International Standard on Auditing 200 Keep up-to-date with the latest information on your clients industry, competitors and markets. The objective of this article is to explain the importance of professional scepticism as an essential part of the auditors mindset, and to consider the reasons why approaching an audit with an attitude of professional scepticism is becoming increasingly important. PDF Strengthening the Pillars of Professional Skepticism - IAASB These are outlined below and largely relate to areas of the audit that are complex, subjective or highly judgmental. We believe it is in the public interest to explorewhat can be done to re-emphasize the important role This Product includes content from the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for. Scepticism: the practitioners take is an older but still very relevant view of audit firm initiatives to enhance professional scepticism. The global financial crisis of 20082009 also focused attention on professional scepticism. Professional skepticism in auditing is a hybrid concept constituting the epistemic and psychological aspects of cognition. PDF Toward Enhanced Professional Skepticism - Iaasb Professional skepticism: Advice for remote audits | CPA Canada There has been much criticism recently that auditors are failing in this requirement and there are plans to try and improve scepticism within the profession. Gain access to world-leading information resources, guidance and local networks. Reasonable assurance is a high level of assurance but not the absolute level of assurance due to the inherent limitations of an audit. As well as auditing and accounting principles and standards, factors may range from the personal characteristics, mindset and behaviours of an auditor, to audit firm culture, resources, training, processes and other environmental factors as well as barriers within the entity being audited. Discover South Africas Tsakani Maluleke's Journey: Meet Jamaicas Auditor General Pamela Monroe Ellis, Meet UK House of Commons Financial management leader Vicky Rock, Meet the Trailblazing Women of the Public Sector Finance World, Tesco PLC - Finance Teams Partnering to Enable Net Zero Commitments, The IESs were revised in December 2019 to address, The concept of professional skepticism lies at the. Fraud risk is greatly increased during periods of turbulence and uncertainty. Internal Controls and Internal Audit Certification, Accounts Payable Management Certification, 1,700+ Courses & Webinars with Premium Content, Compliance Tracker, User Management & Reports. To opt for the correct audit plan and procedures, the auditors need to have a skeptical mind. It covers: Our training films, False Assurance and Without Question provoke discussions and challenge mindsets about how to deal with difficult decisions and topical issues in business situations. Applying an inquiring mind, some of the questions that a professional accountant may want to ask, when faced with this data, might include: If this data comes from a system inside the organization, additional questions arise, such as: This list is not meant to be exhaustive and should vary depending on many factors. ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, contains more guidance on how and why the auditor should act with an attitude of professional scepticism. Where (and when) does scepticism start and finish. Professional judgement is defined 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.". Mr. Owens is a politics & economics graduate who qualified as a Chartered Accountant (ICAEW) in 2000 and became a Fellow Chartered Accountant in 2010. An audit performed without an attitude of professional scepticism is not likely to be a high quality audit. For example, when discussing the results of analytical procedures with management, the auditor should not accept managements explanations at face value, and should obtain corroboratory evidence for the explanations offered. These resources are intended to help auditors in applying and demonstrating a sceptical mind set in their audits, as well as move the debate forwards. Other installments include: Sue currently works for Ernst & Young LLP in their Global Standards, Methodology and Implementation Group. Accordingly, when evaluating managements responses to inquiries with an attitude of professional scepticism, the auditor may judge it necessary to corroborate responses to inquiries with other information (ISA 240.A17). For example, audit evidence received from the warehouse manager regarding administrative expenses is inappropriate and unreliable. While auditing, the auditor must use professional skepticism to decide on a sample quantity based on the entitys circumstances. The UKs Financial Reporting Council (FRC) has issued a Briefing Paper on professional scepticism which suggests that professional scepticism is the cornerstone of audit quality. ISA 240 goes on to state a specific requirement for the auditor: The auditor shall maintain professional scepticism throughout the audit, recognising the possibility that a material misstatement due to fraud could exist, notwithstanding the auditors past experience of the honesty and integrity of the entitys management and those charged with governance (ISA240.12). The IAASBs Work Plan for 201516, Enhancing Audit Quality and Preparing for the Future issued in December 2014 prioritises the issues that impact on audit quality, including group audits, quality control, and professional scepticism. Understanding the Importance of Professional Skepticism in an Audit Professional Skepticism and Inquiring MindConnecting the - IFAC There is public demand for higher quality audit. These are all discussions and concepts that are pervasive across the standards that guide the accountancy profession. The application paragraphs of ISA 240 emphasise the importance of assessing the reliability of the information to be used as audit evidence and the controls over its preparation and maintenance. Professional skepticism is 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 