Want to steer clear of professional judgment traps? New resource sets auditors on the right path

In this Audit Quality Blog post, Eric Turner, principal, Auditing and Assurance Standards, CPA Canada, discusses a U.S. resource designed to help auditors increase their awareness of their judgment tendencies, traps and biases.

The U.S. Center for Audit Quality (CAQ) issued a resource designed to provide auditors with a decision-making process to guide their thinking and increase their awareness of their own judgment tendencies, traps and biases.

The increasing complexity of business transactions, the development of principles-based auditing and accounting standards, the increasing focus on estimates and other highly subjective elements create judgment challenges that are driving many auditors to use a decision-making process to facilitate making consistent judgments in a professionally skeptical manner. The CAQ has developed one such process.

So what does the process look like? There is a sequence of elements for ease of presentation, training and practical use, but these are intended to be used in an iterative manner:

  • identify and define the issue
  • gather the facts and relevant information
  • perform the analysis and identify alternatives
  • make the decision
  • review and complete the documentation and rationale for the conclusion

The elements may be logical and very familiar to many auditors, but where the resource is most helpful is in providing for each element the insights, considerations and common judgment tendencies that can potentially lead to bias and weaken the process.

Tendencies can influence an auditor’s professional skepticism and the resulting judgments. For example, a common judgment tendency is known as anchoring — when the auditor makes an assessment starting from an initial numerical value such as management’s estimate and then adjusts insufficiently away from that initial value in forming a final judgment. The anchoring tendency concept is relatively easy to understand but how do you avoid it? The resource provides some strategies specifically designed to counteract different tendencies such as anchoring. So with respect to anchoring, an auditor might solicit input from others, or consider the potential for management bias by seeking audit evidence such as industry benchmarks that provide alternatives to management’s estimate.

Documenting the auditor’s judgments is a key element of the process but is frequently not done well. The CAQ resource provides guidelines to aid the documentation of the auditor’s decision-making. These are not intended to be all-inclusive or required to be considered in every case but are useful reminders.

Applying professional judgment is becoming ever more complex. There are many reasons why a judgment may not turn out to be the right one. But this resource should increase awareness about the most common traps and biases in making judgments and practical means for avoiding them. It provides useful reading for auditors at all levels on a topic that is vital to audit quality.

Keep the conversation going

Does the CAQ resource touch on all the key issues in your view? How do you think the resource might be best used in practice? What else might improve auditor judgment decisions?

Post a comment below; or email me directly.

Eric

CPA Canada's Audit Quality Blog is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

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About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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