Professional Skepticism and Auditors' Assessment of Misstatement Risks: The Moderating Effect of Experience and Time Budget Pressure

By Hussin, Sayed Alwee Hussnie Sayed; Iskandar, Takiah Mohd et al. | Economics & Sociology, October 1, 2017 | Go to article overview

Professional Skepticism and Auditors' Assessment of Misstatement Risks: The Moderating Effect of Experience and Time Budget Pressure


Hussin, Sayed Alwee Hussnie Sayed, Iskandar, Takiah Mohd, Saleh, Norman Mohd, Jaffar, Romlah, Economics & Sociology


Introduction

Auditors' failure to detect risk from material misstatements within financial statements has a negative impact on the audit profession in general. Auditors' inability to assess fraud risks has become a serious concern particularly when most incidences of fraud are uncovered after financial statements are audited (KPMG, 2013). This has led to a decrease in public confidence and trust among audit regulators in relation to auditors' role in assessing risks from material misstatement. In response to the increasing complexity of this matter, the profession urges auditors to comply with the standards on professional skepticism while assessing the risks related to fraud. The profession expects that the exercise of professional skepticism among auditors minimizes material misstatements within financial statements.

Professional skepticism refers to the attitude of consistent cynicism and the habit of suspending judgments until an individual obtains sufficient information or evidence (Hurtt, 2010). Skepticism occurs when there is doubt concerning the reliability of the information received. When an individual has doubt concerning the reliability of the information provided by a client, he or she would seek for more indications. In this respect, an auditor who exhibits high level of professional skepticism would search for more information and make additional checks to formulate a sufficient basis for further audit judgments. After making additional checks auditors should be able to achieve their objective, that is, to confirm whether the incidence of fraud has actually taken place or not. Regardless the existence and non-existence of fraud, the main objective of an audit is to ensure that financial statements are free from material misstatements due to fraud. In the presence of fraud, auditors must ensure financial statements reflect the appropriate adjustment on the effect of fraud.

A skeptical auditor is generally suspicious in nature and is driven behaviorally to report fraud (Nelson, 2009). Evidence shows that adoption of professional skepticism significantly enhances auditors' performance in relation to assessing risks of fraudulent material misstatements (Hurtt etal., 2013; Hussin and Iskandar, 2013; Saksena, 2010; Rose, 2007). Such behavior conforms to the auditing standards requirement, which prescribes auditors pay serious attention to the possibility of fraud occurrence (ISA 240 2008). Although auditors are not responsible for discovering frauds, they must obtain reasonable assurance that financial statements taken as a whole are free from material misstatements caused by fraud (ISA 200 2004). Thus, auditors are required to maintain professional skepticism, make additional checks and take longer time to gather audit evidence when performing an audit.

However, skepticism among auditors varies due to differences in personal characteristics and working environments. Based on the social cognitive theory, personal features and work environment may influence the behavior of an individual, which in turn affects his/her performance (Bandura, 1986). In auditing, personal characteristics of auditors and work environment may moderate the effect from professional skepticism on risk assessment (Quadackers et al., 2014). In this study, experience represents the personal characteristic and time budget pressure represents the work environment.

Individuals may acquire experience through direct observation or participation in a particular event or activity (Alleyne et al., 2006). Experiences in work-related challenges expose auditors to gaining more confidence and competences in relation to making risk-connected decisions (Payne and Ramsay, 2005). The more diversified is the experience the auditors gain, the higher is their level of confidence and competency. Evidence shows that experience enhances auditors' ability to assess risks related to fraud (Knap and Knapp, 2001). However, there is lack of empirical evidence to prove the effect of experience on performance of risk assessment by auditors with different levels of professional skepticism. …

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