audit evidence. There is an inevitable tug of war between professional skepticism and audit efficiency. Related party relationships and disclosures it can be difficult to obtain information on related parties, as knowledge may be confined to management meaning that the auditor may have to rely on management to identify all related parties The auditor should also be sceptical when assessing the business rationale behind related party transactions. For example, when discussing the results of analytical procedures with management, the auditor should not accept managements explanations at face value, and should obtain corroboratory evidence for the explanations offered. Auditors need to bring the highest ethical standards along with a healthy sense of scepticism to bear when reviewing audit evidence. This FRC paper also draws attention to various types of bias that can affect the application of professional judgement (and biases are explored in Intuitive judgement makingand ways to improve it). All rights reserved. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. skepticism in different circumstances, represents an important opportunity for the audit profession, academics, standard setters, and regulators, to develop more comprehensive and practical view of professional skepticism. It is incumbent on each professional accountant to have the necessary skills to ask the right questions and challenge in the right areas. Auditors in many jurisdictions were criticised for not applying sufficient professional scepticism at that time, particularly in relation to the audit of fair values, related party transactions and going concern assessments. The Outcome Effect and Professional Skepticism New York, New York 10017, https://www.icaew.com/technical/audit-and-assurance/scepticism-the-practitioners-take. Given the increasingly complex and subjective nature of IFRS requirements, auditors must be confident to challenge management on a range of matters relevant to the preparation of the financial statements and the IAASB and national bodies such as the FRC are keen to support auditors in the application of professional scepticism. This overall objective is the fundamental driver for the relevant learning outcomes within the Paper P7 syllabus, namely: The application paragraphs of ISA 200 contain more guidance on what is meant by applying professional scepticism when conducting an audit: Industry guides Identify, address, and evaluate various threats to the quality and integrity of the data, Remain alert for new information and changes in facts and circumstances, Apply critical thinking skills to interpret the story, Be aware of how conscious and unconscious bias might impact how the data or information is used, analyzed, or reported on, Understanding a business and its risks (IES 2(f)(iii)), Continually asking why to understand, and when necessary validate, the source(s) of information used in forming judgments and making decisions (IES 3(a)(i)), Willing to challenge others and our own thinking in any situation (IES 4(a) (i)-(iii)), Ability to self-correct their own thinking (IES 4(a) (i)-(iii)), Ability to identify outliers or exceptions in data and information (IES 4(b)(v)), Willing to explore or further investigate issues (IES 4(a) (i)-(iii)), Working collaboratively with others to avoid tackling issues alone, Discussing ideas and concepts with others who think in a different way to yourself, Not making decisions based upon the beliefs, messages, and biases that we have previously been exposed to. This content is available to ACA students. Professional Skepticism during Audit Planning and Fieldwork: Examples of professional skepticism include: considering what can go wrong during the audit, performing audit procedures to obtain sufficient appropriate evidence rather than merely obtaining the readily available evidence to corroborate managements assertions and critically evaluating all findings, regardless of whether it agrees or disagrees with managements assertions. Insights, resources and tools from leading voices in accountancy and business. PDF Professional scepticism: inside the mind of the auditor - ACCA Global Greg is currently a Director in BDO's Global Assurance Department where has helped to develop and support his network's technology, methodology and learning resources for use by BDO firms. The enduring importance of professional skepticism - Accounting Today The Role of Professional Skepticism in Auditing Financial Statements In addition, ISA 240 states that management is often in the best position to perpetrate fraud. Professional skepticism is an essential concept in auditing practice and theory. The application guidance in ISA 220 also offers practical examples of some impediments to the exercise of professional scepticism, such as: Auditors may find that their implementation of the revised ISA 200 and the new International Standards on Quality Management (ISQMs) may aid firms in addressing some of these barriers (as may the resources highlighted in ISQM 1 tools for the journey). But before we explore some of these, its worth remembering whats required of auditors by the International Standards on Auditing (ISAs). The IAASB has issued a Staff Questions and Answers document entitled Professional Scepticism in an Audit of Financial Statements, which outlines some of the areas of the audit where the use of professional scepticism may be important. The revisions made to both the IESs and the Code raise the behavioral expectations of all professional accountants irrespective of the roles they serve in their employing organizations or clients. The auditor shall not disregard the honesty and integrity of the management and those charged with governance yet still maintain a questioning behavior to ensure nothing is overlooked because a possibility of fraud still exists due to changes in circumstance. But in the new and fast-developing environment, auditors will also need to develop even deeper knowledge of business, a powerful curiosity about technologies and an agile mindset