Auditor Independence: An Examination Independence Risk Factors and Mitigating Factors on Auditor Judgment

WORKING PAPER

Auditor Independence: An Examination Independence Risk Factors and Mitigating Factors on Auditor Judgment

Barbara M. Vinciguerra
Penn State Great Valley
School of Graduate Professional Studies

Auditor Independence: An Examination Independence Risk Factors and Mitigating Factors on Auditor Judgment

Abstract

Professional standards require auditors to be independent in the performance of attestation services. Critics of the accounting profession have expressed concern that pressure to maintain and develop business opportunities may erode an auditor’s objectivity and independence when making audit judgments. The profession contends that aspects of the auditing environment such as peer review, consultation review, and auditor professionalism serve to mitigate this risk.

This study examines the impact of financial dependence, consultation review requirement, and moral development on a judgment based audit decision. Fifty-four experienced auditors were asked to assess the appropriateness of an audit client’s proposed change in accounting estimate for warranties. Two levels of financial dependence (Large client with potential for additional consulting revenues / Small client) and two levels of consultation review requirement (Required / Not required) were manipulated in the case materials. Moral development was measured using the Defining Issues Test (DIT) p-score.

Results of the tests indicate that the presence of a consultation review requirement reduced the auditors’ assessments of the appropriateness of the accounting treatment; in addition, higher scores on the DIT were associated with lower assessments of the appropriateness of the accounting treatment. Financial dependence did not influence the assessment of the appropriateness of the accounting treatment. Implications for practice are discussed. Introduction
Professional standards require auditors to be independent in the performance of attestation services

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