Professional Skepticism
Introduction
The term professional skepticism has a vast range of usage although, its meaning, however, will vary between the different individuals and organizations using it. The Public Company Accounting Oversight Board (PCAOB) elucidate professional skepticism as the attitude that involves a combination of an interrogative mind together with a critical assessment of any audit evidence. The PCAOB standards also require the exercising of the approach and kept throughout the whole auditing process. As much as professional skepticism is of significance in all features of the audit, it bears specific importance and urgency of application in segments of the audit that call for significant management judgments or activities falling outside the usual course of business. The professional ‘doubt’ holds great importance since it relates and reflects any auditor’s consideration or understanding of fraud within an audit. Failure to apply, or appropriately apply professional skepticism is leeway to failure in identifying and addressing misstated financial statements or inability to get sufficient and appropriate evidence to prove the same.
Neutral Skepticism versus Presumptive Doubt
Though there lacks a universally accepted definition of skepticism, two main perspectives have appeared continuously in the various editorial standards of the world, that is presumptive doubt and neutrality. Presumptive doubt is the representation of the auditor’s attitude within which lies the assumption that the management has an extent of bias or dishonesty unless or until the evidence proves otherwise. Neutrality, refers to the opposite, where the auditor does not assume any bias from the management, thus the term neutral. The debate on the two leads to the current lack of consensus on which of the two has more appropriateness in the audit profession.
Ideally, the attitude in the neutral perspective of professional skepticism means the auditor neither unquestionably assumes the management’s honesty nor bluntly denies its existence. Instead, the auditor sits on the fence in regards to the question of the presence of fairness or not. The view became symbolically referred to reasonable skepticism or healthy skepticism as it forms a sound basis for auditors’ evaluation of evidence. The neutrality view requires an auditor having an unbiased state of mind regarding the management’s dishonesty or honesty, making a financial statement in a presumption of deception, in this view would be already wrong from the word go.
The presumptive doubt perspective emphasizes that the auditor takes a proactive angle to audit evidence. The auditor in this doubtful view is expected to keep in mind that the management could have some incentives targeting an intentional misstating of disclosures and amounts. Although the attitude is already essential in any audit settings, the presumptive doubt view stresses on an even greater extent of the same. The auditors are required trust instincts and look into suspicious details. The expected type of skepticism here is constructive meaning the approach to the auditing is much more extensive, intensive and more rigorous.
The presumptive doubt perspective over the neutral approach
Although it sounds finished and defendable theoretically, neutrality becomes less practical in the actual practice of auditing compared to presumptive doubt. Although auditors exercise a level of professional skepticism, management comes up with tactical and often successful schemes to facilitate fraudulent financial reports. This calls for the shift from neutrality to another view, the presumptive doubt perspective. Collusive frauds and all other intricate schemes are naturally not easy to uncover, and management will not make put them out there in black and white, auditors should stay aware of this fact and therefore raise the professional skepticism a notch higher.
Linking professional skepticism and professional judgment
Professional judgment and professional skepticism may not be the same thing, but the two are significantly related. For a professional judgment to be that of high quality, it requires professional skepticism. However, this is one among the many components an auditor needs to make exercise a stable professional judgment. For instance, skepticism without the requisite auditing and accounting industry expertise is insufficient to create a reliable professional judgment. In essence, professional skepticism is one of the qualities or ingredients of professional judgment.
Application of professional skepticism is essential in an evaluation to ensure reaching the best professional judgment. Although separately defined, the two aspects are used in combination throughout the planning an performing of an audit. The identification of risks relying on the auditor’s grasp of the specific entity and the internal controls will need both professional skepticism and judgment. Evaluation of whether the appropriate and sufficient evidence has been obtained also requires the two. Other procedures in auditing like determining the timing, nature an audit procedures meet the requirements and evaluating whether the judgments made by the management regarding financial reports applicable will also require skepticism and professional judgment. All these and more including the drawing of conclusions after considering the evidence will entail, though separate both professional skepticism and judgment.
Importance of professional skepticism
Professional skepticism is of great significance since without it auditors stand susceptible accepting inaccurate and or weak audit evidence. The exercise of sufficient professional skepticism keeps auditors from overlooking unusual circumstances. The attitude bars them (the auditors) from overgeneralizing from restricted audit evidence. Skepticism prevents the auditors from using any inappropriate assumption to determine the timing, nature, and extends in audit procedures.
An auditor that is professionally skeptical reasonably questions the authenticity of any document while bearing in mind that they are genuine unless otherwise proven. Skepticism in the profession gives the auditor an ability to rationally examine the integrity of management, other individuals tasked with governance and any third parties that are part of the audit evidence providers. Only with skepticisms in an auditor able to identify and question contradicting audit evidence, the professionality in it allows him or her, to ensure there is sufficient evidence to back up his support and not making judgments in haste. A professionally skeptical auditor will mainly be diligent in evaluating whether or not the individuals and documentation provided in evidence are reliable.
