An auditor’s independence is damaged if the auditor is not, or a reasonable investor with knowledge of all the circumstances and facts conclude that the auditor is not skilled to exercise objective and impartial judgment on issues encompassed within the audit engagement. An audit committee needs to consider the relationship between the auditor and the company, the management of the company and its directors in order to determine its independence. The Paper below looks at the characteristics that set aside an independent audit from those that are not. It also goes ahead to separate independent engagement committee members from those that are not independent (Adelopo, 2016).
Some of the prohibited non audit services provided by an audit to its clients include bookkeeping, financial information system design and execution, appraisal services, fairness views or contribution in kind reports. Others include Actuarial services, management or human resource services, broker dealer, investment banking services, investment adviser and legal services. Moreover, audit committees should consider if the services provided by the audit firm damage the independence of the firm. The approved services however include services provided by independent auditor for instance tax services, statutory audits and comfort letters. The audit committee needs to consider whether policies of the company require that all audit and non-audit services are brought before the committee for approval (Steinhoff &United States, 2002).
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Employment relationships between the audit firms and the clients are not permitted. A one year cooling off period is necessary before a company hires personnel formally employed or are employed by audit firms since this might affect the firms independence. Audit committees should not also approve engagements that compensate an independent auditor on a commission basis. This remuneration impairs the independence of the auditor. Direct and indirect relationships with the company, its officers, directors or major shareholders are prohibited. Finally the audit committee should be aware specific relationships are prohibited between the auditor and its clients. This includes banking, creditor/debtor relationships, broker-dealer, insurance products and interest rates in investment committee.
The independent engagement committee members include Sarah Ball, Bill Davis, You, David Youssef, Mary Franks, Callie Smart, Wilbur Singation and Yewell. This is because they do not have a past working relationship with the client in a direct manner, they do not also have financial interest in the client and none of their relatives works with the firm. As for David Youssef, he manages the taxation services for the accounting firm which is part of the services pre- approved by independent auditor therefore making him an independent engagement committee member (Whisenant & Tax Management, 2011).
Frank Bell is the first engagement committee member that is not independent. Although he does not have any financial interests in the client, his wife has been working with the client as a worker for 20 years. Sam Martin also has a cousin that works with the client as a mail distributer person. This therefore makes Frank Bell and Sam Martin not independent since they both have relatives working with the client in a direct manner. Beth Wright is another member that is not independent; he indirectly has a relationship with the client since he owns a mutual fund that is invested in the client. Lastly is Phil Cole who is an Auditor with YOUCPA. He is not independent since he has a financial relationship with the client because he is responsible for financial planning and reporting. Another reason is that he used to work at the client less than a year ago. Since he was not given a one year cooling off period before he was employed his employment affects the independence of the firm (Adelopo, 2016).
Conclusion
In conclusion, it is evident that for the engagement and management members to be independent they should not have any direct or indirect relationship with the client. They should also not have any financial interest in the client and should not have a past working relationship with the client.
References;
Adelopo, I. (2016). Auditor independence: Auditing, corporate governance and market confidence . London: Routledge.
Steinhoff, J. C., & United States. (2002). Auditor independence: New GAGAS independence standard . Washington, D.C.: U.S. General Accounting Office, Financial Management and Assurance. Bottom of Form
Whisenant, S., Whisenant, L., & Tax Management Inc. (2011). Auditor independence . Arlington, VA: Tax Management Inc.
