Independence and Objectivity
Independence and objectivity questions test whether you can separate two related but distinct concepts and say what must happen when a threat arises. The exam favors scenarios: a recent transfer, a consulting engagement, a gift, a reporting line.
Two concepts, two scopes
- Independence is freedom from conditions that threaten objectivity; it is an attribute of the internal audit activity and the CAE, achieved through organizational positioning.
- Objectivity is an unbiased mental attitude held by each auditor; it is threatened by self-review, familiarity, social pressure, economic interest, and undue influence from management.
- Standard 1110 requires the CAE to report functionally to the board; the board approves the charter, the audit plan, and the CAE's appointment, and receives communications directly.
- Standard 1120 bars auditors from assessing operations for which they were responsible within the previous year.
- Standard 1130 requires disclosure of impairments to the board; disclosure informs the board, it does not restore independence.
- The Code of Ethics sets four principles - integrity, objectivity, confidentiality, competency - and rules of conduct applying to individuals and the profession.
- Accepting gifts or hospitality that could influence, or appear to influence, judgment breaches objectivity; the appearance test matters as much as the fact.
- Consulting engagements do not automatically impair objectivity, but assuming management responsibility does, and it complicates subsequent assurance work on the same area.
Worked example
An auditor spent ten months as the controller responsible for the accounts payable ledger and is now assigned to audit accounts payable. Rotation and supervision are suggested safeguards, but Standard 1120 is explicit: the auditor must not perform the engagement. Disclosure alone does not cure it. The correct action is to reassign the auditor; if the whole activity is too small to avoid self-review, the CAE documents the impairment and discloses it to the board.
Traps that cost marks
- Treating independence and objectivity as synonyms; the first is structural, the second is personal.
- Assuming that disclosing an impairment makes the engagement conformant.
- Letting internal audit sit on the committee that designs and implements the control it will later audit.
- Believing that independence is lost only when actual bias is proven.