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Mandatory Audit Firm Rotation

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Mandatory Audit Firm Rotation Mandatory audit firm rotation has been discussed by different accounting boards numerous times since the 1970s. Mandatory audit firm rotation would cause auditing firms to change clients after a certain amount of years with the client. The Public Company Accounting Oversight Board (PCAOB) has recently opened a discussion on audit firm rotation because the Board is concerned about the many problems that have come up on different auditing reports made by top auditing firms. PCAOB is concerned with auditor independence because they feel that it is being compromised as different firms continue to stay with particular clients for extended periods of time. This paper is going to discuss auditor independence and its effect on audit opinion, the history of audit firm rotation, and the advantages and disadvantages of audit firm rotation because it is a solution that is being considered. According to the PCAOB auditor independence is a description of the relationship between auditor and client and the mindset with which the auditor must approach his or her work. A measure for the mindset is the auditor’s ability to exercise professional skepticism, which is an attitude that includes a questioning mind and a critical assessment of audit evidence. For the last eight years the Board conducted annual inspections of the largest audit firms and found that more than 2,800 of the firm’s engagements were audit failures. An audit failure is a failure to obtain reasonable assurance about whether the financial statements are free of material misstatements. This means that investors relied on an audit opinion that was not supported by sufficient appropriate evidence. (Public Company Accounting Oversight Board, 2011) The Board does not want to think that the reason for so many audit failures is the relationship that the audit firms have with their clients

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