Independence Rules

Concept

Why Independence Matters

Independence is the cornerstone of auditing. It has two components: Independence in Fact (actual state of mind — no bias) and Independence in Appearance (a reasonable observer would conclude the auditor is unbiased). Both must be maintained.

Key Point

Threats to Independence

The conceptual framework identifies threats: Self-interest (financial interest in client), Self-review (auditing your own work), Advocacy (promoting client's position), Familiarity (close relationship with client), and Undue Influence (intimidation or pressure).

Concept

Financial Interest Rules

A covered member cannot have a direct financial interest in an attest client — period. Indirect financial interests are allowed only if immaterial. A covered member includes the CPA, their firm, and immediate family members.

Example

Independence Violation

An audit partner owns 100 shares of stock in their audit client. Even though 100 shares is a small amount, this is a DIRECT financial interest and violates independence regardless of materiality. The partner must sell the shares or be removed from the engagement.

AICPA Code of Professional Conduct

SEC Independence Requirements

Ready to test your knowledge?

Practice questions from this module to reinforce what you learned.

Practice Questions