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Independence and Objectivity Part 1 For Students

The document discusses standards for independence and objectivity from the Internal Audit Standards. It defines independence as the freedom from conditions that could bias internal audit work. It establishes that internal auditors must be independent of the activities they audit and report to a level high enough to allow fulfilling audit responsibilities. Auditors must disclose any impairments to independence or objectivity. Objectivity requires an impartial mental attitude. The standards aim to ensure the internal audit function is free from bias and undue influence.

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Azrisah Panandigan
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172 views12 pages

Independence and Objectivity Part 1 For Students

The document discusses standards for independence and objectivity from the Internal Audit Standards. It defines independence as the freedom from conditions that could bias internal audit work. It establishes that internal auditors must be independent of the activities they audit and report to a level high enough to allow fulfilling audit responsibilities. Auditors must disclose any impairments to independence or objectivity. Objectivity requires an impartial mental attitude. The standards aim to ensure the internal audit function is free from bias and undue influence.

Uploaded by

Azrisah Panandigan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Code of Ethics for Professional Accountants

1. Fundamental Principles and Conceptual Framework


2. Professional Accountants in Business
3. Professional Accountants in Public Practice
4 International Independence Standards (Parts 4A and 4B)
 Independence is the freedom from conditions
that threaten the ability of the internal audit
activity to carry out internal audit
responsibilities in an unbiased manner.
 1100 - Independence and Objectivity
The internal audit activity must be
independent, and internal auditors must be
objective in performing their work.
 Objectivity is an unbiased mental attitude
that allows internal auditors to perform
engagements in such a manner that they
believe in their work product and that no
quality compromises are made.
 1110 - Organizational Independence
(Standard)
The chief audit executive must report to a
level within the organization that allows the
internal audit activity to fulfill its
responsibilities. The chief audit executive
must confirm to the board, at least annually,
the organizational independence of the
internal audit activity.
 1130 - Impairment to Independence or
Objectivity (Standard)
If independence or objectivity is impaired in
fact or appearance, the details of the
impairment must be disclosed to appropriate
parties. The nature of the disclosure will
depend upon the impairment.
 1110.A1 - The internal audit activity must be
free from interference in determining the
scope of internal auditing, performing work,
and communicating results.
 1111 – Direct Interaction with the Board
The chief audit executive must communicate
and interact directly with the board.
 1120 - Individual Objectivity (Standard)
Internal auditors must have an impartial,
unbiased attitude and avoid any conflict of
interest.
 1130.A1 - Internal auditors must refrain from assessing
specific operations for which they were previously
responsible. Objectivity is presumed to be impaired if an
internal auditor provides assurance services for an activity
for which the internal auditor had responsibility within the
previous year.
 1130.A2 - Assurance engagements for functions over
which the chief audit executive has responsibility must be
overseen by a party outside the internal audit activity.
 1130.C1 - Internal auditors may provide consulting
services relating to operations for which they had previous
responsibilities.
 1130.C2 - If internal auditors have potential impairments
to independence or objectivity relating to proposed
consulting services, disclosure must be made to the
engagement client prior to accepting the engagement.
 In the current IESBA Code of Ethics 120.1 Objectivity
‘imposes an obligation on all professional accountants not
to compromise their professional or business judgment
because of bias, conflict of interest or the undue influence
of others’.
 The current IESBA Code of Ethics definition of
Independence explains it as being made up of two
elements: ‘Independence of mind’ and ‘independence of
appearance’. The former is still defined to include
integrity, objectivity and skepticism. The latter is defined
as being free from ‘facts and circumstances’ that would
lead a reasonable and informed third party to conclude
that integrity, objectivity or skepticism was compromised.

 (this is an example of an approach that has been adopted by some. It is
not intended to be an exhaustive independence checklist and should not
be treated as such).
 Do staff have any direct/indirect financial interests in the audited entity?
(290.102)
 Do any partners or staff have personal, family or business relationships
with officers or employees of the audited entity? (290.123 – 290.131)
 Is there actual/threatened litigation between the firm and the audited
entity? (290.228)
 Have any staff received non-trivial gifts or hospitality from the audited
entity or its staff? (290.227)
 Are there any urgent reporting deadlines that may lead to resourcing
issues and pressure from the management of the audited entity?
 Does the audited entity have informed management? (290.163)
 Has the audit fee exceeded 15% of the firm’s income for two consecutive
years? (290.217)
 Are there significant overdue fees from the audited entity? (290.220)
 Is the firm adequately resourced to perform the audit?
The scenarios below illustrate the distinction (and interaction)
between the concepts of independence and objectivity as defined by
the IESBA Code of Ethics.
 Phedra is an audit manager for a medium sized accounting firm.
She has recently taken on a new engagement auditing Theseus
plc, the parent company of a tech group. She is always diligent in
her work and has proven very skilled in identifying and dealing
with ethical threats appropriately. Her father in law recently
passed away. Her husband’s inheritance includes a small
shareholding in Theseus plc. Phedra is unaware of the existence
of this shareholding.

Is Phedra
a) Objective
b) Independent
c) Neither
d) Both?
 Kim works as an audit manager for a small firm. The firm
has just taken on the audit of Dynamo Co, a small
marketing company, and he has been selected to manage
the engagement.
 Kim has no prior association with Dynamo or its
employees, and no direct or indirect financial interests.
During the audit he is diligent and skeptical but ultimately
finds no real issues. On the final day before signing off the
accounts the Finance Director invites Kim for lunch at a
local, family run restaurant. He accepts.
 Is Kim
 a) Objective
b) Independent
c) Neither
d) Both?

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