Final answer:
An external auditor must maintain independence to provide an unbiased and objective evaluation of an entity's financial statements. Independence is critical for the credibility of the auditor's report and is enforced by international and national regulations, including the International Standards on Auditing.
Step-by-step explanation:
An external auditor must be independent when performing audits to ensure unbiased and objective opinions on the financial statements of the entity being audited. Independence means that the auditor is not influenced by any parties, including company management, that may have a stake in the audit results. This is critical because stakeholders, such as investors and regulators, rely on the auditor's unbiased assessment to make informed decisions.
In terms of the audit process, an auditor needs to remain free from any relationships or circumstances that could compromise their professional judgment or objectivity. This includes avoiding conflicts of interest, ensuring there is no personal or financial relationship with the client, and adhering to strict professional ethics and standards.
Regulatory bodies, such as the International Federation of Accountants (IFAC) and national regulatory agencies, have set forth guidelines and standards, including the International Standards on Auditing (ISA), to help govern the independence of auditors. Organizations are expected to comply with these standards to uphold the integrity of the financial reporting process.