As the development of the present day business, audit is playing a more and more important role to guarantee the trueness of the financial survey and help survey users to make proper decisions. Therefore, it is very important for auditors to remain independence in body and mind when doing an audit based on a general population limited company. To expound this topic clearly, the essay is divided into the following parts: Firstly, it creates a literature review of audit freedom and concluded the viewpoint into four categories; second of all, it introduces this is of audit freedom in body and mind and stated the important of both of these independently; Finally, it analyzes why it's important to stay audit freedom from many sides such as shareholders, lenders, government, operators and other stakeholders.
When it comes to the audit independence, many scholars have conducted organized research in this topic. Some scholars pointed out that auditor has two kinds of freedom- body and mind, lack of the former you can tremble the public's self confidence on freedom and business lead to interest issues, and lack of the latter one means auditors lose their professional ethics which is very dangerous (Carmichael & Swieringa, 1968). Salehi have emphasized that the cornerstone for the auditing profession is audit freedom. The auditor's opinion is think without self-reliance and the third parties think that you don't have for exterior auditors without freedom (Salehi, 2009).
Due to highly publicized audit failures, this issue of auditor freedom has gained increasing attention from academics, regulators, and professionals round the world in recent years (Anticipation & Langli, 2008). Under the background of several visible companies fraud instances subjection such as Enron, Adelphia, WorldCom, the importance of audit independence to improve corporate governance is getting increasingly more attention (Rezaee. 2003).
As the no-audit services has turned into a more and more important lucrative business for CFA businesses, audit freedom is slightly influenced, which make it even more imperative to maintain audit self-reliance for auditors (Gul, Tsui & Dhaliwal, 2006).
Besides, Bou-Raad G. emphasized the significance of audit importance from the value -added potential customer. Internal auditors aren't simply a traditional audit for guidance but also a valuable usage of assisting managers to execute the objectives of the organization. In other words, corporate management benefits from audit quality (Bou-Raad. 2000).
From the books above, the importance of audit independence can be classified into four reasons: Firstly, audit independence can hold the public self-confidence and prevent interest conflicts; Second of all, audit freedom can help auditors to provide high quality financial survey and avoid scandals like 'Enron bomb'; Thirdly, the development of no-audit services make it more challenging but more important to keep up audit independence; Finally, audit freedom can improve the quality of audit and it can assist managers to make strategy formulations.
When it comes to remaining freedom in body, it could be also known as physical independence, external independence or surface independence. Auditors should take the role of freedom auditors on forward of the 3rd parties. And it is the direct information for the public judging the self-reliance of auditors. Once statement users feel that auditors involve some current or potential marriage that damages the self-reliance with the consigner such as work, business spouse, family or relatives and so on, it'll definitely decrease the audit function as they probably do not depend on those reports a lot (Rules, 2010). Auditors must have no specific romantic relationships with entity, plus they mustn't hold equity stakes of the entity and should not be on the older position than it. To avoid misunderstanding and improve the trust, auditor must avoid or reduce this menace to a level which is acceptable. Independence at heart is hard to boost and the general public can only infer the independence of auditors from your body like connections with the entity and other stakeholders. Actually, even if auditors maintain freedom in mind, as long as the public think they take attributes with the entity or any other get-togethers, no matter how correct the audit consequence is it is pointless.
As for left over independence in mind, it demands that there is no stake between auditor and the consigner intrinsically. In the whole auditing process, auditor should keep an neutral attitude which makes a specialist decision and never succumbs to any external pressure. It arises with higher requirement of auditors' mindset. They are required to be natural, objective and fact-based.
Actually, those two ideas will vary but integrative. They reflect both exterior and internal edges. Only remaining freedom in mind and body can make sure the auditing result persuasive. Also, the function and value of conducting audit can be recognized.
Stakeholders make economy decisions by firmly taking advantage of accounts. Whether those accounts are related and reliable are questions. Audit can help to solve this problem. However, auditor fails to fulfill the duty if indeed they cannot remain freedom in the conducting process. Similarly, article users will doubt this kind of dependence if they thought auditor and consigner belong to the same party. Alternatively, when auditor cannot keep an neutral way of thinking, the auditing judgment probably gets wrong. For instance, auditor fails to discover the info is cooked properly and issues unqualified point of view. This result is straightforward to mislead related survey users for decision making. They could bear reduction because of depending upon this audit judgment. As the problem varies from Stakeholder to Stakeholder, the following analysis in the value to remain freedom in mind and body is dependant on different Stakeholders.
Shareholders are the immediate beneficiary of companies and they'll get more bonus deals if the firms operate successfully. Therefore, shareholders have popular for audit freedom. Actually, when the company is in poor operation, handling shareholders are not inclined to public the truth, and then injured the interest of minority shareholders. Controlling shareholders don't possess the incentive to employ high self-reliance auditors, which phenomenon is called Entrenchment Impact (Supporter & Wong, 2002).
