Professional Skepticism in Auditing

 Discuss about the Professional Skepticism in Auditing.

Introduction

According to Gunn and Jules (2012), the term Professional skepticism refers to an “attitude”. An attitude like this in the auditing scenario deals with a questioning mindset, being cautious of the conditions that may indicate the possibility of any contradictions which may arise in the audited evidence. The attitude also deals with a questioning approach which is used to address several instances related to the possibility of any misstatement, error or fraud.  The recognition of these circumstances of the fraud or error in the financial statements is known as the Professional skepticism in auditing. The conceptualization also refers to planning of the auditing data and bringing about modifications in the audit procedures. As per the data provided in the International Standards in auditing (ISA 200) it recognizes the scope of application of the professional skepticism in terms of audit evidence that contradicts with the other audit evidence, conditions which may indicate the possibility of the fraud. It also includes the scope of projection of any information that may question about the authenticity of the documents and responses to the inquiries which is to be used as audit evidence (McKenna 2013).

The study intends to show the application of Professional skepticism as a means to enhance the ability of the auditor for identifying the risks factors related the material misstatement (Such statements which may affect the economic decisions) and addressing of the same. The study also demonstrates the scope of the auditor’s obligations to which are be exercised as per the Securities and Exchange Commission (SEC). The discussion shows the application of the auditor’s obligation stated under Section 10A. The study also shows the practical application of the several instances of the application of professional skepticism in the auditing evidence. This has been done by evaluating by the various incidences reported in the corporate environment. The discussion also shows the inclusion of the academic research in this context, which relates to the study conducted by several academic researchers (http://www.accaglobal.com 2016).

Discussion     

The application of the professional skepticism by the auditors to improve the audit quality is observed at different levels, ranging from client’s acceptance during the various processes. Some of the discussions related to this concept includes the understanding of the acceptance of the assigning engagement of the acceptance, assessment procedures, obtaining of the audit evidence and evaluation of the same (Auasb.gov.au. 2016).

In the stage of the assessing of the engagement acceptance, the auditor should consider whether the management of the audited client is responsible enough to act with integrity. It should be also observed by the auditor’s to make sure, whether there are any concerns related to the act of professional skepticism. The auditor’s should also ensure there is no obligations posing ethical threat to the objectivity of a company (Brown-Liburd et al. 2013).

In this stage of the risk assessment procedure, an auditor needs to be skeptical for the performing of the different types of the risk, assessment procedures which is required during the planning of the audit. For example, during a conference about the results of the analytical procedures with the management of the company, the auditor should make sure that he does not finalize the management’s explanation at the face-to-face interaction itself. The auditor should work upon the necessary corroboratory evidence for the various types of the evidence offered (Sec.gov. 2016).

In order to improve the quality of the audited data, while acquiring of the audit evidence, the auditor should be prompt enough to challenge the management team to challenge on the subjective issues and the matters which require a proficient degree of judgmental abilities. The auditor should consider the reliability factors especially where there is risk of fraud in the audit evidences. For example, in case the management of the company refuses to the request of the auditor to obtain evidence from the third party, the auditor needs to consider the management who can be trusted for obtaining evidence. In such a situation, the auditor may ask for a written statement from the management. According to the “ISA 200” norms even if the management has shown the necessary consideration for maintaining the integrity, the auditor has full authority to maintain professional skepticism regarding any act that will allow the auditor to remain satisfied while obtaining the reasonable assurance (Glover and Prawitt 2014).

In the process of the evaluation evidence, the auditor needs to perform a critical assessment of the various types of audit evidence available and needs to stay alert for any kind of the contradictory evidence, which may undervalue the sufficiency, and the relevance of the obtained evidence (Carpenter and Reimers 2013).

The specific applications of the concept of the professional skepticism are seen in the fraud detection. As per the “ISA 240” standards related to the “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, when an auditor is obtaining assurance, an auditor is responsible for assuring professional skepticism in the entire audit procedure and also needs to consider the potential of the management to avoid the controls. The audit procedure needs to further recognize the process for effective fraud detection (ISA 240.8).

The ISA 240 further states about the specific requirement to maintain the professional skepticism in the entire audit procedure when including any form of misstatement, which may arise due to fraud, there by notwithstanding the auditor’s previous experience of honesty and the integrity of the management and those, charged with governance (ISA 240.12). 

The important paragraphs in the ISA 240 emphasize on the importance of the reliability of the information that can be used as audit evidence. The section under the ISA 240 states that fraud perpetuation of the fraud detection is often the result of the management’s responses to the inquiries (“ISA 240. A17”).  The ISA 240 norms reminds that when the management provides the necessary audit evidence, which may be in the form of a documentary evidence, written  representation or the responses to the enquiries, shall be carefully considered for evaluating the integrity of the various type of the evidences obtained (Ifac.org. 2016).

