Watch your step – wading through the “mind” field of skepticism

Audit inspectors around the world have been raising concerns about whether auditors are exercising professional skepticism appropriately in practice.

Audit inspectors around the world have been raising concerns about whether auditors are exercising professional skepticism appropriately in practice. Are they on to something?

Professional skepticism is the term used to describe the mindset of an auditor in critically assessing the audit evidence obtained during an audit. It means asking the right questions, following up when things don’t make sense and not accepting what management tells you without corroboration. Professional skepticism is so fundamental in what auditors do that the requirement to exercise it is woven throughout the auditing standards – you can’t do a high quality audit without it. The problem is, use of appropriate skepticism can be difficult to prove.

More than ever, audit inspectors are challenging auditors to practice – and demonstrate – use of appropriate skepticism.  A number of recent reports have found that some auditors:

  1. have not responded appropriately in circumstances when inconsistent or contradictory audit evidence has been obtained
  2. appear to have been over-reliant on management representations
  3. appear to only have sought audit evidence that corroborates rather than challenges management’s assertions or
  4. appear to have accepted unreliable audit evidence as being sufficient and appropriate.

There are three main avenues being pursued by audit firms, standard setters and others to respond to the challenge of professional skepticism:

  1. Improving individual auditor training to help auditors understand when they need to: challenge management’s assertions, consider different alternatives, seek more reliable audit evidence, and respond to inconsistencies or contradictions. Such training also includes strengthening inquiry techniques to improve the reliability of evidence obtained by this means.
  2. Increasing awareness of where auditing standards give particular emphasis on the need to exercise professional skepticism during an audit. When auditors understand that the reason for many required audit procedures in the standards is to promote the exercise of professional skepticism it may drive improved performance of those procedures.
  3. Strengthening documentation procedures to make sure that the auditor’s thought process, not just conclusions from the work done, are explicitly set out in the audit file. Documenting the auditor’s thought process may provide a clearer roadmap as to how the auditor reached those conclusions.

Underscoring the renewed focus on this issue, a number of bodies have recently issued materials on professional skepticism, including the Auditing and Assurance Standards Board’s Bulletin Enhancing Professional Skepticism, the International Auditing and Assurance Standards Board’s Staff Questions and Answers – Professional Skepticism in an Audit of Financial Statements and the U.K. Auditing Practices Board’s Briefing Paper: Professional Skepticism. But many are still grappling with how to develop practical means of enhancing the exercise of professional skepticism in the field.

Keep the conversation going…do you agree that there needs to be a mindset change on audits today? If so, how can this be done effectively? And how can it be documented in a meaningful way? Email me directly.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada .

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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