Question Tag: Professional scepticism

The matters to be considered in the training material are;

• The meaning of Professional scepticism
• The importance of professional scepticism
• What can firms do to enhance awareness of professional scepticism’s importance?
• At what stage of the audit is professional scepticism necessary?
• How does this relate to fraud?
• Where else is professional scepticism important, other than fraud.
• How can professional scepticism be evidenced?

Discussion

In February 2012, the IAASB issued a Q & A paper on Professional Scepticism. Professional scepticism is a crucial aspect of audit, defined in ISA 200. The Paper can be summarised by the following points.

• What is professional scepticism?
  It is hard to define, but is fundamentally a ‘mind-set’ which is linked to the ethical principles of objectivity and independence. It means ‘being alert’ to evidence that contradicts evidence already obtained, or which casts doubts on the reliability of documents or explanations provided, or which may indicate fraud.
• Why is professional scepticism important in audits?
  It is part of the auditor’s ‘skill set’, and is part of professional judgement. It affects decisions about: the procedures to be performed; the sufficiency & appropriateness of evidence obtained; the validity of management’s financial reporting judgements; and the conclusions drawn based on audit evidence.
• What can firms do to enhance awareness of professional scepticism’s importance?
  It is a matter of education, training and experience, as well as the culture of the firm. At a firm-wide level, this means establishing policies and procedures, promoting a quality-oriented culture, and establishing training and CPD schemes.
  At an engagement level, this means that the partner must communicate the importance of quality, and that the audit team is able to raise concerns without fear of reprisals.
• At what stage of the audit is professional scepticism necessary?
  Throughout the audit! E.g., at engagement acceptance, when considering the integrity of management and owners.
• How does this relate to fraud?
  The fact that fraud involves deception and concealment makes professional scepticism particularly important in relation to it. ISA 240 emphasises professional scepticism, particularly in the form of ‘an on-going questioning’ of whether there has been a fraud: There are also areas where there is a required presumption that there is a risk of fraud; revenue recognition, risks of management override of controls as a result of fraud, and accounting estimates.
• Where else is professional scepticism important, other than fraud?
  Significant or judgemental areas, such as:
  • Accounting estimates (e.g., are assumptions reasonable?)
  • Going concern (e.g., are management’s plans really feasible?)
  • Related party relationships & transactions (e.g., transactions outside the normal course of business – misappropriation of assets?)
  • Law & regulations (e.g., where non-compliance may call into question going concern)
• How can this be evidenced?
  Audit documentation should enable an experienced auditor to understand significant decisions made during the audit and any conclusions drawn. As the auditor should be professionally sceptical when making these decisions, the documentation would provide evidence of this. For example, it should document the discussions the auditors have about possible non-compliance with laws & regulations, or possible management bias in relation to accounting estimates.