Independence is impaired if a Covered Member prepares client source documents.
True
False
The correct answer and explanation is:
The correct answer is True.
In auditing, independence is a fundamental principle. For an auditor to provide an unbiased and objective opinion on the financial statements of a client, they must maintain independence in both fact and appearance. A “Covered Member” is defined as an individual who is in a position to influence the audit, such as an auditor or someone in the firm’s audit team.
Independence is considered impaired if a covered member becomes involved in preparing the client’s financial records, such as source documents or accounting entries. This includes actions like drafting invoices, bills, or making journal entries for the client. When an auditor or member of their team participates in the preparation of financial statements or supporting documentation, it creates a conflict of interest. The primary issue is that the auditor would be in the position of preparing the records they are later required to audit, which undermines the impartiality of the audit.
This could lead to questions about the auditor’s objectivity, and stakeholders could perceive the audit as being biased because the auditor was directly involved in the creation of the financial documents. The appearance of bias is just as problematic as actual bias in maintaining the integrity of the audit process.
Additionally, professional standards such as those outlined by the American Institute of Certified Public Accountants (AICPA) and the Public Company Accounting Oversight Board (PCAOB) explicitly prohibit auditors from performing management functions. By preparing client source documents, the auditor is essentially performing a role that is considered management’s responsibility, thereby violating the ethical requirement for independence. This is why independence would be impaired in such a situation.