July 03, 2022 July 03, 2022/ The objectivity principle is the concept that the financial statements of an organization be based on solid evidence. The intent behind this principle is to keep the management team and the accounting department of an entity from producing financial statements that are slanted by their opinions and biases. For example, if management believes that it will shortly be the beneficiary of a massive payout from a lawsuit, it may accrue the revenue associated with the payout, even though the evidence states that such an outcome might not occur. A more objective viewpoint would be to wait for more information before making such a determination. Another form of bias that can skew financial results is when management owns a large stake in the company, and so has an interest in reporting optimistic results for the business, even though a more objective view would result in the reporting of more conservative results. By using an objective viewpoint when constructing financial statements, the result should be financial information that the investment community can rely upon when evaluating the financial results, cash flows, and financial position of an entity. Outside auditors need their clients to produce financial statements under the objectivity principle, so that the auditors can use evidentiary matter to verify that the information in the statements is correct. It is easier for a business to comply with the principle if it has an excellent record archiving system; this makes it easier for auditors to locate information that supports the aggregate balances noted in the financial statements. Another way of viewing the objectivity principle is from the viewpoint of the auditor. If an auditor recently worked for a company and has now been assigned to manage the audit of that business, he or she may not be objective about the resulting audit report, depending on the former relationship with the client. July 03, 2022/
Internal Auditors whose work purports to comply with the Institute of Internal Auditors’ (IIA, Institute) International Standards for the Professional Practice of Internal Auditing (Standards) are also required to comply with the Institute’s Code of Ethics (Code). These documents, the Standards and the Code, require that internal auditors be independent and objective in performing their work. Independence and objectivity is required of the internal audit activity as a whole and of each individual auditor. Independent Standards 1100 requires auditor independence. It further interprets independence to be “… the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.” (Standards 1100, Interpretation) Practically, independence is achieved by assuring that the internal audit activity has no management responsibility for any of the organization’s non-audit functions subject to internal audit assessments, and by separating management of the internal audit activity from the functional oversight of the organization’s senior management. What does that mean? It means that we cannot audit what we are responsible for. If we are making management decisions for a department subject to our review, then we are auditing our own work and are, by definition, not independent. It further means that internal audit activities cannot be hindered by senior management wishing to deflect attention by redirecting its efforts to other issues. At the LCTCS, this is accomplished by what is called a dual reporting relationship. The internal audit activity report functionally to the Audit Committee of the LCTCS Board of Supervisors. This means that the work of Internal Audit is authorized, approved and overseen by the Audit Committee. The Director of Internal Audit is hired, compensated and fired by the Audit Committee. The reports issued by Internal Audit are addressed to the Board President and the Chair of the Audit Committee. Having the Board’s approval of its charter provides the internal audit activity with the authority it needs to access records and documentation without hindrance and to assure adequate audit coverage. Administratively, Internal Audit reports to the LCTCS President facilitating the day-to-day operations of the department, including budgeting and departmental management, human resource administration and evaluations, administration of departmental policies and procedures, and internal communications and information flows. This dual reporting arrangement also guarantees access to the appropriate levels of communications related to the work of the internal audit activity, concerns that may arise that require management’s attention and/or response and alignment of the work of internal audit with organizational goals and strategies. Objective Both the Standards and the Code require internal auditor objectivity. Objectivity is “… an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made.” (Standards 1100, Interpretation) Objectivity is achieved by avoiding, in fact and in appearance, any conflict of interest. Not only do LCTCS internal auditors have to abide by the State of Louisiana’s ethics laws, they also have to abide by the IIA’s Code of Ethics and Rules of Conduct. Internal auditors cannot be assigned to projects where they have previously been involved in the work being reviewed, unless at least one year has passed since their involvement. They may not work on a project that involves a family member. Even if no conflict in fact exists, the appearance of a conflict could be enough to impair an auditor’s impartiality and unbiased assessment of an audit area. Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others. This doesn’t mean that we are always right or that we know everything there is to know about a subject. It simply means that we are required to follow the evidence. We cannot overlook a matter just because management has an explanation. Objectivity would require us to see evidence of the explanation. Benefits of Independence and Objectivity What does this mean to you, the audit client? Auditor independence and objectivity means that we do not arrive on site with a predetermined outcome in view. It means that conclusions will be fair and unbiased, based on evidence and not unduly influenced by management or personal relationships. It means that recommendations will be in the best interest of the client. Impairments to Independence and Objectivity Independence and/or objectivity can be impaired in a number of ways and on either organizational or individual levels. At the organization level, senior management may attempt to limit the scope of a review, limit auditor access to records or not cooperate with the auditor in attempting to understand transactions or processes. An individual auditor’s independence and/or objectivity may be impaired by an undisclosed conflict of interest with the client, by reviewing an activity for which they were previously responsible or by being unduly influenced by a personal friendship. Whenever auditor independence or objectivity is impaired, in fact or in appearance, it must be disclosed to appropriate parties. If the impairment is not severe, with client agreement, the audit project may be able to continue to completion. If, however, the impairment is deemed to be significant, to the extent that successful completion of the project may be compromised, once disclosed to the appropriate parties, it may be necessary for internal audit to withdraw from the project. Auditor independence and objectivity is about more than just complying with the Standards. It’s about stakeholders being able to rely on the auditors work and recommendations. It’s about clients believing that the auditors have their best interests in mind. It’s about adding value. Audit independence refers to the ability of an audit team to perform an independent assessment without interference from management. It is achieved by having the right people on the audit team and by ensuring that they are free from any influence from management. Audit independence means that an auditor has no stake in the business being audited. Audit independence ensures that there is no conflict of interest; it also helps ensure that the auditor can be trusted because he/she will have nothing to gain or lose from the results of the audit. The Institute of internal auditors (IIA) defines objectivity as the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner. Audit Objectivity:Audit objectivity refers to the impartiality of the auditor's judgment. This is achieved by having the appropriate skills and experience to make objective judgments about the situation being assessed. Audit objectivity refers to the fact that an auditor’s professional judgment is not influenced by personal interest or bias. Objectivity means that an auditor does not take sides in a dispute. Auditors are expected to remain impartial, and the audit is done based on facts. The Institute of internal auditors (IIA) defines objectivity as an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made.
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