Auditor independence and audit quality

Auditor independence

An auditor is required to be independent from the entity it audits. The independence requirements applying to auditors are legally enforceable and are located within the following legislation and standards:

Divisions 3, 4 and 5 of Part 2M.4 and s307C of the Corporations Act
APES 110 Code of Ethics for Professional Accountants
Auditing standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements; and
Auditing Standard ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information.

Maintaining independence has a number of aspects that the auditor must be mindful of throughout the client/auditor relationship. A brief overview of the areas an auditor must be aware of and implement appropriate responses to include:

conflict of interest situations

general requirements, including the provision of certain non-audit services, and
specific relationships of the auditor and/or audit team members with the audited entity,

auditor rotation for listed companies. In certain limited circumstances auditor rotation relief may be granted by ASIC
auditors must be diligent in identifying and evaluating threats to independence and applying appropriate safeguards. If a conflict of interest situation remains in existence after seven days, the auditor must inform ASIC in writing that the conflict of interest situation or that the relevant relationship still exists. More information about breach notification.

When conducting an audit or review of a financial report, the auditor must provide a written declaration confirming that there have been no contraventions of the auditor independence requirements or applicable code of professional conduct.

Audit quality

In accordance with section 307 of the Corporations Act, it is the auditor's responsibility to form an opinion about whether:

the financial report being audited or reviewed complies with accounting standards and gives a true and fair view of the financial position and performance of the entity;
the auditor has been given all information, explanation and assistance necessary for the conduct of the audit;
the entity has kept financial records sufficient to enable a financial report to be prepared and audited; and
the entity has kept other records and registered required by the Corporations Act.

In conducting an audit or review of a financial report, section 307A of the Corporations Act requires an auditor to follow the auditing standards issued by the Auditing and Assurance Standards Board.

The audit inspection program aims to raise the standard of audit quality and auditor independence in the profession.