This paper presents a framework that explains how certain incentives affecting independence risk interact with situational factors to affect actual or perceived audit quality. We articulate the combined effects of direct incentives, indirect incentives, and judgment‐based decisions involving difficult accounting issues, materiality, and audit conduct. We then identify a variety of factors that may mitigate independence risk, including corporate governance mechanisms, regulatory oversight, auditing firm policies, auditing firm culture, and individual auditor characteristics. Finally, we discuss the effects of independence risk on various stakeholders, and propose actions that should be taken by the auditing profession, auditing firms, regulators, and researchers.

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