Professional Skepticism
Association of Local Government Auditors
Webinar
June 16, 2015
Opening Remarks
Moderator
R. Kinney Poynter
Executive Director
NASACT
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Speaker
Amanda Noble
Deputy City Auditor
Atlanta, GA
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Learning Objectives
 Define professional skepticism
 Understand why professional skepticism is important in
auditing
 Describe factors that influence skeptical judgment and
skeptical action
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Why Talk About Professional Skepticism?
 Majority of SEC enforcement actions against auditors in the
ten years leading up to Sarbanes-Oxley cited failure of
professional skepticism as the cause.
 The next ten years brought Sarbanes-Oxley, SAS 99, and
major revisions to Government Auditing Standards on
independence and auditor responsibilities in detecting and
reporting fraud.
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“The Need for Professional Skepticism
in an Audit Cannot be Overemphasized”
Staff Questions and Answers
February 2012
 “In the aftermath of the 2008-2009 global financial crisis,
recent audit inspection reports in various jurisdictions have
noted areas, such as fair values, related party transactions,
and going concern assessments, where regulators and
oversight bodies believe that auditors should have more
clearly demonstrated professional skepticism.”
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Maintaining and Applying Professional
Skepticism in Audits
Staff Audit Practice Alert
December 2012
 “…oversight activities continue to raise concerns about
whether auditors consistently and diligently apply professional
skepticism. Certain circumstances can impede the appropriate
application of professional skepticism and allow unconscious
biases to prevail, including incentives and pressures resulting
from certain conditions inherent in the audit environment…”
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Defining Professional Skepticism:
Academics
 A conservatism bias in audit judgment (McMillan and White,




1993)
The opposite of trust (Shaub, 1996)
The concept that everyone is a suspect (Copeland, 1996)
Ability to detect fraud (Choo and Tan, 2000)
Professional skepticism can be broken in to three attributes:
 Recognition that fraud may be present
 An attitude that includes a questioning mind and a critical
assessment of the evidence
 A commitment to persuasive evidence…go the extra mile to tie
up all loose ends (Kranacher, Riley, Jr., and Wells, 2011)
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Defining Professional Skepticism:
Oversight and Standards Setting Bodies
 “As an attitude, professional skepticism is fundamentally a
mindset.” (IAASB)
 “Professional skepticism, an attitude that includes a questioning
mind and a critical assessment of audit evidence, is essential to the
performance of effective audits…” (PCOAB)
 “Professional skepticism is an attitude that includes a questioning
mind and a critical assessment of evidence. Professional skepticism
includes a mindset in which auditors assume neither that
management is dishonest nor of unquestioned honesty.” (GAGAS
3.61)
 “Professional skepticism is an attitude that includes a questioning
mind and a critical assessment of audit evidence.” (AU 230.07)
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Statements on Auditing Standards
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Government Auditing Standards
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Similarities and Differences in
Standards
material
evaluate/evaluating
financial statements
misstatement
requirements
confirmation
procedures
results
appropriate
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AICPA
audit/auditor
professional
skepticism
fraud
evidence
management
independence
risk/risks
objective/objectivity
assess/assessment
mind/mindset
team
exercise
information
gathering/gathered
factors
questioned/questioning
reasonable(ness)
integrity
significant
attitude
judgment
commit
acceptable
influences
compromised
Yellow Book
Similarities and Differences in
Standards
International Professional Practices Framework
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Relationship with Independence and
Objectivity
Professional
Skepticism
Personal
Attributes
Procedural
Structural
Independence
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Objectivity
Characteristics of Professional
Skepticism
 Questioning mind
 Suspension of judgment
Evaluate evidence
 Search for knowledge
 Interpersonal understanding
Evaluate evidence providers
 Autonomy
 Self esteem
Act on the information
R. Kathy Hurtt , Development of a Scale to Measure Professional Skepticism, Auditing: A
Journal of Practice & Theory, May 2010.
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Behaviors of Skeptics
 Increased information search
 Increased contradiction detection
 Increased alternative generation
 Expanded scrutiny of interpersonal information
R. Kathy Hurtt , Development of a Scale to Measure Professional Skepticism, Auditing: A Journal
of Practice & Theory, May 2010.
Mark W. Nelson, A Model and Literature Review of Professional Skepticism in Auditing, Auditing: A
Journal of Practice & Theory, November 2009.
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Trait vs. State
Mean Score
Range
Standard
Deviation
Number of
Respondents
Accounting
Students
73.7
42.8 – 97.2
8.8
147
Professional
Auditors
77.0
61.7 – 91.1
7.0
200
CFE conference
attendees
78.3
61.6 – 92.8
6.6
102
ALGA members
80.7
62.2 – 92.2
6.4
55
R. Kathy Hurtt , Development of a Scale to Measure Professional Skepticism, Auditing: A Journal
of Practice & Theory, May 2010.
Joel Pike and Gerald Smith, How Professionally Skeptical are Certified Fraud Examiners? , Sixth
Annual Fraud & Forensic Accounting Education Conference, May 2012
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Survey of auditors working at 20 randomly selected ALGA member organizations, October 2013
Model of Determinants of Professional
Skepticism in Audit Performance
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Mark W. Nelson, A Model and Literature Review of Professional Skepticism in Auditing, Auditing: A
Journal of Practice & Theory, November 2009.
Professional Skepticism as Creative
Problem Solving
 Steps are sequential
 Process is explicit
 Conscious
Problem
Construction
 Deliberate
 Avoid accepting first
plausible explanation
 Check for logical
errors
 Over-explain?
 Under-explain?
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• Identify relevant facts
Divergent
Thinking
• Recognize cues and links between
available information
• Generate explanations
Convergent
Thinking
• Assess limitations of general
explanations
• Eliminate infeasible explanations
Plumlee, Rixom, Rosman, Training Auditors to Think Skeptically, Draft, April 2012
Results of Training
Training Received
Percentage of Unique
Explanations With at Least
One of Four Crucial Facts
Divergent Thinking
5.5
71.3%
Alternate Task
4.4
56.7%
Training Received
Full Training
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Number of Unique
Explanations Generated
(Mean)
Generated and
Chose One of
Two Correct
Solutions
25.0%
Partial Training
5.3%
Control Group
0.0%
Correctly
Eliminated
Partially Valid
Explanations
Correctly Kept
Valid
Explanations
37.5%
79.9%
10.6%
71.5%
Plumlee, Rixom, Rosman, Training Auditors to Think Skeptically, Draft, April 2012
Implications
 Recruitment
 Motivation/Reward
 Training
 Audit Tools/Methodologies
 Disconfirmation
 Teamwork
 Structured decision making
 Documentation
TEAMSMART® Cards Assessment
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Question & Answer
Session
Moderator
R. Kinney Poynter
Executive Director
NASACT
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Speaker
Amanda Noble
Deputy City Auditor
Atlanta, GA
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Professional Skepticism
An ALGA Webinar
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