What is an 'Independent Auditor'

An independent auditor is a certified public accountant (CPA) or chartered accountant (CA) who examines the financial records and business transactions of a company with which he is not affiliated. An independent auditor is typically used to avoid conflicts of interest and to ensure the integrity of performing an audit.

BREAKING DOWN 'Independent Auditor'

Independent auditors are often used – or even mandated – to protect shareholders and potential investors from the occasional fraudulent or unrepresentative financial claims made by public companies, such as following the implosion of the dotcom bubble and the passage of the Sarbanes-Oxley Act (SOX) in 2002.

An independent auditor either works for a public accounting firm or is self-employed. The auditor examines financial statements and related data, analyzes business operations and processes, and provides recommendations on achieving greater efficiency. He evaluates company assets for impairment and proper valuation and determines tax liability, ensuring compliance with tax code and laws.

The auditor develops an opinion asserting the reliability and fairness of clients' financial statements, then communicates the information to investors, creditors and government organizations. In addition, he may perform other auditing, tax and consulting services for individuals, corporations, nonprofit organizations or government entities.

Auditing Procedures

An independent auditor asks questions of management and staff for a better understanding of the business, its operations, financial reporting, internal control system, and known fraud or error. He may perform analytical procedures on expected and unexpected variances in account balances or transaction classes, then test documentation supporting those variances. The auditor also observes the company’s physical inventory count and confirms accounts receivable (AR) and other third-party accounts.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 was passed after Enron, WorldCom and large numbers of technology companies were failing. The goal of SOX is improving corporate governance and restoring the faith of companies' investors. However, many in the business world are against SOX, seeing it as a politically motivated move leading to a loss of risk-taking and competitiveness.

Of concern to many is the mandate requiring that public companies obtain an independent audit of their internal control practices. The cost of the requirement is felt most acutely by companies with market caps of $75 million or greater. The audit standards were also modified in 2007, reducing costs for many firms by 25% or more annually. In addition, despite high initial costs of the internal control mandate, markets use the information to assess businesses more effectively, managers continue improving internal processes, and the internal control testing becomes more cost-effective over time.

  1. Auditor

    An official whose job it is to carefully check the accuracy of ...
  2. Generally Accepted Auditing Standards ...

    Generally Accepted Auditing Standards are a set of guidelines ...
  3. Certified Internal Auditor - CIA

    A certification offered to accountants who conduct internal audits. ...
  4. Audit

    An unbiased examination and evaluation of the financial statements ...
  5. Unqualified Opinion

    An independent auditor's judgment that a company's financial ...
  6. Public Company Accounting Oversight ...

    A non-profit organization that regulates auditors of publicly ...
Related Articles
  1. Insights

    Financial Auditor: Career Path & Qualifications

    Learn more about what it takes to become an internal or external financial auditor, and determine whether the profession is right for you.
  2. Tech

    An Inside Look At Internal Auditors

    Find out why these number crunchers are part of every chief officer's dream team.
  3. Personal Finance

    Career advice: Accounting versus auditing

    Understand the distinctions between accounting and auditing, and learn what each offers new graduates in terms of salary, job security and daily life.
  4. Insights

    IT Security Auditing

    Find out about this promising career that can match IT with business studies.
  5. Insights

    A Look At Accounting Careers

    More than just crunching numbers, this career blends detective work with trouble shooting.
  6. Taxes

    America's Missing $15 Billion in Corporate Taxes

    The “Starve the IRS” strategy cuts the supply of corporate auditors. Result: Big-money tax cheats go free and ordinary taxpayers pay every penny they owe.
  7. Taxes

    How To Appeal Your IRS Audit

    The auditor's review isn't always the last word. Many taxpayers who are audited can successfully appeal their audits and save thousands of dollars.
  8. Financial Advisor

    A Guide To Careers In Accounting Information Systems

    We provide an overview of the types of AIS jobs available, and the education and training requirements to enter this field.
  9. Small Business

    Sarbanes-Oxley Act Of 2002 – SOX

    The Sarbanes-Oxley Act of 2002 is a legislative response to a number of corporate scandals that sent shockwaves through the world financial markets.
  1. Are IRS audits random?

    Learn about how the U.S. Internal Revenue Service (IRS) conducts its tax audits based on random selection, document matching ... Read Answer >>
  2. How did Sarbanes Oxley (SOX) affect the rules and regulations for account reconciliation?

    Read about the various regulations and impositions of the Sarbanes-Oxley Act of 2002 on account reconciliation for publicly ... Read Answer >>
  3. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    A detailed rundown of the provisions of the Sarbanes-Oxley Act, including strict disclosures, criminal liability and audit ... Read Answer >>
  4. Are money market funds considered cash?

    Learn the difference between how analysts and auditors treat money market funds and why not knowing the difference can hurt ... Read Answer >>
  5. What is the difference between the Sarbanes-Oxley Act and the Dodd-Frank Act?

    Learn about the differences between the Sarbanes-Oxley Act and the Dodd-Frank Act, and understand the reasons why each bill ... Read Answer >>
  6. Why was the accountant responsible for auditing ZZZZ Best unable to determine that ...

    Find out why the accountant responsible for auditing ZZZZ Best couldn't determine that the company was engaged in a Ponzi ... Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center