AUDITORS’ IMPORTANCE, RESPONSIBILITY AND INDEPENDENCE

1.0 INTRODUCTION

In Module 1, Unit 1, you learnt about the “Overview of Auditing” where, the following topics were discussed.

1. Purpose and advantages of audit; 
2. Qualities of a good auditor. 

In this unit, you are going to follow up the above topics by being exposed, to the topics listed below.

1. Importance of the auditor in a business organisation; 
2. Responsibilities of the auditor in relation to those of management; 
3. Auditor’s independence relative to his relationship with interested groups. 

OBJECTIVES

At the end of this unit, you should be able to:

1. discuss the importance of the auditor in a business organisation 
2. outline the responsibilities of the auditor 
3. explain the concept of auditor’s independence 
4. describe important groups with which the auditor maintains 
5. professional relationships 
6. differentiate between the responsibilities of the auditor and those of management. 

3.0 MAIN CONTENT

3.1 Importance of the Auditor in a Business Organisation Business organisations, whether public or private, generate financial statements – balance sheet, profit and loss accounts, etc. periodically. Also, internal control comes into play to ensure adherence to management policies, safeguard the company’s assets, and ensure accurate and reliable records. All of these have to be appraised and verified. The law even requires that this should be done for public liability companies. Both the owners of the business and users of financial statements will be interested in the following, amongst others:

1. that the results of operations is authenticated; 
2. that the business is doing well;
3.  that the accounts are true and fair; 
4. that the company complied with statutory stipulations. 

Therefore, the importance of the auditor can be seen from the perspectives of the role/purpose and advantages of audit, as summarised below.

1. Appraises and helps to improve the system of internal control; 
2.  Enables the organisation to comply with statutory provisions on the audit of accounts; 
3. Confirms the actual financial position of the organisation being audited; 
4.  Gives credibility to the financial statements; 
5.  Ensures that accounts are produced in line with the best practice. 

3.2 Auditor’s Responsibility in relation to those of Management

Fundamental to a financial statement audit is the division of responsibility between management and the external auditor. The critical distinction is as follows:
Management is responsible for preparing the financial statements and the contents of the statements are the assertions of management.
The auditor is responsible for examining (verifying) management’s financial statements and produces report that contains an expression of opinion on their fairness. In the course
of examination, the auditor detects errors and frauds. In discharging its responsibility, management is expected to:

1. devise a system of internal control that will safeguard assets and help assure the production of reliable financial statements;
2. maintain an adequate and effective system of accounts; 
3. adopt appropriate accounting policies. 

Note that the criteria followed by:

1.  Management in preparing financial statements ordinarily are Generally Accepted Accounting Principles (GAAP), and 
2. The auditor in his examination, uses Generally Accepted 

Auditing Standards (GAAS).

In order to highlight the division of responsibilities between management and the auditor, many companies include “a report on management’s responsibility” in their annual reports to the shareholders. The auditor may assist in the preparation of financial statements. For example, he may counsel management as to the applicability of a new accounting principle, and, during the course of the audit, he may propose adjustments to the client’s statements. However, acceptance of this advice and the inclusion of the suggested adjustments in the financial statements do not alter the basic separation of responsibility. Ultimately, management is responsible for all decisions concerning the form and content of the statements.

SELF-ASSESSMENT EXERCISE 1

1.  Highlight the importance of the auditor in a businessorganisation. 
2. Distinguish between the responsibilities of the independentauditor withthoseofmanagement. 

3.3 Auditor’s Independence

This will be discussed under the following sub-heads.

3.3.1 Concept of Auditor’s Independence

In line with our earlier discussion in Module 1, Unit 1, professional independence is a concept fundamental to the accounting profession. It is essentially an attribute of mind, characterised by integrity and objective approach to professional work. An auditor is expected to examine the work of others and to express his opinion therein. Therefore, it is necessary that he is independent of those who appointed him.

In auditing, independence means the possession of integrity, ability to be self-reliant and honest, freedom from bias and the avoidance of relationships which, to a reasonable observer, would suggest a conflict of interest on the auditor’s part. Also, it means the avoidance of any relationship which might impair the auditor’s objectivity in expressing opinion. An auditor must have an independence of mind.

However, there are situations which have the effect of undermining the auditor’s independence, most of which border on the temptation on his part not to incur the wrath of those who have the capacity to disengage him.

As a way out, Section 359 (6) of CAMA, 1990 has provided for the establishment of audit committees to ensure the auditor’s independence. The committees include non-executive members of the company appointed to view the company’s position in a detached and dispassionate manner, liaise between the auditors and the management board, and to reconcile disputes between the auditor and the management board.

3.3.2 Auditor’s Relationships

The auditor is an intermediary in the communication of accounting data. In the discharge of his responsibilities, the auditor must be independent of both the preparers and the users of the financial statements that represent summaries of such data. In an audit engagement, the auditor maintains professional relationships with four important groups as listed below.

1.  Management 
2. The board of directors 
3.  Internal auditors 
4.  Shareholders. 

3.3.2.1 Management

During the course of an audit, there is extensive interaction between the auditor and management. To obtain the evidence needed in an audit, the auditor often requires confidential data about the entity. It is imperative, therefore, to have a relationship based on mutual trust and respect. The auditor should have an interest in the well-being and future of his client. However, this concern should be tempered by a posture of professional scepticism about management’s assertions. Moreover, the auditor must be prepared to evaluate critically the fairness of management’s financial statement representations.

3.3.2.2 The Board of Directors

The board of directors of a company is responsible for seeing that the company is operated in the best interests of the shareholders. The auditor’s relationship with the directors depends largely on the composition of the board. When the board consists primarily of company officers, the auditor’s relationship with the board may be the same as with management.

However, when the board has a number of outside members, a different relationship is possible. Outside members are not officers or employees of the company. In such a case, the board, or a designated audit committee composed primarily of outside members of the board, can serve as an intermediary between the auditor and management.

3.3.2.3 Internal Auditors

An external auditor ordinarily has a close working relationship with the client’s internal auditors. Management, for example, may ask the auditor to review the internal auditors planned activities for the year and report on the quality of their work. The auditor also has a direct interest in the work of internal auditors that pertains to the client’s system of internal control. internal auditor’s work cannot be used as a substitute for the external auditor’s work. However, it can be an important complement. In determining the effect of such work on his examination, the auditor should:

1.  consider the competence and objectivity of the internal auditor, and 
2.  evaluate the quality of the internal auditors’ work. 

The competence of the internal auditor can be ascertained by inquiring into his technical training, experience and proficiency. His objectivity can be evaluated by considering the organisational level to which he reports and reviewing the substance of his reports. In evaluating the quality of the internal auditors’ work, the auditor should examine, on a test basis, the audit programmes and working papers of the work performed.

3.3.2.4 Shareholders

Shareholders rely on audited financial statements for assurance that management has properly discharged its stewardship responsibility. The auditor, therefore, has an important responsibility to shareholders as the primary users of his report.

During the course of an engagement, the auditor is not likely to have direct personal contact with the shareholders who are not officers or key employees of the client.

SELF-ASSESSMENT EXERCISE 2

List and explain four important groups with which the auditor maintains professional relationship.

4.0 CONCLUSION

In this unit, you have discovered that it is permissible under GAAS for the internal auditor to provide direct assistance to the auditor in performing a financial statement audit. When this occurs, the auditor should supervise the internal auditor to the extent considered necessary. In addition, all judgment required in the examination must be made by the external auditor.