What are the factors that may affect the independence of internal auditors?

What are the factors that may affect the independence of internal auditors?

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The independence of the auditor is considered the hallmark of the auditing profession. Independence is fundamental to the reliability of the auditor's report(s). Growth in the education sector and in particular the rampant growth and expansion of Universities in Kenya during the last couple of decades has not experienced similar expansion in the provision of internal audit function. This is happening at the time when the internal auditor's role has evolved from the traditional role of checking and reporting on internal controls to the ever expanding and broader role of appraisal, review, management advisory and risk management. While it is evident that there is dramatic growth and expansion of universities in Kenya, the same cannot be said about the quality of their operations, activities and services as measured in internal audit assurance reports. The quality of audit assurance is impaired and this can be attributed to a number of factors significant among them being the unsettled issue of auditors' independence. By being part of the university and having personal and official relations with other university personnel, it is not easy for an internal auditor to perform his/ her work objectively. This research sought to examine the factors influencing independence of the internal auditors in Universities in Meru Region, Kenya. The factors that were looked at were: management support, internal auditors' competencies, provision of non - audit services and reporting structure. The survey was carried out in three Universities, which are: Meru University of Science and Technology, Chuka University and Kenya Methodist University. Descriptive research design was adopted in conducting this study. Primary data was collected using open and closed - ended questionnaires while secondary data was collected from the relevant books and journals. The total population in the survey was 120 respondents which comprised of top managers, senior management employees, heads and employees of selected departments and internal auditors. Purposive sampling was used to select respondents from each stratum to form a sample size of 66 respondents. Multiple Logistic Regression model was used to link the relationship between independent variables and dependent variable and to test the hypothesis at 95% confidence level using Wald test aided by SPSS (version 20). Data was summarised and presented in form of frequency tables and percentages. The findings revealed that the model as a block was found to be a significant predictor based on the omnibus test. Management support was the only factor that had significant influence on the independence of internal auditors. It was recommended that adequate support should be given to the internal audit from management in. order to achieve their much needed independence in terms of: staffing, budget allocation, training and responding to the internal audit recommendations. It was also recommended that internal auditors should engage in non - audit services being cautious of the negative influence it had their independence even though it was insignificant based on the results findings.

AS 2105: Consideration of Materiality in Planning and Performing an Audit

Adopting Release: PCAOB Release No. 2010-004

Effective Date of Standard: For audits of fiscal years beginning on or after Dec. 15, 2010

Amendments: Amending releases and related SEC approval orders 

Guidance on AS 2105:  Staff Audit Practice Alert No. 9 and  Staff Guidance for Auditors of SEC-Registered Brokers and Dealers

Summary Table of Contents
  • .01  Introduction
  • .05  Objective
  • .06  Considering Materiality in Planning and Performing an Audit
  • .11  Considerations as the Audit Progresses                                              

Introduction

.01        This standard establishes requirements regarding the auditor's consideration of materiality in planning and performing an audit.1

Materiality in the Context of an Audit

.02        In interpreting the federal securities laws, the Supreme Court of the United States has held that a fact is material if there is "a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."2 As the Supreme Court has noted, determinations of materiality require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him . . . ."3

.03        To obtain reasonable assurance about whether the financial statements are free of material misstatement, the auditor should plan and perform audit procedures to detect misstatements that, individually or in combination with other misstatements, would result in material misstatement of the financial statements. This includes being alert while planning and performing audit procedures for misstatements that could be material due to quantitative or qualitative factors. Also, the evaluation of uncorrected misstatements in accordance with AS 2810, Evaluating Audit Results, requires consideration of both qualitative and quantitative factors.4 However, it ordinarily is not practical to design audit procedures to detect misstatements that are material based solely on qualitative factors.

.04        For integrated audits, AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, states, "In planning the audit of internal control over financial reporting, the auditor should use the same materiality considerations he or she would use in planning the audit of the company's annual financial statements."5

Objective

.05        The objective of the auditor is to apply the concept of materiality appropriately in planning and performing audit procedures.

Considering Materiality in Planning and Performing an Audit

Establishing a Materiality Level for the Financial Statements as a Whole

.06        To plan the nature, timing, and extent of audit procedures, the auditor should establish a materiality level for the financial statements as a whole that is appropriate in light of the particular circumstances. This includes consideration of the company's earnings and other relevant factors. To determine the nature, timing, and extent of audit procedures, the materiality level for the financial statements as a whole needs to be expressed as a specified amount.