Professional skepticism, in essence, lies at the heart of the job of an auditor. Without skepticism, the process of auditing would permanently hold less value. An active skeptic in auditing will not accept just any answer at face value without a follow-up, no matter how plausible it sounds. The advantage of this skepticism being professional is that the auditor is still able to know the right questions to ask, how and when to follow up the answers and most will understand when to move on from a lead. Unlike just any other skepticism, the professional skepticism in auditing stems from professional judgment and knowledge in the field and will more often than not bear positive outcomes.
Conclusively, the objective of an audit requires auditors to carry out the process with a questioning mind. The main aim or goal when carrying out audits is to get an opinion on whether the provided financial statements depict a possible fair view at a specific date. This is reason enough for an auditor to approach the procedure with doubt, that it, the presumptive doubt. The mindset alerts the professional of any condition or detail that could indicate a misstatement was owing from either fraud or even error. Professional skepticism not only ensures critical assessment of doubtful evidence but also scrutiny of corroborative evidence too.
Cognitive biases and their effect on professional skepticism.
Confirmation Bias
In the process of investigating any management assertion which underlies an account balance or even any other item for a financial statement, auditors usually establish a mental hypothesis on whether or not the allegation is accurate. So typically, the start of the evaluation is done in the mindset that the details are materially correct. Research shows that decision-makers often edge towards subconsciously searching for evidence that will confirm their expectations rather than reject them. The bias often manifests itself in the willingness of auditors to believe that what the management provides is valid which bars the requisite professional skepticism.
Availability Bias
Availability bias dampens that professional skepticism required of auditors rendering them less capable of uncovering fraudulent or erroneous details. The bias involves decision maker’s tending to predict the chances of given events relying on how easily the event or account comes to mind. Since client fraud is not the most common event, auditors usually lack an immediate relation of the event occurring in their memory. So due to this bias, the mental image of most auditors is that every client is yet another organization dedicated to the provision of materially correct and accurate financial statements.
Familiarity Bias
With the aim of simplifying decisions needed for the usual and recurring decision-making events, the human mind is prone to choosing the familiar alternatives that had worked well in the past. Auditors do not fall short of this which reduces their skeptic sense when handling data that has over the years been a certain way. For instance, as auditors update the permanent work papers, rarely do they ever find any year to year changes in the procedures and policies specific to accounting. The result of this is some auditors getting lulled into complacency which causes them to have an all-too-familiar mindset in concluding the evaluation.
The anchoring and adjustment bias
Auditors assigned to particular accounts explicitly or implicitly establish mental anchors that are, expectations of the accounts true dollar value. So during the collection of evidence to ascertain the accuracy of the material, the auditor adjusts the already expected balance either higher or lower. Auditors tend to remain prone to this bias especially when auditing inventory and other account estimates. In these cases, the auditors are embedded in the company’s pre-audit estimation rather than maintaining a professional skepticism attitude.
State and trait in professional skepticism
For an auditor to make a well informed and skeptical judgment, they must possess the knowledge and experience required to identify a potential issue and to formulate the most appropriate response for it. Therefore, and auditor lacking these desired traits will often stand less likely to make the well informed and skeptical judgment. Conversely, one with the characteristics will likely identify the potential issues and raise questions in matters involving the complex areas in accounting. For an auditor to have an informed skeptical judgment, they will require the traits to make the estimates and professional judgments.
An auditor with all the knowledge, experience and ability to implement skeptical judgment could choose not to use it due to the environment he or she faced with and other potential pressures. Tight deadlines, reward, and promotion systems and engagement budget pressure are some of the reasons an auditor would fail to apply skeptical professionalism. A tone at the top that rarely or never emphasizes the need or the stressing need for skepticism in all procedures may also lure an individual not to practice any of these.
Enhancing the levels of skepticism
There are several ways an organization may use to strengthen and raise the standards of professional skepticism in any auditor. The organization should encourage the acquisition of professional licensing and the continuation of educational requirements. Supervising, reviewing, mentoring and conducting work inspections then evaluating the performance of an auditor will likely steer him or her to be more professionally skeptical. Setting expectations during the planning of audit programs set the tone before an auditor even starts. Knowing that trait is a factor that affects the level of skepticism, organizations should set stringent recruiting requirements. Performance metrics that offer rewards for high-quality audits will steer any auditor to be as professionally skeptical as possible. The partners, leaders, and auditors should have effective engagement and communication. Finally, training the auditors on the professional judgments, competencies and a regular re-visit of the same
Conclusion
Professional skepticism is an area of great significance to the audit career, from professionals, regulators, standard setters to all the others that work in the arena for the good of public interest. Though widely used and carriers multiple definitions, the term has some basic requirements and expectations followed worldwide. For one any audit process must be approached with a scrutinous mindset whether in the neutral view or presumption of doubt. The end goal is to ascertain no fraudulent or erroneous activity is given in the financial report evidences. The variety of bias especially since they are psychological, meaning they refer to mindsets of auditors from all corners of the universe should be educated to enhance and awaken the thinking of auditors. Whether state or trait, audit organizations have an enormous task in establishing and improving the levels of professional skepticism in their auditors.