Audit independence concepts

The magazine publisher is the copyright holder of this article and it is reproduced with permission. Further reproduction of this article in violation of the copyright is prohibited. The immediate role of audit independence is to serve the audit, and the objective of the audit is to improve the reliability of information used for investment and credit decisions. Ultimately, the purpose of audit independenc e is to improve the cost-effectiveness of the capital markets. Materiality has to be considered within this context, and an auditor's interest should be considered material if it presents a risk of impaired objectivity with a likelihood so high and an impairment of such a dimension that the interest reasonably can be assumed to affect the outcome of the audit. The appearance-of-independence concept should not be included in any conceptual framework unless the relationship of that concept to both the objective of independence and desirable concepts of independence is determined and spelled out. The root question in evaluating audit independence is whether an interest creates an unacceptable risk of material bias. In answering that question, a decision will have to be made as to whether it should be based on a reasonable or prudent person concept, regulators' judgment, or investor opinion. Another question that has to be answered is whether the objective of audit independence is served by applying regulatory prohibitions to parties that cannot influence the audit. The authors have developed a set of eight principles that should be part of the conceptual framework. There has never been a conceptual framework for audit independence before-not even an official definition of the term. Audit independence has been guided by detailed rules, common sense, and conservatism. The public has been protected. But the rules have not had the benefit of clear concepts and consistently applied principles. It is hard to believe this of independence, because no other single idea has so much signified what the auditing profession means in the world. It is time to give it fresh thought, to rise above the clutter of detail and think through what audit independence should mean in any circumstance, what is necessary to analyze and evaluate whether the properties of independence are present, and what is the objective of the whole exercise. There is reason for hope. The Independence Standards Board (ISB) has put the conceptual framework for audit independence in its sights. Planning decisions have been made, and …