that embraces disruption. Although the importance of professional skepticism has been emphasized in different ways, the common underpinning is "How can auditors exercise the right degree . An Independent Auditors job is to give reasonable assurance that a companys financial statements give a true and fair view. Practically auditors need to remain alert to the risk of misstatement, regardless of the perceived strength of the client's controls or the results of previous audit procedures (either in the current or prior years). An audit firm needs to establish a culture within which professional scepticism can thrive. Documentation of significant professional judgements in an ISA audit. IT Compliance Auditor - Key Role and Responsibilities, How to Prepare An Internal Audit Program? Professional scepticism includes being alert to, for example: Essentially, ISA 200 requires the use of professional scepticism as a means of enhancing the auditors ability to identify risks of material misstatement and to respond to the risks identified. Audit teams should remember that their main contact in an audited entity is often the person in the strongest position to commit a fraud. As the profession moves into digital areas and providing sustainability-related services, the importance of having an inquiring mind and of applying skills and competences that involve exercising professional skepticism will continue to be vital. Tel: +1 (212) 286-9344 Under the Code professional accountants comply with the principle of objectivity, which requires them not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others. At the time of issuing the practice alert we also noted that the PCAOB was continuing to explore whether additional actions . What is professional scepticism? (Responsibilities and More). Please visit our global website instead. The IAASBs standards (for example, ISA 200, ISAE 3000) take this one step further and require professional accountants performing audits, reviews, and other assurance services to use professional skepticism when considering data and information. For example, the COVID-19 pandemic forced many professional accountants (and their employers and clients) to switch to working in a completely virtual environment leading to developing newer skills, such as virtual collaboration, the ability to apply critical thinking skills to help with problem-solving in a fast changing and uncertain environment, and flexing existing skills, such as professional skepticism, when all information was provided virtually. We are the global organization for the accountancy profession, comprising 180 member and associate organizations in 135 jurisdictions, representing more than 3 million professional accountants. To assess whether an engagement has been planned and performed with an attitude of professional scepticism, and evaluate the implications (B1f). Some areas potentially affected by managements judgement include related-party transactions and financing transactions. ISA 200 instructs the auditor to keep skeptical behavior during audit even if the auditors client has proven to be honest and integral in the past. It is clear the professional scepticism is to stay on the agenda of the regulatory authorities for some time to come, as it is so intrinsically linked to other key audit issues such as audit quality, ethics and independence and, ultimately, the confidence that the public has in the auditing profession. This article will explain professional skepticism, its importance, followed by necessary elements. (ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing). Skills needed for developing an inquiring mind could include (parenthetical references indicate relevant foundational skills included in the IES, not intended to be exhaustive): These are skills that are often best learned through case studies or practical experience. These revisions are particularly relevant as we move into a more digital and data-driven world. Another implication of scepticism is to consider the nature of identified misstatements. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. Auditors should consider misstatements more deeply; they could be due to fraud, or at least indicative of deficiencies in the accounting system that could lead to further errors or frauds. This is due to the application of International Financial Reporting Standards (IFRS), which are largely principle-based, and often require the preparers of financial statements to exercise significant judgment when making decisions on accounting treatments. There has been a tendency in the past to immediately identify a misstatement as an error (i.e. This is due to the application of International Financial Reporting Standards (IFRS), which are largely principle-based, and often require the preparers of financial statements to exercise significant judgment when making decisions on accounting treatments. For example, ISA 540, ISA 570, ISA 315 and ISA (UK) 240 all include specific requirements for the auditor to perform a stand back and/or perform audit procedures in a manner that is not biased towards obtaining audit evidence that may be corroborative or towards excluding evidence that may be contradictory. The IESs provide this baseline or foundation. Inquiring Mind. This guide looks at how auditors assess the risk of management override and their response to it. We work to prepare a future-ready accounting profession. ISA 200 contains a specific requirement in relation to professional scepticism: The auditor shall plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated. The temptation to ask on what basis they were calculated, to generally prod and poke around, and to make sure that they are what they appear to be, becomes instinctive. If you want to start the ACA qualification there are several routes you can take. Building in professional skepticism from the outset is key. .04 The matter of due professional care concerns what the independent auditor does and how well he or she does it. The practice alert focuses on the importance of professional