Professional Skepticism
INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS OF KENYA
Credibility
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Professionalism
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AccountAbility
What is it?
ISA 200
15. The auditor shall plan and perform an audit with
professional skepticism recognizing that circumstances may
exist that cause the financial statements to be materially
misstated.
“An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to
error or fraud, and a critical assessment of evidence.”
Professional skepticism is fundamentally a mindset
What is it?
ISA 200
Professional skepticism also includes
1. being alert to audit evidence that contradicts other audit
evidence obtained, brings into question the reliability of
documents/ responses to inquiries
2. conditions that may indicate possible fraud
3. critical assessment of audit evidence
NB. A belief that management or TCWG are honest and
have integrity does not relieve the auditor of the need to
maintain professional skepticism
Why it matters
• 60 percent of Securities and Exchange Commission (SEC)
enforcement actions against auditors between 1987 and
1997 involved their insufficient use of professional
skepticism
• The Public Companies Accounting Oversight Board
(PCAOB) reports that this shortcoming continued between
2004 and 2007 with the eight largest auditing firms having
audit deficiencies caused, at least in part, by the failure to
apply an appropriate level of professional skepticism
• An American academic study examined 28 disciplinary
proceeding cases related to engagement quality reviewers
and found a lack of professional skepticism in 22 of 23
cases involving deficiencies in due professional care.
Why do we get fooled?
• Professional Skepticism Video 1
In each scenario:
1. Was the deception obvious?
2. Did the “fooled” party notice that something
was amiss?
3. Why did they accept the statement?
Why it matters
• Deferral to perceived expertise of the issuer;
• Failure to obtain audit evidence beyond inquiry of
management;
• Failure to consider or sufficiently evaluate evidence
included in work papers that may contradict an auditor's
conclusion; and
• Acceptance of information included in management or
specialist calculations without performing procedures to
verify completeness and accuracy of underlying data.
• While auditors may devote significant effort to the review
of complex accounting areas, sometimes the basics are
overlooked.
Why it matters
• An integral part of the auditor’s skill set
• Closely interrelated with professional judgment
• Skepticism is particularly important in areas of the audit
that involve significant management judgments or
transactions outside the normal course of business.
• Professional skepticism is especially important in
addressing fraud risks. Auditors should appropriately
modify planned audit procedures as a result of fraud
considerations.
Why it matters
Facilitates the appropriate exercise of professional judgment by the
auditor, particularly regarding decisions about:
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The nature, timing and extent of audit procedures to be
performed.
Whether sufficient appropriate audit evidence has been
obtained and whether more needs to be done to achieve the
objectives of the ISAs.
The evaluation of management’s judgments in applying the
entity’s applicable financial reporting framework.
The drawing of conclusions based on the audit evidence
obtained, for example, assessing the reasonableness of the
estimates made by management in preparing the financial
statements.
Actions to fix this – Firm level
• Promote an internal culture recognizing that quality is
essential in performing engagements.
• Clear, consistent and frequent actions and messages
from all levels of the firm’s management. This may be
communicated by, but not limited to, training
seminars, meetings, formal or informal dialogue,
mission statements, newsletters, or briefing
memoranda.
• Appropriately monitor the quality control system and
take necessary corrective actions to address
deficiencies, specifically in instances when teams do
not appropriately apply professional skepticism.
Actions to fix this – Firm level
• Encourage engagement partners to actively
participate in planning, directing and
reviewing work and to emphasize the need for
a questioning mind.
• Implement appraisal, promotion and
compensation processes that encourage
application of professional skepticism.
• Monitor workload demands on partners and
staff that may inhibit appropriate application of
professional skepticism.
Actions to fix thisEngagement level
• Assign personnel with necessary competencies to
engagement teams.
• Avoid inappropriate trust or confidence in
management.
• Avoid pressures that can lead to decreased
professional skepticism, including
• Time pressure to provide an unqualified audit
opinion prior to the issuer's filing deadline.
• Professional pressure to achieve high client
satisfaction ratings.
• Economic pressures to keep audit costs low or to
cross-sell additional professional services.
Actions to fix thisEngagement level
• Pre-audit team discussion by the engagement partner
and other key engagement team members of the
susceptibility of the entity’s financial statements to
material misstatement.
• The direction, supervision and performance of the
audit engagement.
• Reviews of work performed.
• Undertaking appropriate consultation on difficult or
contentious matters and that the conclusions reached
from such consultations have been implemented.
Professional skepticism and
fraud considerations
• ISA 240 places special emphasis on professional
skepticism.
• requires an ongoing questioning of whether the
information and audit evidence suggests that a
material misstatement due to fraud may exist.
• In some cases, the ISAs even specify fraud-detection
procedures that are required to be performed e.g.
• required presumption that there are risks of fraud
in revenue recognition,
• the treatment of risks of management override
• review of accounting estimates for biases
• i.e. standard error detection tests are NOT enough
Professional skepticism and
fraud considerations
• The risk of the auditor not detecting a material
misstatement resulting from management fraud is
greater than for employee fraud, because of
management override.
• May require the auditor to obtain corroborating
evidence for management representations or even
investigate further if indicated.
Professional skepticism other areas
• Accounting estimates
• Going concern
• Related party relationships and
transactions
• Consideration of laws and regulations
• Auditing significant unusual or highly
complex transactions
• Understanding technology
Professional skepticism Evidencing
• Document discussions of significant matters
with management, TCWG, and others
• Significant decisions reached during the
discussion among the engagement team
• Identified or suspected non-compliance with
laws and regulations
• Conclusions about the reasonableness of
accounting estimates
Professional skepticism Evidencing
• Identified information that is inconsistent with
the auditor’s final conclusion regarding a
significant matter
• Basis for the auditor’s conclusions on the
reasonableness of areas of subjective
judgments
• The basis for the auditor’s conclusion about
the authenticity of a document where doubts
have been reasonably raised
Professional skepticism –
Closing thoughts - video
• Professional skepticism video2