:
 Self-interest
An auditor's independence can be threatened by self-interest, such as when the auditor owns a
significant amount of shares in the client company.
 Non-audit services
An auditor's independence can be threatened by providing non-audit services to the client.
 Audit tenure
An auditor's independence can be threatened by the length of time they have worked on an
audit.
 Competition
An auditor's independence can be threatened by competition within the external audit
market.
 Personal characteristics
An auditor's independence can be threatened by their personal characteristics.
 Audit firm environment
An auditor's independence can be threatened by the environment of their audit firm.
 Legal environment
An auditor's independence can be threatened by the legal environment in which they work.
 Undisclosed conflicts of interest
An auditor's independence can be threatened by an undisclosed conflict of interest with the
client.
 Personal friendships
An auditor's independence can be threatened by being unduly influenced by a personal
friendship.
The International Code of Ethics for Professional Accountants (IFAC) and the Financial
Reporting Council's (FRC) Ethical Standard for Auditors are frameworks that can be used to
identify, evaluate, and address threats to independence in audits.
IFAC's International Code of Ethics for Professional Accountants
 Establishes the standard of behavior for professional accountants
 Includes fundamental principles like integrity, objectivity, and confidentiality
 Includes categories of threats to those principles, like self-review and self-interest
 Includes a conceptual framework for applying the principles
 Includes International Independence Standards
 Includes guidance on how to apply the code's requirements to independence
FRC's Ethical Standard for Auditors
 Applies to audits of financial statements and other public interest assurance
engagements
 Applies in both the private and public sectors
To address threats to independence, you can:
 Evaluate the significance of the threat
 Apply safeguards to eliminate or reduce the threat
 Decline the job if no safeguards are available
 Consider the perspective of a reasonable and informed third party
 Apply a conceptual framework instead of a set of specific rules
A system of quality control ensures that an audit firm's personnel follow the professional
standards and quality standards of the firm. The engagement partner, ethics partner, and
engagement quality control reviewer (EQCR) all play a role in maintaining this system.
Engagement partner
 Responsible for the overall quality of the audit
 Monitors the engagement team for compliance with ethical requirements
 Determines the appropriate action if any members of the engagement team don't
comply with ethical requirements
Ethics partner
 Ensures that the firm implements ethical standards
 Monitors the ethical standards
 Acts as an arbiter when difficult judgments need to be made
Engagement quality control reviewer (EQCR)
 Evaluates the engagement team's conclusions, significant judgments, and identified
risks
 Provides an objective evaluation of the engagement report
 Plays a key role in safeguarding audit quality
A system of quality control is important because it ensures that the firm's personnel comply
with professional standards and the firm's quality standards.
The arguments for and against mandatory auditor rotation include:
 Arguments for
 Improved audit quality: Rotation can reduce the risk of familiarity and
improve the quality of audits
 Fresher perspective: New auditors can bring a fresh perspective to the audit
 Increased investor confidence: Rotation can strengthen investor confidence
 Arguments against
  Increased costs: Rotating auditors can increase costs for clients and auditors
 Lower quality audits: Shorter engagements with new auditors can lead to
lower quality audits
 Learning curve: New auditors need to learn about the client's business,
operations, and information systems
The debate over mandatory auditor rotation highlights the need to balance the benefits of
auditor independence with the practical challenges of implementation.
Additional considerations
 The perception of audit quality may increase with audit firm rotation
 The potential impact of national and cultural differences on mandatory rotation