skepticism, the appropriate application of professional skepticism in audits, and certain important considerations for audit firms' quality control systems. Moreover, it also indicates the extent to which auditors play their role and whether they are biased in their approach. Critical and central to, all audits, professional scepticism is a topic that is heavily debated within and outside the accountancy profession. Please visit our global website instead, Can't find your location listed? Contactpermissions@ifac.orgfor permission to reproduce, store, translate or transmit this document. W hile businesses deal with the day-to-day challenges presented by the pandemic and the uncertainty ahead, professional accountants are . Long-term relationships can reduce the level of professional skepticism because auditors place an inappropriate level of trust in management based on past engagements. PDF Skepticism in Practice - The Institute of Internal Auditors or The IIA Mr. Greg Owens was nominated by BDO LLP to serve on the International Panel on Accountancy Education (IPAE) in 2019 and re-appointed in 2021. The engagement team briefing meeting provides an opportunity to discuss the possibility of material misstatement arising because of fraud or error, with particular attention paid to complex and difficult areas such as estimates, going concern, group considerations and related parties. Professional Skepticism in Auditing - Why Is It Necessary? Prior to joining IFAC, Ms. Partridge was an accountant in practice, having spent 16 years in audit, advisory and audit systems design in the US and Asia Pacific. It proposes that the auditor should actively look for risks of material misstatement, and that this is only possible when a high degree of knowledge of the audited entitys business and the environment in which it operates is obtained. Without professional skepticism, the audit has low worth and doesnt provide a high level of assurance by the auditor. 10 Best Books To Help You Understand More on Transfer Pricing (2023), 10 Best Accounting Software for Small Businesses in 2023, Accounting For Hurricane Damage: An Essential Guide. There are many documentation requirements in International Standards on Auditing but the extent of documentation of judgement is a particularly critical area for auditors. Maintaining an attitude of professional skepticism during the entire audit process is crucial to perform an effective audit. When performing risk assessment procedures an auditor should be sceptical when performing risk assessment procedures at the planning stage of the audit. Practically auditors need to remain alert to the risk of misstatement, regardless of the . It examines the consequences of a lack of skepticism and offers practical steps to maintain skepticism even in the face of evolutionary technology or challenging and disruptive times. ISA 240 goes on to state a specific requirement for the auditor: The auditor shall maintain professional scepticism throughout the audit, recognising the possibility that a material misstatement due to fraud could exist, notwithstanding the auditors past experience of the honesty and integrity of the entitys management and those charged with governance (ISA240.12). The application of professional judgement and professional scepticism are critical to high-quality audits. We work to prepare a future-ready accounting profession. Related party relationships and disclosures it can be difficult to obtain information on related parties, as knowledge may be confined to management meaning that the auditor may have to rely on management to identify all related parties The auditor should also be sceptical when assessing the business rationale behind related party transactions. Greg has experience in auditing financial services, manufacturing, and hospitality clients, providing audit methodology support to engagement teams, performing file reviews and liaising with audit regulators. Is this for the full facility or a portion? At its core the application of professional scepticism should help to ensure that the auditor does not neglect unusual circumstances, oversimplify the results from audit procedures or adopt inappropriate assumptions when determining the audit response required to address identified risks, all of which should improve audit quality. Auditors in many jurisdictions were criticised for not applying sufficient professional scepticism at that time, particularly in relation to the audit of fair values, related party transactions and going concern assessments. The three elements of professional skepticism auditor attributes, auditor mindset, and auditor actions permeate the entire audit process and are integral to audit quality. Professional skepticism lies at the heart of a quality audit This Communiqu forms part of a series from the International Auditing . These potential constraints can lead to the auditor forgetting that they are primarily responsible to companys investors, not its management. These are some of the key messages: Professional skepticism is at the heart of what auditors do - Without it, the audit has little value. The need for appropriate documentation of the auditor's exercise of professional skepticism assumes greater importance because of these ongoing regulatory concerns. Auditors lack of professional scepticism is often seen by audit oversight bodies and the public as being at the root of issues with audit quality. Many auditors will benefit from the information and insights in FRC papers on aspects of professional judgement and scepticism, which offer examples of behaviour drivers, good practices and practical approaches taken by firms. Professional skepticism and why it matters to audit stakeholders The global financial crisis of 20082009 also focused attention on professional scepticism. Consideration of laws and regulations the auditor should be alert throughout the audit for indications that there may have been a suspected non-compliance with laws and regulations. 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