As the shareholders right separates from the management right, owners do not require into the daily management to the company. They employ personnel to use their company and revel in the gains. Usually, shareholders care and attention much about the profitability, efficiency, going matter, and solvency and so on. Those indexes echo how well manager operates the company. Also, shareholders can assess professionals' performance according to the information. Generally speaking, they have the information from the reports made by professionals. However, the report may involve fraudulence since it is supervisor who makes those records. It gets the possibility that professionals cook the report so as to cover up their problems, bad performance and other situation where they neglect to match their responsibility. At the moment, auditor's work helps answer fully the question that how much article users can rely upon the survey information. But if auditor is unable to keep freedom, it probably arouses the hesitation to audit judgment from survey users. Clearly, audit loses the worthiness under this condition. Without impartial and objective audit thoughts and opinions, report users are unable to acquire useful information to learn the business's condition and evaluate professionals' performance. Once shareholders lose control to the company, this business system will definitely go disorder as professionals probably make their own benefits by firmly taking good thing about shareholders' source and electric power and regardless of the limitation from legislation and law (Agbejule, 2009). In the long run, the company probably would go to liquidation or bankruptcy.
Nowadays, debtor-creditor romance is quite typical and necessary. Debtors want to loan in order to expend creation or develop new market, and lenders want to acquire interest utilizing their spare money. And the actual creditors matter most is the debtor's potential to cover your debt. The debtor's financial records will offer some information such as some ratios which can show the debt paying ability. And when the company has a terrible financial result, creditors can consider getting in touch with in a loan prior to the expiry day to guarantee their money is safe. However, those reviews are created by the debtor. Therefore, creditors may raise the doubt whether there is the possibility that debtor offer false information to diddle money or conceal the actual fact they have no ability to pay that cash back. At this time, auditor's work can eliminate or minimize this doubt. However, audit can't workout if auditor were not able to remain independence when performing the audit. Creditors are likely to make a wrong decision due to the failed audit impression. When creditor lends money to unqualified debtor, it probably bears a great deal of bad accounts and toxic asset as outcome (Siddiqui, 2002). Therefore, audit independence which can help provide true financial reports is very crucial to creditors.
As a firm operates within one country, it uses the infrastructure development and investment environment provided by the government. It will take on taxes responsibility. The financial record provided by companies is the data for government to choose whether levy or not and just how many to levy. For instance, business tax is dependant on the revenues of the company that can be on the income statement. Plus the income tax is based on the profit also from income assertion. If company cooks the financial information to conserve tax cost, the federal government will be suffered directly. Therefore, authorities will execute audit in case of taxes evasion.
Moreover, lacking of audit freedom would influence authorities indirectly. If auditors provided fake financial records, the pubic will be experienced. They have less self confidence on the trueness of the procedure of the company, and the stakeholders will feel betrayed. If their hobbies are impaired, conflicts would emerge, which is harmful to the stableness of the world. That is why the government released the 2002 Sarbanes-Oxley Function following the "Enron Bomb".
Many people may misunderstand that auditor is opponent to operator discussing manager in this article and the lifestyle of audit is a rock in the manner. This idea is partial and shallow. The role of audit takes on is to increase the dependence to the info and check whether the entire business activities are relative to the regulation. To some extent, it serves to obtain superior management (Shih, 2006). Sometimes, auditors should come up with answers to the existing management problems. For instance, the internal control has leak which might incur situation where damages the whole benefits associated with company. Going details, the design of regulation may give a chance for embezzlement. Or auditor finds out some staff should go against regulation. Cases like that should call managers' attention for better management. If auditor cannot keep freedom when doing audit, it'll pose the risk to the company such as damage the company benefits. For instance, the auditor is a sibling to the cashier. When this auditor conducts audit to cash, he can't stay freedom or his independence has been affected. He might conceal the actual fact if the cashier got some guilt and issues unqualified judgment (Fadzil, 2005). Because of this opinion, managers can't notice this threat. It may have a negative influence on their working performance and company development.
The existence of your company must bear many tasks. Therefore, the stakeholders can never be limited to the above mention. Whenever a company becomes a detailed company specifically a general population limited company, it has to fulfill more obligations to the world and recognize more guidance from the general public. It raises account by stock stocks. Its public traders sell or choose the shares in the stock exchange, and their decision usually relies in the financial reviews. However, those studies perhaps cannot indicate the financial position and income condition. Audit judgment is vital in their decision making process. If auditor cannot remain self-reliance, the audit judgment will mislead the users. Shareholders will eventually lose money if indeed they invested a reduction company. For instance, the collapse of Enron results from the accounting organization Andersen didn't remain independence. In the end, the share price cannot indicate the value of the business (Abbott, 2000). Currency markets will fail and the current economic climate will break apart.
The most significant responsibility for auditors is to provide high quality financial report which can help report users to make right decisions. The authenticity and dependability of the financial report is very essential because it immediately decides the strategies of stakeholders. The trueness of financial statement which is also the quality of audit is set by two factors: professional competence of auditors and audit self-reliance, and the latter is more important. Audit failures induced by insufficient audit independence have resulted in many companies fraud situations. Audit freedom is also the need of shareholders, creditors, government, operators and other stakeholders. Overall, it is actually important for auditors to remain independence in mind and body when conducting an audit.