Auditing is the on-site verification activity, such as inspection or examination, of a process or quality system, to ensure compliance to requirements. Auditing is a process of examining financial statements of an organisation or client to view if they truly present the operations and the financial position of an entity in order to give an opinion if they reflect the truth about the state of the affairs of the organization. As defined in (ISO 19011:2011—Guidelines for auditing management systems), an audit is an “independent systematic and documented process of obtaining audit evidence (records, statements of fact or other information which are relevant and verifiable) and evaluating it objectively to determine the extent to which the audit criteria (set of policies, procedures or requirements) are fulfilled.”
They are different types of audit and some audits are named according to their purpose or scope. The scope of a function audit is a particular department or function. The purpose of a management audit relates to management interests such as assessment of area performance or efficiency. An audit is classified as internal or external, depending on the interrelationships among participants. Internal audits are performed by employees of the organization while external audits are performed by an outside individual. Internal audits are often know as first-party audits, while external audits can be either second-party or third-party. Both internal and external auditors scrutinise the activities of the firm and writing reports expressing their views of their examination of the accounts.
It is so difficult to come up with a single definition of auditing and the following are some of the authors views or definitions. International Federation of Accountants (IFAC, 2017) defined auditing as the, “independent examination of financial information of, an entity, whether profit oriented or not and irrespective of its size, or legal form, when such an examination is conducted with a view to expressing an opinion thereon.” According to, Spicer and Pegler, (2017) also defined auditing as the verification of the books, accounts and vouchers of a client, as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up, so as to give a true and fair view of the state of the affairs of the business, and whether the Profit and Loss Account gives a true and fair view of the profit or loss for the financial period, in the best interest of his information and the explanations given to him and as shown by the books; and if not, in what respect he is not satisfied.
According to American Accounting Association (AAA, 2017) auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. Porter et al, (2015) says, “Auditing is a systematic process of objectively gathering and evaluating evidence relating to assertions about economic actions and events in which the organisation making the assertions has been engaged, to ascertain the degree of correspondence between those assertions and established criteria, and communicating the results to users of the reports in which the assertions are made.” Porter according to his viewpoint or definition he seems to be agreeing with (AAA) because he is saying that auditing is a system of achieving the desired objectives during the audit process.
The users of the information are all actors who have a financial interest in the company such as banks, employees, shareholders, customers, suppliers, government, etc. Every one of them relies on the professional auditing to detect material irregularities that may give a misleading impression of the company’s position and/or its performance, Porter et al, (2015). From the above definitions we can see that the authors seem to be defining auditing from a different point of view. And it is clear from these definitions that auditing is a systematic process of examination of financial statements which enables the auditor to judge if the accounts truly review the state of the business. The above definitions stated in general that auditing by stating that auditing is an introspection of accounting records conducted with a prospect to substantiate whether they rectify and completely mirror the transactions to which they purport to relate. This research seeks to identify whether the auditors still know the purpose of audit, have an understanding of auditing and its purpose in the public sector.
2.2 Nature of independence
Wherever the word independence is mentioned, individuals often think that the parties ought to be free from all economic, financial and other relations, which appear to entail dependence of any form, but is this the case? Auditor independence is an important issue that has been debated since the birth of the profession of accountancy. Independence refers to independence of both internal and external auditors. The researchers study is concerned with the independence of external statutory auditor. Independence of auditor refers to the ability of the auditor to remain independent from the management of their clients. An auditor “must fulfil his obligations even when it means opposing or denying the wishes of those who have employed him, and who, he knows may cease to do so.” This section discusses in brief the nature of auditor independence comprising its meaning, definition, classification, elements, independence risks, relationship with integrity and objectivity, and with ethics.
According to Knapp ; Kemp (2011) “the nature of auditor independence is that members should be, and should be seen to be, free of any interests that may be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.” An Accountant will not be considered to be independent with respect to any person in whom he has a substantial interest direct or indirect with whom he is connected as officer, employee, promoter, underwriter, trustee, partner, or director or person performing similar functions. Editorial, (2012). ADDITIONS HERE PLEASE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2.2.1 External auditor
The definitions stated above refer to an external auditor as an independent personnel who satisfies himself or herself of the reasonableness of a statement or declaration made by another and he examines financial statements and other accounting information and expresses an opinion on whether or not the financial statements fairly present, in all material respects, the financial position of the entity at a specific date, and the results of its operations and cash flow information for the period ended on that date, in accordance with an identified financial reporting framework and/or statutory requirements.
