What Is an Independent Auditor?

An independent auditor is a certified public accountant (CPA) or chartered accountant (CA) who examines the financial records and business transactions of a company with which they are not affiliated. An independent auditor is typically used to avoid 澳洲幸运5官方开奖结果体彩网:conflicts of interest and to ensur𒆙e the integrity of performing a♎n audit.

Independent auditors are often used—or even mandated—to protect shareholders and potential investors from the occasional fraudulent or unrepresentative financial claims made by public companies. The use of independent auditors became more critical after the implosion of the dotcom bubble and the passage of the🍬 Sarbanes-Oxley Act (SOX) in 2002.

How Independent Auditors Work

An independent auditor either works for a public accounting firm or is self-employed. An auditor examines financial statements and related data, analyzes business operations and processes. The objective of an audit is to provide a conclusion on whether the financial statements provide a materially accurate view of the company's financial position and whether they are free from bias. As part of the audit they will test items on the company's balance sheet to ensure correct valuation and for completeness. For example, they will check that assets are not inflated and that liabilities have not been left out. An auditor also checks items of income and expenses are accurate and complete.

Companies may have internal auditors which are not the same as independent auditors. The internal auditors may perform other auditing, tax, and consulting services for individuals, corporations, nonprofit organizations, or government entities as they are not required to be independent of the bodies they work for. They also don't produce statutorily required reports for external stakeholders.

Procedures for an Independent Audit

An independent auditor asks questions of management and staff for a better understanding of the business, its operations, financial reporting, internal control system, and known fraud or error. They may perform analytical procedures on expected and unexpected variances in account balances or transaction classes, then test documentation supporting those variances. The auditor also observes the company’s physical inventory count and confirms 澳洲幸运5官方开奖结果体彩网:accounts receivable (AR) and other third-party accounts.

The Sarbanes-Oxley Act (SOX)

The Sarbanes-Oxley Act of 2002 was passed after Enron, WorldCom, and several other technology companies collapsed due to accounting improprieties. The goal of SOX was to improve 澳洲幸运5官方开奖结果体彩网:corporate governance and restore the faith of companies' investors. At the time of introduction, some in the business world w👍ere against SOX, seeing it as a po✱litically motivated move leading to a loss of risk-taking and competitiveness.

Of concern to many is the mandate requiring that public companies obtain an independent audit of their internal control practices. The cost of the requirement is felt most acutely by companies with a 澳洲幸运5官方开奖结果体彩网:market capitalization of $75 million or greater. The audit standards were modified in 2007, reducing costs for many firms by 25% or more🥀 annually.

Benefits of an Independent Auditor

Despite the high initial costs of the internal control mandate, companies can experience many benefits from the independent audit process. Managers can use the information to continually improve internal processes. Companies frequently find that over time the internal control testing becomes more cost-effect💃ive. A company that is not properly controlled is open to fraud, theft and other nefarious business practices which lose shareholder value. Not only that, without strict controls corporate failures are much more likely which results in job loss and economic contraction.

Additionally, markets use the information from the audit to assess businesses more effectively. Independent audits provide a judgement about the reliability of a company's financial statements which helps investors make an informed decision when considering whether to purchase a company’s shares. Financial analysts and brokerage companies also rely on an audit's results when making investment recommendations to their clients.