 Conceptualization of the professional skepticism can play an important role in several areas.  “International Auditing and Assurance Standards Board (IAASB)” has proposed several types of staff questions and responses, which translates to outline the importance of the professional skepticism in areas related to accounting estimates, ongoing concerns, considerations made for the law and regulation and the disclosure made by the related parties (Messier 2016).

The accounting estimates, includes the fair value consideration of the different types of the accounting estimates, which can be used for significant assumptions by the management especially in the developing accounting estimates, and the review process of the judgmental decisions used by the management.

The auditor’s should be further responsible for the review process of the management’s assessment of the going concern and identify whether the plans proposed by the management are viable enough for the going concern.

The disclosures for the related parties can be often difficult to procure and knowledge of the information may remain confined only to the management. In such a situation, the auditors may need to rely on the management for the identification of the related party members. In such a case, the auditors should be prudent enough to apply professional skepticism (Apps.americanbar.org. 2016).

The “Securities and Exchange Commission (SEC)” has issued sanctions against 80/81 individual auditors for instances in 27/81 instances and 26 cases which involves sanctions against the both. The application of the various types of professional skepticism incidences is seen through the section 10A of the audit requirement (Retheauditors.com. 2016).

The professional skepticism requires an ongoing questioning of the different evidences and the auditor should not be content unless the persuasive belief of the management is based on honest evidence. As per Section 10A of “Securities and Exchange Commission” (SEC) auditors need to report to SEC in case of any likely illegal acts, which might have a material, affect the financial statement. Some of the top areas sourced by the SEC shows the incompetency of the several auditors in terms of failure to gather sufficient competent audit evidence, failure to carry out the necessary professional, care. The SEC also shows the insufficient level for the professional skepticism skills, failure of retrieve the adequate evidence, which is related to the representation by the management and failure to express an appropriate opinion for the audited data. Some of the companies detected odds in the auditing area, especially associated to breach of the code of conduct in areas related to Foreign Corrupt Practices Act (FCPA), Tax evasion, Anti money laundering act. The companies observed with such mal practices include Wal- Mart, News corps, Las Vegas sands on the ground FCPA. Companies like Deutsche Bank and UBS have been known for frauds related to tax evasion. Due to the observance of these various types of instances, the inclusion of the professional skepticism is important to consider in the modern corporate practices (Quadackers and Wright 2014).

 Some of the areas where the professional skepticism is particularly important is due to the factors such as the acceptance and the continuance of the frauds in the financial statements, risk assessment, developing of an audit plan, adhering to the law and the regulations, significant and the unusual transactions.

The acceptance and the continuance criteria are important to consider the integrity of the management. The risk assessment is based on questions and the responses to the various types of the enquiries. It also considers the results to be identified related to the material misstatements or inconsistent information. The development of the audit plan is necessary for incorporating the uncertainty in the audit plan and also increase the extent of the use of external confirmations necessary for the purpose of obtaining of the third party information. The planning of the procedures is important for sufficient procedures to evaluate the reliability of the data that is to be used for the purpose of the audit data. The auditors need to be aware of the various type of laws and regulations to remain alert due to the instances of the non-compliance whole performing of the audit procedures. For professional skepticism, it is important to consider the significant and the unusual entries, as the auditors need to consider the rationale for the transaction and corroborate the management’s explanations for the purpose of the further evidence, which includes the reviewing of the contracts.

The increasing importance of professional skepticism is seen by the IAASB staff questions and the responses which is consists of the foreword of the IAASB chairman Arnold Schilder, who states on the growing need for the auditor to apply professional skepticism. The most important reason identified for professional skepticism is due to the introduction of the “International Financial Reporting Standards” (IFRS). This is seen in the form of the requirement of the preparers (an individual preparing income tax returns) for the financial statement for exercising the significant judgment when making the decision for the purpose of the accounting treatments.

The need for professional skepticism was further seen during the global financial crisis in the year 2008-2009. The auditors in the several jurisdictions were tagged as unpopular for the inability in this section,  the application of the professional skepticism is majorly in the areas related to audit of the fair values, going concern assessments and the related party transactions. The primary reason for issuing of the staff questions and the responses by the IAASB was to show the importance of the audit of the financial statements (Hurtt et al. 2013).

Conclusion

As per the statement provided by IAASB the requirement for the professional skepticism should not be over emphasized and it is also important to consider that the adaptation of the skeptical attitude is a personal and professional responsibility which needs to be embraced by every auditor. Keeping in mind the intricacies and the subjective nature in the IFRS requirement, the auditors need to be  prepare themselves for being able to challenge the management on a number of areas relevant to the preparation of the financial statements. The national bodies like financial reporting council (FRC) and IAASB are always keen to provide support to the auditors in terms of the application of professional skepticism so as to improve the overall audit quality of the financial reports. These mentioned bodies are responsible for the purpose of maintaining credibility in the audit opinion and safeguarding the interest of the auditors.

Reference List

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