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How to Establish Independence with Auditing Clients

When deciding whether to accept an auditing engagement, you must judge your independence and objectivity. If your audit firm lacks independence or objectivity, you can’t accept the engagement. Independence and objectivity are closely related attributes that you need as an auditor. You and your firm have to be independent in both fact and appearance.

Here are examples of situations that can lead to an actual or perceived lack of independence:

  • Someone at the CPA firm has an immediate family member working for or with the potential client.

  • You’re put in the position of auditing your own work. You can’t prepare the financial statements you’re auditing.

  • You or your audit firm has served in a management capacity with the potential client within the past few years or has provided appraisal, actuarial, or valuation services to the client:

    • Appraisal services consist of evaluating the value of the business or any of its assets.

    • An example of an actuarial service would be defining and creating pension and retirement plans for the potential client.

    • Valuation services may consist of coming up with a balance sheet value for intangible assets such as patents and trademarks.

  • You or your firm has a direct or material indirect financial interest in the potential client. Direct interests are substantial, such as you, your immediate family, or your partner owning stock in the company, or your firm having a loan to or from the potential client. An example of a material indirect circumstance is if you have a financial interest with an entity associated with the client. For example, you have an interest in an estate, trust, or investment vehicle such as a mutual fund.

  • Too large a percentage of your firm’s overall revenue is coming from the same client. This situation creates at least a perceived lack of independence, because your firm has a very good reason to issue a favorable report — you don’t want to lose the revenue!

This list is not exhaustive, of course. The key is that the auditor must be unbiased and avoid any engagements that may lead users of the financial statements to question the auditor’s independence. And although you must be independent, gauging firm independence isn’t a decision you have to make until you reach the level of senior manager or partner at an auditing firm.

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