Magazine article The CPA Journal

Demonstrating Professional Skepticism

Magazine article The CPA Journal

Demonstrating Professional Skepticism

Article excerpt

In Brief

Demonstrating professional skepticism while conducting an audit is an important, well-documented expectation of the profession. A skeptical mindset ensures that auditors approach audits recognizing that it is always possible that fraud is present. Unfortunately, recent audit deficiencies and failures have raised questions as to whether auditors exhibit an appropriate degree of skepticism. This article reviews the profession's guidance regarding professional skepticism, summarizes the results of studies examining audit deficiencies and failures attributed to a lack of sufficient professional skepticism, and offer's suggestions to aid auditors in exhibiting appropriate levels of professional skepticism in audit engagements.

Professional skepticism is a concept of critical importance to the audit profession. Statements on Auditing Standards (SAS) 1, Responsibilities and Functions of the Independent Auditor, clearly states that "Due care requires [emphasis added] the auditor to exercise professional skepticism" (AU 230.07). SAS 99, Consideration of Fraud in a Financial Statement Audit, further clarifies the essential role of professional skepticism by discussing and restating its elements and necessity in conducting an audit:

Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. the auditor should conduct the engagement with a mindset that recognizes the possibility that a material misstatement due to fraud could be present, regardless of any past experience with the entity and regardless of the auditor's belief about management's honesty and integrity. Furthermore, professional skepticism requires an ongoing questioning of whether the information and evidence obtained suggests that a material misstatement due to fraud has occurred. In exercising professional skepticism in gathering and evaluating evidence, the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest, (p. 1724; AU 316.13)

In Staff Audit Practice Alert 10, "Maintaining and Applying Professional Skepticism in Audits" (Dec. 4, 2012), the PCAOB underscores this emphasis by stating the following:

Professional skepticism is essential to the performance of effective audits under Public Company Accounting Oversight Board standards. Those standards require that professional skepticism be applied throughout the audit by each individual auditor on the engagement team. (p. 1)

In addition to the above sources, throughout the professional literature, there aie similar calls for auditors to exhibit appropriate levels of professional skepticism through a questioning mindset, as a fundamental requirement in conducting an audit.

Audit Failures Associated with a Lack of Professional Skepticism

Despite the well-documented expectation and requirement for auditors to exhibit professional skepticism, research indicates that it is often not implemented in a maimer satisfactoiy to the SEC's, enforcement division and the PCAOB's review process.

In a 2013 Center for Audit Quality study (Mark S. Beasley, Joseph V. Carcello, Dana R. Hermanson, and Terry L. Neal, "An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998-2010," 2013; http://www.thecaq.org/ docs/press-release-attachments/caq_ deficienciesmay2013.pdf?sfvrsn=2), the authors examined SEC sanctions of auditors involved in 87 cases of alleged fraudulent financial reporting by public companies (including national and non-national firms). In those 87 audit reports, 58% received an unqualified opinion with no modification and 42% received an unqualified opinion with only some type of explanatory paragraph. Importantly, an insufficient level of professional skepticism was the third-most cited contributory cause of fraudulent reporting in SEC sanctions, being noted in 60% of these cases. Moreover, Staff Audit Practice Alert 10 noted, "Observations from the PCAOB's oversight activities continue to raise concerns about whether auditors consistently and diligently apply professional skepticism" (p. …

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