Audit & Accounting » The Importance of Independence of your Auditor

The Importance of Independence of your Auditor

Auditor independence is part of the foundation of the auditing profession. An independent, reliable, and ethically sound audit gives a company credibility and allows the public to trust in the accuracy of the results and the integrity of the accounting profession. Since the early 2000s, a series of publicized accounting scandals involving corporate fraud have shone a spotlight on the issue of auditor independence. Against this backdrop, it is more important than ever for companies to consider the use of independent auditors.

The Importance of Independence of your Auditor

What is an independent auditor?

Independent auditors are certified public accountants or chartered accountants, who examine the financial records of companies with which they are not affiliated. This means they have no financial interest in the business being audited. They are also not linked to any parties who may have an interest in or might be harmed by the results of an audit or its publication. By being independent, an auditor is more qualified to approach the audit process objectively and perform the task with integrity. An independent audit offers company shareholders an expert, unbiased opinion. The audit will determine the accuracy of the company’s annual accounts as a fair reflection of its financial position. Independent auditors are often used to avoid conflicts of interest and to protect shareholders and potential investors in public companies.

How do independent auditors operate?

An independent auditor will examine financial statements and other data assessing business operations and procedures. As part of an audit, they may discuss questions with management and staff to gain a better understanding of the way the business operates. Additionally, auditors may observe a company’s physical inventory count, conduct various analytical procedures and checks as well as test supporting documents. These processes help them ensure that company assets are valued correctly and that tax codes and laws are complied with. Auditors can also provide valuable recommendations for ways to achieve greater efficiency for the company. Finally, they form an opinion regarding the reliability of the business’s financial statements, and communicate this to investors, creditors and government organizations.

What are the benefits of using an independent auditor?

Although independent audits are required legally, there are also many other benefits to an independent audit for your company:

  • Learning and improving: Company managers can use the results of the audit to continually improve internal processes. The process can save money over time as the audit helps to show wastages or areas where the business is losing money. Audits can also indicate where better internal checks and controls need to be applied.
  • Providing an accurate overview: Independent audits provide a clear picture of a company’s worth, which helps investors make an informed decision when considering whether to purchase a company’s shares. Financial analysts and brokers also use independent audits to make sound investment recommendations to clients.
  • Protection for investors and shareholders: Similarly, independent auditors protect shareholders from a public company’s possible fraud and accounting improprieties and safeguard the financial interests of partners or shareholders not involved with management and the daily running of the company.
  • The judgment of a particular case is better. An independent audit gives greater credibility to a company’s financial records through written assurance from an unaffiliated source. Honest opinions can be given and all parties are considered. This is helpful when settling trade disputes for higher wages, bonuses or dealing with claims regarding property damage, fires etc.
  • Checking a company’s records for flaws: Independent audits act as a moral check on the employees and prevent them from misappropriating funds. Independent audits determine whether books and records have been properly kept and help the company to be aware of any discrepancies.
  • Useful administration: Audited statements of account are helpful for a variety of administrative purposes. Settling liability for taxes, negotiating loans, determining the purchase consideration for a business or settling accounts in the case of the death of a partner. Audited and certified statements may also be required by the government, before granting assistance or a trade licence.

Our auditing services at Exceed

We can offer our clients our independent auditing services as we provide you with external accounting functions and therefore we are a public accounting firm, not connected to your business. We take our independence seriously while still striving to maintain great relationships with you, our clients. With that in mind, we aim to add value to our clients’ businesses providing more than only statutory compliance, by ensuring our auditing services will give you an objective review of your company’s financial information. Read more about our auditing services here.

The Importance of Independence of your Auditor

When are companies required to be independently audited by law?

When private or personal liability companies need to be audited (according to the Companies Act of 2008) they must file their latest Audited Financial Statements with their annual return.

These private companies are required to have their annual financial statements audited:

  • Private or personal liability companies with assets over R5 million for persons who are not related to the company;
  • Any private/ personal company that compiles its financial statements internally and has a Public Interest Score (PIS) of 100 or more;
  • Any private or personal liability company that has its financial statements compiled by an independent party (such as an external accountant) and that has a PIS of 350 or more;

When a company has not opted to have its annual financial statements audited, and an audit is not required by its Memorandum of Incorporation, a private or personal liability company (not managed by its owners) could be subject to independent review:

  • if the company compiles its financial statements internally and has a Public Interest Score of less than 100;
  • or the financial statements are compiled independently, and its Public Interest Score is between 100 and 349.

Private or personal liability companies that are not required to have their financial statements audited, may still choose to voluntarily file their audited or reviewed statements with their annual returns.

Calculating a Public Interest Score (PIS) can be done according to the following information:

Are you unsure about whether your business requires an independent auditor?

At Exceed, we are here to assist with auditing services while ensuring we give you an objective review of your company’s financial information.

Get in touch with Exceed today and let’s define your needs.