2.2.2 Definition of auditor independence
The International Federation of Accountants (2012) divided independence into two dimensions: independence in mind and independence in appearance. Independence in mind is defined as “the state of mind that permits the expression of a conclusion without being affected by negative influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional scepticism.” (p. 46). On the other hand, independence in appearance is “the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or professional scepticism has been compromised” (p. 46).
The Government Accountability Office (GAO), also indicate that the concept of independence comprises two elements: independence of mind, and independence in appearance. Therefore, independence of mind is the mental state that allows an auditor to perform his or her duties with integrity and objectivity, without being influenced by factors that could compromise his or her professional judgment. This concept is sometimes referred as “independence in fact,” but there is an important distinction here, the (GAO) isn’t concerned about whether the auditor is “factually” independent of his or her client, but rather whether the auditor is actually able to undertake the audit with the appropriate mental attitude.
The concept of independence in appearance speaks of public perception and is defined as “the absence of circumstances” that would cause a third party to conclude that an auditor’s integrity, objectivity, or professional judgment had been compromised. The main objectives of an audit are to allow users of financial statements to be confident of their reliability, it would be counterproductive to argue that an auditor should be permitted to conduct an audit when the users of the financial statements might reasonably question his or her independence. Of course, if not appropriately limited, this rule could easily be abused. Accordingly, the standard refers to a “reasonable and informed third party, having knowledge of the relevant information.”
Independence Standards Board (ISB) in its conceptual framework for auditor independence defines it as “freedom from those factors that compromise, or can reasonably be expected to compromise, an auditor’s ability to make unbiased audit decisions.” Other authors also described auditor’s independence accordingly as follows, Chepkorir, (2013) “It can be described as having an unbiased viewpoint while performing audit test, analysing the results and confirming the audit report. Auditor independence increases “the effectiveness of the audit by ensuring that the auditor plans and carries out the audit objectively.” The following authors seem to have a differing view on this issue.
Richard, (2013) says, “the definition of independence does not require the auditor to be completely free of all the factors that affect the ability to make an unbiased audit decision, but only free from those that rise to the level of compromising that ability” The overall goal with independence is to ensure financial reports are reliable and improve capital markets efficiency. Arthur, (2012) says, “Independence, at its most basic level, is exercised and honoured by those professionals who must abide by it, and assumed by those who must rely on it. It is a covenant between auditor and investor, and no one else; a covenant that says the auditor works in the interests of shareholders, not on behalf of management.” It simply refers to the auditor’s ability to express his conclusions honestly and impartially. Auditors’ independence has been termed the building block of the auditing profession, since it forms the foundation for the public’s trust in the attest function of ascertaining whether the financial statement show a fair and true position of the financial status of an organization, Caswell ; Allen (2012).
2.2.3 Role of independent auditor
The role of the public accountant is to add credibility to financial statements prepared for users for accounting. Those users do not have access to the internal working of the company and rely on the auditor to attest to the financial statements from which they can base decisions on utilising their scarce resources. According to Steven H, (2016) the independent auditor serves a vital role in our capital markets by providing an objective third party opinion on the integrity of financial statements that investors rely upon for investment decisions. Accurate and reliable financial statements are critical for companies to raise capital and are the bedrock upon which investors depend to make informed decisions. In the United States, the auditor has been given a unique franchise under our federal securities laws in that all companies wishing to access the U.S. capital markets must obtain an audit. That franchise, however, carries certain responsibilities. The following are the viewpoints of other authors;
The main thread of thought of auditor independence is the responsibility of auditor. Heretofore we have discussed that the primary responsibility of auditor is to make report to the members about the financial position and performance of a company. Auditor’s opinion enhances the credibility of financial statements and thereby creates confidence in the minds of shareholders and others. An auditor is in fact a conscience-keeper. If an auditor is not independent of the client, his opinion on financial assertions will carry little value to the users.