Generally Accepted Auditing Standards Research Paper
Ethical framework on a C.P.A.'s independence as an Auditor for a Bank
A CPA will be subject to rules and regulations established by the AICPA. There is a total of ten standards categorized into three groups. These include general standards, standards of field work and standards of reporting. General standards require the auditor to maintain independence, have adequate proficiency and training to perform a job and to exercise due professional care in the entire audit process. There are three standards of field work that relate to the actual audit. They include requirements that the auditor must plan adequately for the audit process and allocate the audit to qualified personnel. In addition, the auditor should obtain adequate understanding of the client’s business in order to assess the risk of material misstatement. The last standard of field work requires the auditor to acquire sufficient audit evidence to enable him make a reasonable opinion of the client’s financial statements.
AICPA outlines four standards of reporting which guide the manner in which the auditor should report his opinion on the financial statements. The must report on whether the financial statements were prepared in accordance with the underlying accounting standards (GAAPs). The CPA must also report on whether the accounting policies were applied consistently in the current and previous periods. Thirdly, the CPA must report on whether the client made adequate disclosure and that the information on the financial statements is complete. Finally, the CPA is required to express an opinion on the financial statements as whole or report that he cannot form a reasonable opinion.
The purpose of an audit to enable the auditor express an opinion on the truth and fairness of the financial statements, among other statements, presented to the members of the company. In order to give an unbiased opinion, the independence of the auditor must be maintained (Aicpa.org, 2015). AICPA regulations require all auditors of corporations to maintain independence and take measures that reduce threats to an acceptable level. The CPA must not only be independent but must also be seen to be so. This implies that the auditor must be independent in both fact and appearance. Independence in mind or fact refers to a state of mind of the auditor that allows him to undertake his duties without compromising his professional judgment. Independence in appearance involves avoiding situations that may cause a third party with adequate knowledge of the CPA and the auditing process to conclude that the CPA’s professional judgment has been compromised. According to AICPA's regulations, the auditor will be in violation of the independence rules if he/she is unable to reduce the threats to an acceptable level. Threats are those relationships or circumstances that limit the independence of the CPA hence impairing his/her ability to give an unbiased opinion on the financial statements of the entity. Safeguards are measures taken by the auditor to reduce the significant threats to an acceptable level.
Situations that compromise the independence of the auditor
Categories of threat and persons who are not allowed to act as auditors
Adverse interest threat: This is the threat that a CPA will not give an objective opinion because his interests conflict the interest of the client (Whittington, 2012). In this case, the failure of the client in any way will be beneficial to the CPA. In order to reduce this threat, a member that has initiated litigation or represents another person in litigation against the client is not allowed to act as the auditor of that client.
Advocacy threat: It occurs when the CPA and the auditor have similar interests. Any gain by the client will lead to gains by the auditor hence the auditor may not give an independent opinion (Whittington, 2012). The professional standards minimize this threat by prohibiting persons offering expert services to the client such as consultancy in IPO, representing the client in tax disputes, among others, to act as the client’s auditor.
Familiarity threat: The threat emerges when the auditor has had a lengthy relationship with the client. In this case, the objectivity of the CPA may be compromised due to potential sympathy for the client. For purposes of reducing this threat, a CPA that has a close friend or relative holding a critical position in the client’s business are not permitted to become an auditor of the client. In addition, an auditor who has had a prolonged engagement with the client is not allowed to be appointed by the client as the auditor.
Self-interest threat: It is the threat that a CPA will benefit from an interest or relationship with the client’s associates or employees (Whittington, 2012). Self-interest threat can be reduced by prohibiting persons that have a shareholding or are directors in the client’s business to become the client’s auditors (Blay & Geiger, 2012). In addition, an auditor who derives most of his income from a single client will not be objective hence should not be an independent auditor of the client.
Management participation threat: It occurs when the member assumes a managerial role in the client’s business (Blay & Geiger, 2012). It can be reduced if directors of the client’s business or a member responsible for managing the client’s human resources are not allowed to work as the auditors of the client.
Self-review threat: It occurs when a member is required to evaluate the service of another CPA, and this service is expected to be used the former in making future professional judgments (Blay & Geiger, 2012). There are no safeguards that can be placed to eliminate most of the self-review threats.
Undue influence threat: It is the threat that the work of a junior employee at the CPA’s firm may be influenced by an influential party who has an interest in the client’s business. It can be reduced by refusing gifts from the officers of the client’s business.
Other circumstances compromising independence of CPAs include large variety of management and advisory services offered by CPA firms, absence of active audit committees in some companies,
Audit engagement with my bank
The rule that requires a CPA to maintain independence and reduce the threat to acceptable levels will not allow me to audit my bank. In such case, I will not be independent since the situation will result in a self-interest threat. I use the services of the bank and may obtain loans from the bank. Therefore, I have an interest (self-interest) in the success of the bank. A qualified opinion on the bank statements will adversely affect the operations of the bank reducing the safety of his deposits with the bank (Rittenberg, Schwieger & Johnstone, 2013). It is thus likely that such I will give a subjective opinion on the bank’s financial statements. It is almost impossible for me to audit the bank and give an objective opinion.
My independence in mind or fact is not sufficient since I will not meet the requirement of being independent in appearance. Third parties with the knowledge that I have an account with the bank are likely to conclude that such a relationship compromises the ability of the CPA to give an objective opinion.
If my family or relative is working with the bank
A conflict of interest will arise if I have a close relative or family member working at the bank. In this case, the interest of my family member or close friend working in the bank may impair my professional judgment. This causes the familiarity threat hence I am likely to be sympathetic to the bank. For instance, a qualified opinion on the bank’s financial statements may lead the bank to trouble since it may lose the confidence of investor. This may result in financial challenges that may force the bank to lay off some staff. The fear that my close friend or family member’s job will be hanging in the balance if that happens may make me give a subjective report. My independence will be significantly compromised thus misleading the users of the auditing standards.
In addition, some reasonable third parties may obtain knowledge about the fact that my close friends and family member work with the bank. Such third parties are likely to conclude that my relationship with the said employees impairs my ability to conduct an independent audit and issue an objective opinion. Therefore, I will not meet the requirement of the independence rule that a member of AICPA must be objective in fact as well as appearance (Rittenberg, Schwieger & Johnstone, 2013). I may be independent in conducting the audit process but so long as third parties are not seeing me be so, I should not accept to audit my bank.
Aicpa.org,. (2015). AICPA - Code of Professional Conduct Superseded Citation. Retrieved 4 April 2015, from http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/Code-Redirection.aspx
Blay, A., & Geiger, M. (2012). Auditor Fees and Auditor Independence: Evidence from Going Concern Reporting Decisions*. Contemporary Accounting Research, 30(2), 579-606. doi:10.1111/j.1911-3846.2012.01166.x
Rittenberg, L., Schwieger, B., & Johnstone, K. (2013). Auditing: A Business Risk Approach (9th ed.). Mason, OH: Cengage Learning.
Whittington, R. (2012). Auditing and attestation 2012. Hoboken, N.J.: Wiley.
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