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Professional scepticism

New audit report is now implementing. Some strange wordings can be found in that report.  Putting it aside, one needs to understand the mindset of being an auditor nowadays.

One of the essential parts of the auditor’s mindset is professional scepticism which is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.  What is that?  Simply put, auditor is required to pinpoint “what could go wrong” with the client’s financial statements and to obtain “sufficient appropriate evidence” to address every issues identified.

Examples of conditions that may alert the auditors are:

  • One audit evidence that contradicts another audit evidence obtained.
  • Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.
  • Conditions that may indicate possible fraud.
  • Circumstances that suggest the need for additional audit procedures.

Essentially, professional scepticism is closely related to fundamental ethical considerations of auditor objectivity and independence.  It is also linked to the application of professional judgment by the auditor.  An audit performed without an attitude of professional scepticism is not likely to be a high quality audit.

Therefore, professional scepticism permeates the entire audit process from client acceptance and at various points during the audit process, and some typical examples are given below:

  • When assessing engagement acceptance – at this stage the auditor should consider whether the management of the intended audit client acts with integrity and whether there are any matters that may impact on the auditor being able to act with professional scepticism if they accept the engagement, such as ethical threats to objectivity.
  • When performing risk assessment procedures – an auditor should be sceptical when performing risk assessment procedures at the planning stage of the audit.  For example, when discussing the results of analytical procedures with management, the auditor should not accept management’s explanations at face value, and should obtain corroboratory evidence for the explanations offered.
  • When obtaining audit evidence – the auditor should be ready to challenge management, especially on complex and subjective matters and matters that have required a degree of judgement to be exercised by management. The reliability and sufficiency of evidence should be considered, especially where there are risks of fraud.  There may also be specific issues arising during an audit which impacts on professional scepticism – for example, if management refuses the auditor’s request to obtain evidence from a third party.  The auditor will have to consider how much trust can be placed on evidence obtained from management – for example, evidence in the form of enquiry with management or written representations obtained from management. When evaluating evidence – the auditor should critically assess audit evidence and be alert for contradictory evidence that may undermine the sufficiency and appropriateness of evidence obtained.

Other areas inlcude going concern, related party relationships and transactions and unusual or highly complex transactions may lead to the application of professional scepticism.  The auditor should also apply professional scepticism when forming the auditor’s opinion, by considering the overall sufficiency of evidence to support the audit opinion, and by evaluating whether the financial statements overall are a fair presentation of underlying transactions and events.

Hopefully, the application of professional scepticism could reduce detection risk as it could enhance the effectiveness of applied audit procedures and reduce the possibility that the auditor will reach an inappropriate conclusion when evaluating the results of audit procedures.