Addressing the challenge of professional judgment

Professional judgment is a key skill in preparing and auditing financial statements, but demonstrating that professional judgment has been applied can be a challenge.

Professional judgment is a key skill in preparing and auditing financial statements, but demonstrating that professional judgment has been applied can be a challenge. A new framework developed by the Institute of Chartered Accountants of Scotland (ICAS) is designed to help.

Accounting and auditing standards recognize that standards cannot address every specific situation encountered in preparing and auditing financial statements. This is where professional judgment comes in. But defining what constitutes sound professional judgment and how one can show that it has been applied has always been difficult.

One of the difficulties has been demonstrating the judgments to be reasonable at the time they are made and in light of the facts and circumstances then existing. This can assist regulators when they challenge judgments after the event.

The intent of the ICAS publication, A Professional Judgement Framework for Financial Reporting, is to set out “a structured process by which preparers and auditors, with an appropriate level of knowledge, experience, and objectivity, can form an opinion on an accounting matter based on the relevant facts and circumstances within the context provided by applicable accounting standards.” In this context, “preparers” represent all those parties involved in judgments on accounting matters for financial reporting, including financial management, the audit committee and the board of directors.

The framework identifies principles for preparers (and auditors) in the following four key areas:

  • Knowledge gathering and analysis
  • Assessment of accounting (and auditing) guidance
  • Process for making a judgment (and for assessing and challenging that judgment)
  • Documentation of judgment.

An interesting approach taken in the framework is to specify principles that regulators might use in challenging preparers’ judgments. The process involves reviewing the disclosure of professional judgments in the financial statements and preparer and auditor documentation of those judgments, and deciding whether judgments have been appropriately made.

The framework supports the principles with lists of actions that might be taken to apply the principles. I think this is a great approach because it avoids reducing professional judgment to a box-ticking exercise, or to expect that the framework would be used for every judgment made in preparing and auditing the financial statements. It enables users to focus on significant judgments or those which would have a material effect on the financial statements.

Sir David Tweedie states in his foreword to the ICAS publication: “The framework is a starting point for consideration and implementation across the globe and we welcome any feedback on this project which would help to develop what we believe is a critical tool to assist those making and checking key judgments.”

I would love to hear your thoughts on the framework and how it might be improved. Post a comment below; or email me directly.


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