The purpose of the independent audit process is to have a third party examine an organization's financial statements to see if they are accurate and reliable. The process has to include safeguards that make sure that the auditor, or the auditing firm, is truly independent. The independent audit process also has to specify whether the auditor examined enough documents to make an informed statement about the company's financial position.
Auditor Independence
One goal of the independent audit process is to make sure that the auditor does not receive wage income from the company which impairs his judgment. The Securities and Exchange Commission establishes rules that regulate both an accounting firm that hires an accountant who worked at the company that it is now auditing, and a company's decision to hire the auditor who audited it after the audit is complete.
Audit Firm Independence
Independent audit process regulations limit the business relationships between the audit firm and the company. Securities and Exchange Commission rules prevent the independent audit firm from providing valuation services, such as actuarial advice and appraisal; borrowing money from the audit client; designing its financial record storage systems; or helping the company decide which stocks and bonds to purchase. The goal is to prevent the audit firm itself from benefiting from the opinion it provides.
Audit Committee
The independent audit process also establishes the responsibilities of the company's management. The company selects an audit committee, which is responsible for hiring the auditor and monitoring the auditor while she conducts the audit. It is the audit committee's responsibility to make sure that the auditor is an independent contractor. The audit committee also defines the scope of the audit, which determines which financial records the auditor has access to. If the auditor has limited access to the company's records, she can provide a qualified opinion, which states that the records she could see were accurate.
Cost and Efficiency
The independent audit process is meant to provide enough information for a bank or investor to see if a company is providing accurate information without disrupting the company's business operations or causing it to incur excessive costs. The auditor uses his own judgment when he determines how much time he will spend examining each account based on the likelihood of an error in an account and the financial consequences if an error is present.
