Estimated study time: 50 minutes
Content:
Independence is the cornerstone of the audit function. The AICPA Code of Professional Conduct (ET Section 1.200) requires auditors to be independent in both fact and appearance. A threat to independence exists in five categories: self-interest, self-review, advocacy, familiarity, and intimidation. Threats are evaluated against whether a reasonable and informed third party would conclude that the auditor's objectivity is compromised.
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. PCAOB AS 1015 requires auditors to plan and perform the audit with professional skepticism, recognizing that circumstances may exist that cause the financial statements to be materially misstated. Professional skepticism is not synonymous with suspicion but demands that auditors not accept management representations without corroboration.
Ethical obligations under the Sarbanes-Oxley Act (SOX) include requirements for audit partner rotation (every 5 years for lead engagement partner under PCAOB rules), a cooling-off period before former audit firm personnel can join a public-company audit client in a financial reporting oversight role (1 year), and prohibition on auditors providing certain non-audit services (bookkeeping, financial information systems design, appraisal, actuarial services, internal audit outsourcing, management functions, human resources, broker/dealer services, legal services) to public-company audit clients.
The AICPA's Conceptual Framework approach: when no specific rule governs, the auditor evaluates threats and applies safeguards. Safeguards include firm-level controls (e.g., partner concurring reviews), profession-level controls (e.g., licensing, standards), and client-level controls (e.g., audit committees). If safeguards cannot reduce threats to an acceptable level, the auditor must decline or terminate the engagement.
Government Auditing Standards (Yellow Book) impose additional independence requirements beyond AICPA standards for auditors performing government engagements. The GAGAS personal independence requirements cover financial relationships and employment impairments; organizational independence covers the structure of the audit organization relative to the audited entity.
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