Effectively Applying Professional Skepticism to Improve Audit Quality

By Coppage, Richard; Shastri, Trimbak | The CPA Journal, August 2014 | Go to article overview

Effectively Applying Professional Skepticism to Improve Audit Quality


Coppage, Richard, Shastri, Trimbak, The CPA Journal


Tn planning and performing an audit, including the preparation of the audit report, an auditor is required to exercise due professional care. Implicit in this responsibility is maintaining an attitude of professional skepticism. Upholding such an attitude in practice, however, can be difficult. This discussion highlights some situations identified by the PCAOB that involve auditors' failure to maintain a skeptical attitude. These situations, together with some specific strategies, can help auditors avoid similar or comparable failures.

Hie Meaning of Professional Skepticism

The PCAOB auditing standards define professional skepticism as an attitude that includes a questioning mind and a critical assessment of audit evidence (see interim standard AU section 230, "Due Professional Care in the Performance of Work"; AU-C section 200.A22-A26). The AICPA's auditing standards define professional skepticism as an attitude that includes a questioning mind, an alertness to conditions that might indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence (see AU-C section 200, "Overall Objectives of the Independent Audit and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards"). Auditing standards require auditors to exercise professional skepticism throughout the audit, and maintaining skepticism is critical in effectively completing any assurance engagement.

As indicated by PCAOB board member Jeanette Franzel-

Deconstructing the application of professional skepticism in auditing is complex and crosses multiple disciplines, including auditing literature, theory, and practice; corporate governance; business models; human behavior; and ethics. ("Auditor Objectivity and SkepticismWhat's Next?," Aug. 5, 2013, speech at American Accounting Association Annual Meeting in Anaheim, Calif.)

Impact of Auditor Independence, Technical Proficiency, and Judgment

Auditors should exercise professional judgment and maintain professional skepticism in planning and performing an audit, recognizing that circumstances might exist that would cause the financial statements to be materially misstated (AU-C 200). Under AU section 150, "Generally Accepted Auditing Standards," auditors are required to have adequate technical proficiency in audits, be independent, and exercise due care in audits.

Before accepting an audit engagement, auditors should ensure that the professionals assigned to the engagement are (individually and collectively) technically proficient. Auditors must be able to adapt to the ever-changing environments of regulation, the economy, and technology by updating their skills on a continuous basis. Independence and technical proficiency should enable an auditor to exercise due professional care, which requires applying sound professional judgment to accomplish the audit objectives. AU-C section 200.14 defines professional judgment as "the application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement." To make informed decisions, an auditor should identify viable alternative courses of actions for evaluation in an unbiased manner; this requires applying sound professional judgment with a skeptical mindset.

According to International Auditing and Assurance Board (IAASB) Chairman Arnold Schilder, adopting and applying a skeptical mindset is ultimately a personal and professional responsibility that every auditor should embrace; it is an integral part of an auditor's skill set and is closely interrelated to the fundamental concepts of auditor independence and professional judgment, which contribute to audit quality (Professional Skepticism in an Audit of Financial Statements," http://www.ifac .org/sites/default/files/publications/files/ IAASB%20Professional%20Skepticism %20QandA-final. …

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