Which factor can compromise external auditor independence?

Which factor can compromise external auditor independence?

• A. Maintaining independence by performing only audit services.
• B. Holding a material financial interest in the client.
• C. Having no relationship with client personnel.
• D. Adequate rotation of audit staff to maintain fresh perspective.

Answer: (B)

External auditor independence means being able to form and express an opinion objectively, without influence from interests or relationships with the client. Holding a material financial interest in the client creates a self-interest threat: the auditor’s own finances could bias judgment or at least create the appearance of bias, which undermines both independence in fact and independence in appearance. Professional standards treat any material financial stake as a significant threat that can compromise objectivity, so it would disqualify the auditor from maintaining independence. The other scenarios are safeguards or neutral conditions that support independence. Performing only audit services helps avoid conflicts that can arise when auditors provide non-audit services. Having no relationship with client personnel eliminates interpersonal pressures that might affect judgment. Adequate rotation of audit staff reduces familiarity threats and helps maintain professional skepticism.

External auditor independence means being able to form and express an opinion objectively, without influence from interests or relationships with the client. Holding a material financial interest in the client creates a self-interest threat: the auditor’s own finances could bias judgment or at least create the appearance of bias, which undermines both independence in fact and independence in appearance. Professional standards treat any material financial stake as a significant threat that can compromise objectivity, so it would disqualify the auditor from maintaining independence.

The other scenarios are safeguards or neutral conditions that support independence. Performing only audit services helps avoid conflicts that can arise when auditors provide non-audit services. Having no relationship with client personnel eliminates interpersonal pressures that might affect judgment. Adequate rotation of audit staff reduces familiarity threats and helps maintain professional skepticism.