Theindependence and objectivity are some of the key principles the guideprofessional auditors in their practices. All professional bodies inthe fields of accounting and auditing consider it to be ethical whenthe auditor maintains the highest level of independence from the firmwhich financial reports are being audited (Tepalagu & Lin, 2015).The main purpose of observing independence is to increase thecredibility of the financial records, which can only be achieved whenthe financial statements are reviewed by an auditor who cannot beinfluenced by the management of the employees of the client company(Gadalla, 2014). This paper will focus on the interim standard ET 191Ethics Ruling on Independence, Objectivity, and Integrity, which iscontained in the AICPA’s code of ethics.
TheET 191 Ethics standard was set to define independence in differentstakeholders and how they should relate with the business entities.The standard impacts the practices of independent auditors bydefining the boundaries between them and their clients. The standardaccomplishes this by stating instances in which independence can beconsidered to have been impaired by the actions of either the clientof the external auditor. For example, section 21 of the standardstates that the independence is compromised when the director of agiven company serves as an external auditor of the company’sretirement and profit sharing (American Institute of Certified PublicAccountants, 2015). This is because the director has an influence onthe managerial functions of the company where these functions in turnaffect the affairs of the trust. Therefore, the director who acceptsthe responsibilities of an external auditor is considered to beunethical.
Inanother example given in section 48 of the ET 191 standard,independence would be considered to have been impaired if a member,either part-time or full-time of a non-profit making entity (such asthe students` fund) assumes the responsibilities of an externalauditor (AICPA, 2015). The standard provides that the decision toserve as an external auditor would impair independence because themember plays a role in the management functions of the entity,irrespective of how limited the role could be. Similarly, thedecision of an advisor of any given entity to audit the financialstatement of the entity that the individual advises would compromiseindependence. In this case, independence would be impaired by thepossibility of the external auditor being influenced by themanagement, as opposed to taking an active role in the management ofthe entity. The influence of the entity being audited may also comein the form of gifts, in kind or in cash, given to the externalauditor (AICPA, 2015).
Inconclusion, the spirit of the ET 191 standard is to ensure that theboundary between the external auditor and the entity being audited issufficient to prevent circumvention and enhance accuracy as well asthe fairness of the audit process. The standard accomplishes this byhighlighting the possible factors those unprofessional andprofessional interactions between the auditor and the entity, whichhave the capacity to influence the decision of the auditor whenmaking the report on the state of affairs of the financial reports.In addition, ET 191 standard prevents impairment of independence byhighlighting individuals who do not qualify to be appointed asindependent auditors. These individuals include people who have arole in the management functions, shares, or any other form ofinterest in the entity being audited.
AmericanInstitute of Certified Public Accountants (2015). ET Section 191:EthicsRulings on Independence, Integrity, and Objectivity.AICPA.Retrieved August 25, 2015, fromhttp://pcaobus.org/Standards/EI/Pages/ET191.aspx
Gadalla,A. (2014, January 26). Importance of auditor independence. Corplaw.Retrieved August 25, 2015, fromhttp://www.corplaw.ie/blog/bid/369348/Importance-Of-Auditor-Independence
Tepalagu,N. & Lin, L. (2015). Auditor independence and audit quality: Aliterature review. Journalof Accounting, Auditing & Finance,30 (1), 101-121.