Note: If financial statements for the audit period are not available, the auditor may establish an initial materiality level based on estimated or preliminary financial statement amounts. In those situations, the auditor should take into account the effects of known or expected changes in the company's financial statements, including significant transactions or adjustments that are expected to be reflected in the financial statements at the end of the period.

Establishing Materiality Levels for Particular Accounts or Disclosures

.07        The auditor should evaluate whether, in light of the particular circumstances, there are certain accounts or disclosures for which there is a substantial likelihood that misstatements of lesser amounts than the materiality level established for the financial statements as a whole would influence the judgment of a reasonable investor. If so, the auditor should establish separate materiality levels for those accounts or disclosures to plan the nature, timing, and extent of audit procedures for those accounts or disclosures.

Note: Lesser amounts of misstatements could influence the judgment of a reasonable investor because of qualitative factors, e.g., because of the sensitivity of circumstances surrounding misstatements, such as conflicts of interest in related party transactions.

Determining Tolerable Misstatement

.08        The auditor should determine the amount or amounts of tolerable misstatement for purposes of assessing risks of material misstatement and planning and performing audit procedures at the account or disclosure level. The auditor should determine tolerable misstatement at an amount or amounts that reduce to an appropriately low level the probability that the total of uncorrected and undetected misstatements would result in material misstatement of the financial statements. Accordingly, tolerable misstatement should be less than the materiality level for the financial statements as a whole and, if applicable, the materiality level or levels for particular accounts or disclosures.

.09        In determining tolerable misstatement and planning and performing audit procedures, the auditor should take into account the nature, cause (if known), and amount of misstatements that were accumulated in audits of the financial statements of prior periods.

Considerations for Multi-location Engagements

.10        For purposes of the audit of the consolidated financial statements of a company with multiple locations or business units, the auditor should determine tolerable misstatement for the individual locations or business units at an amount that reduces to an appropriately low level the probability that the total of uncorrected and undetected misstatements would result in material misstatement of the consolidated financial statements. Accordingly, tolerable misstatement at an individual location should be less than the materiality level for the financial statements as a whole.

Considerations as the Audit Progresses

.11        The auditor should reevaluate the established materiality level or levels and tolerable misstatement when, because of changes in the particular circumstances or additional information that comes to the auditor's attention, there is a substantial likelihood that misstatements of amounts that differ significantly from the materiality level or levels that were established initially would influence the judgment of a reasonable investor. Situations in which changes in circumstances or additional information that comes to the auditor's attention would require such reevaluation include:

  1. The materiality level or levels and tolerable misstatement were established initially based on estimated or preliminary financial statement amounts that differ significantly from actual amounts.
  2. Events or changes in conditions occurring after the materiality level or levels and tolerable misstatement were established initially are likely to affect investors' perceptions about the company's financial position, results of operations, or cash flows.

    Note: Examples of such events or changes in conditions include (1) changes in laws, regulations, or the applicable financial reporting framework that affect investors' expectations about the measurement or disclosure of certain items and (2) significant new contractual arrangements that draw attention to a particular aspect of a company's business that is separately disclosed in the financial statements.

.12        If the auditor's reevaluation results in a lower amount for the materiality level or levels or tolerable misstatement than initially established by the auditor, the auditor should (1) evaluate the effect, if any, of the lower amount or amounts on his or her risk assessments and audit procedures and (2) modify the nature, timing, and extent of audit procedures as necessary to obtain sufficient appropriate audit evidence.

Note: The reevaluation of the materiality level or levels and tolerable misstatement is also relevant to the auditor's evaluation of uncorrected misstatements in accordance with AS 2810.6

Footnotes (AS 2105 - Consideration of Materiality in Planning and Performing an Audit):

1AS 2810 establishes requirements regarding the auditor's consideration of materiality in evaluating audit results.

Which of the following factors affects the degree of independence of internal auditors?

Reporting to the chief financial officer limits the influence and independence of the internal audit activity.

What are the 5 threats to independence of an auditor?

Self-interest, reflection, familiarity, intimidation, and threats to advocate are the main threats to auditor independence.

What are the factors of internal audit?

The findings of study showed that quality of internal audit activity, competence of audit team, independence of internal audit and support of management are main factors that positively affect IAE. The results of study reveal that independence of internal audit is the most prominent factor.

What impairs independence of an auditor?

The commencement of litigation by the present management alleging deficiencies in audit work for the client would be considered to impair independence. The commencement of litigation by the covered member against the present management alleging management fraud or deceit would be considered to impair independence.