Auditors Independence

By auditors independence we means that the independence of the external auditor or internal auditor from the people or parties that might have some sort of financial interest in the organization that is being audit.

As the major purpose of the audit is to provide information to the shareholder and general public that is fraud free or is not misrepresented by the company. So the auditor makes sure that the data or information provide to shareholder and general public is fair and true. And independence is the main way through which an auditor can provide a fair and true audit report.

The auditors should be independent and they must not have any close relation with the company or with the people working in the company because in this way the auditor can be somehow biased and as a result of his biasness the information or data he will present to the shareholder and general public can be untrue or biased.

There may exists some doubts related to the independence of the external auditor as well as internal auditor, so to clear the doubts of the people and clients regarding the independence of the auditor’s suitable corporate governance measures should be place and should be followed by the company.

So to have a fair and true audit report the auditors must be independent and their decisions and audit should not be influence by any person or party because a little influence can cause fraud in audit.

Major threats to the Auditors Independence

As auditing is the most essential and important thing because in this way reliable information is provided to the general public and shareholder so because of this there are many threats that are faced by the auditors. Sometime the auditors face a threat of self-interest threat means that the auditor is not independent and he depends on the client company or he is having any close relation with the organization or may be any employee of the organization that is being audit by him. And it also means that the external auditor is dependent on the management for the appointment and re-appointment as an auditor.

Sometime the auditor face the threat of the trusting means that the auditor built a long lasting trust on the director and management of the organization and this trust prevents him from proper auditing of financial reports because he blindly trust the director and management of the company. And rarely but sometime do the external auditor come under the pressure of the director and management not to provide the real and fair information.

And sometime the directors of the company give some handsome offers to the external auditors that they can’t avoid it and work for the interest of the company and directors and they forget that actually they were working for the right of shareholder and general public. The relationship among the auditor and its client can some time also become a hurdle in giving clear and reliable information because when the auditor and client have mutual interest then the auditor will not provide the fair and true report but rather he will work for his and client interest.

Auditing and Public Interest

Auditors should keep in mind the public interest, especially when formulating codes, issuing guidelines, regulations to its members.

Public Interest

“Public Interest involves forming a balanced view of public opinion, what the public is entailed to expect and what accountants can reasonably be asked to deliver.”

Recently new ethical standard for auditors and accountants professional is established known as NOCLAR (Non-compliance with laws and regulations). This standard will result in the transformation of the thinking of the auditors and accountants professionals nationally and internationally because the accountants professional have important and essential role to the general public as well as shareholder. Because of the accountants professionals it is possible for the shareholder and general public to invest in any company because as a result of accountants the public can have fair, true and reliable report.

Auditors Regulation in Pakistan

According to the company ordinance act of 1984 the auditing regulations are as follow.

According to section 252 of the company ordinance act 1984 the company at each annual general meeting will elect an external auditor who will hold the office and he will also provide the conclusion of the annual general meeting.

It’s the duty of the external auditors to tell about all the new rules and regulation of International standards on auditing which are made by the International Auditing practices committee.

Section 260 describes the all the sanctions that might be imposed on the external auditor who signs the report of the company that do not follow the rules and regulations of the generally accepted accounting Principle (GAAP) or of National standards.

SECP Auditors Independence Guidelines

A person cannot be appointed as the auditor of the company if:

  1. To be an auditor of a company it is essential that the person must be charted accountant.
  2. And the person cannot be appointed as auditor of the company in which he had performed as director of the company.
  3. If the person has any relation directly or indirectly with the company or employees working there then he cannot be appointed as the auditor of the company.
  4. And he cannot also be appointed as auditor of the company if his/her spouse is working there as a director.
  5. He cannot be appointed as auditor of the company if he is indebted to the company.

The auditors are not supposed to perform the management function or to make the management decisions or to take active part in daily operations they are only supposed to check that the financial statements made by the company are true or not.

financial reporting and analysis

March 16, 2019