What is Independence?

Fact

Independence is a state of mind and appearance where the auditor is free from influences that could affect professional judgement. 

Elaboration

Independence of mind:

• You can make decisions without being influenced by others (e.g. fees, relationships, threats).

Sometimes called independence in fact. This is the actual mental state of the professional accountant.

You are able to:

• Give an opinion without being influenced by pressures, relationships, or personal interests.
• Exercise professional judgment with integrity, objectivity and professional scepticism.

Even if outsiders think you are biased, as long as you are genuinely mentally free from influence, you have independence of mind.

You can think of it as:

“Di dalam hati & fikiran saya, saya benar-benar bebas dan jujur bila buat keputusan audit.”

Independence in appearance:

• Outsiders (users of FS) must be able to see that you are independent – no obvious conflict (e.g. big shareholding in client).
• Independence increases reliability of the audit report for decision making. 

This is about how things look to “a reasonable and informed third party.” 

• Even if you are independent in your mind, you must also avoid situations that make you look biased.
• If a reasonable outsider, knowing all relevant facts, might conclude that your integrity, objectivity or scepticism are compromised, then independence in appearance is not achieved.

To put into perspective:

Audit partner is the brother of the company’s CEO. As a result, even if he is very professional, outsiders will doubt the independence.

You can think of it as:

“Orang luar yang waras, bila tengok hubungan/situasi saya, akan rasa saya bebas dan boleh dipercayai.”

Example

If the auditor owns 30% of the client’s shares, users will doubt the audit opinion → independence in appearance is affected.

For exam answers, you can write something like:

Under the MIA By-Laws, independence comprises independence of mind and independence in appearance.

Independence of mind is the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing integrity, objectivity and professional scepticism to be exercised. 

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 that integrity, objectivity or professional scepticism has been compromised.

Ethical conduct towards clients:

• For audit and assurance engagements, maintain independence in mind and in appearance.