"The auditor must be independent of the entity when performing an engagement in accordance with GAAS unless (a) GAAS provides otherwise or (b) the auditor is required by law or regulation to accept the engagement and report on the financial statements. When the auditor is not independent and neither (a) nor (b) are applicable, the auditor is precluded from issuing a report under GAAS."
There are an enumerate number of relationships and circumstances that might cause independence to be impaired, so it is impractical to plan for all situations; therefore, The AICPA's Code of Professional Conduct has published a framework that can be applied to specific engagements and situations.
In performing its independence analysis, the auditor reviews the engagement for relationships or circumstances that could impair independence (i.e., threats); then he takes actions or other measures that may eliminate or reduce the threat (i.e., safeguards) to a level at which a reasonable and third party who is aware of the relevant information would be expected to conclude that the auditor's independence is not impaired (i.e., to an acceptable level). When an auditor's independence is impaired, the auditor is not independent.
The AICPA provides a list of 7 categories of threats to independence:
- Adverse Interest Threat: the auditor may not act objectively because his interests are in opposition to his client's (e.g, if the auditor and client are in litigation against each other).
- Advocacy Threat: the auditor may promote a client's or position to the point that his independence is compromised (e.g, by promoting securities in an IPO, providing expert witness services, or representing the client in US tax court).
- Familiarity Threat: the auditor may become too sympathetic to the interests of the client, because of its long or close relationship (e.g., if an engagement team member has a close friend or family member in a key position at the client, if a partner of the engagement team has worked with that client for a long time, a member of the audit firm has been an officer or director of the client).
- Management Participation Threat: the auditor may take on the role of client's management or assume management responsibilities (e.g., by serving as an officer or director of the client, accepting responsibility for the design/implementation/maintenance of internal controls, or hiring/supervising/terminating the client's employees).
- Self-interest Threat: the auditor could benefit from an interest in the client (e.g., if the auditor has a financial interest in the client, the auditor has a loan with the client, the auditor owns a significant portion of the client's equity securities, the auditor relies excessively on revenue from that one client, or the auditor has a joint venture with the client).
- Self-review Threat: the auditor may not appropriately judge the results of a previous judgment he made for the client (e.g., by preparing source documents used to generate the client's financial statements).
- Undue Influence Threat: the auditor may subordinate his judgement to an individual associated with the client (e.g., if management threatens to replace the auditor over a disagreement, management pressures the auditor to reduce audit procedures in an effort to lower the fee, or the auditor receives a gift from the client).
- Safeguards created by the profession, legislation, or regulation (e.g., the publishing of ethical requirements).
- Safeguards implemented by the client (e.g., a policy of preparing its own financial statements).
- Safeguards implemented by the audit firm (e.g., removing an engagement team member from that particular engagement).
https://pub.aicpa.org/codeofconduct/Handlers/DownloadDocument.ashx?docid=19976&d_ft=2
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