Can We Actually Achieve Professional Skepticism Accounting Essay

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Professional Skepticism as per International Auditing Standards issued by the International Auditing and Assurance Standards Board refers to - 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. (IFAC) (KOJUTSUKAN)

Professional scepticism is an attitude adopted by the auditor when conducting the audit. It means that the auditor remains independent of the entity, its management and its staff when completing the audit work. In a practical sense, it means that the auditor maintains a questioning mind and thoroughly investigating all evidence provided by the client. The auditor must seek independent evidence to corroborate information provided by their client; they must be suspicious when evidence contradicts documents held by their client or enquiries made of client personnel. (Moroney, Campbell & Hamilton, 2011, p 23)

What it requires

The role of the auditor is to serve as an independent reference point for the stakeholders to be able to refer to in order to rely on the information provided by the management of the affairs of their Company. This raises the bar of responsibility upon the auditors and consequently their fundamental duty is to be able to apply an inquiring mind to every critical areas of judgment and every aspect of their work that has an inherent risk of misstatement.

Being skeptic is an art of stepping back and looking at the assumptions employed by the management from a completely independent point of view whereby the auditor can challenge the point of view of the management to the extent to which it does not make sense in terms of the substance of the transactions and the business of the client in the context of the economic and industry specific environment.

Modern Challenges

As the world faces economic downturn and financial crises, the auditors are pushed more and more towards maintaining their independence and raising the bars of professional skepticism to the levels of perfection. At the same time the clients are being faced by increasing pressures from the increasing expectations of stake holders at one hand and increasing fear of failure of business and loss of wealth accompanying the prevailing financial crises.

All in all auditing within the guidelines of ethics and professionalism is becoming more and more difficult to uphold. The increasing level of competition among the audit firms is yet again playing a part in making life difficult for the individual audit firms.

This situation is forcing the audit firms to increase the quality of documentation involved so that the work performed should not deviate from the requirements of international auditing standards.

An increased requirement for documentation and increased risks of deviations from maintaining the quality of the work performed has left the profession facing the following major risks:

Focusing on supporting the management assumptions through audit evidence instead of challenging the assumptions.

Focusing on the information available and not on the information that might exist but is not available.

Approach being shifted from finalizing the audits according to established timelines instead of reassessing the timelines in light of new audit evidence.

Corroborative audit evidence not being sought to the extent to which current audit evidence serves the documentation requirements.

Inability to challenge work performed in previous years

Building sense and applying logics to clients assumptions to avoid extra work required in case of challenging the same

Overlooking the substance of the transaction

What should be done to achieve professional skepticism in the current scenario?

To be able to live the auditing standards rather than just filling up the audit files, the auditors need to be more focused on the application of the risk based approach from the outset of the audit and the audit partners and managers should be able to build the same in the behavior of the audit team and make them realize that audit is more than just a job, its more about carrying the responsibility of reliance held by the stakeholders and not working under the familiarity terms of the management that is more often a practical concern on engagements where audit teams are repeated more than once.

Professional skepticism can be achieved if the audit is conducted strictly in the flow required by the auditing standards, which can be summarized as under:

Identify risk areas and communicate the same to the audit team effectively and make sure they understand the importance of challenging assumptions and management representations.

Look for corroborative audit evidence to support an evidence which appears to be thin and corroborate management representations by other audit evidence.

More often than not the audit team does not test the data provided by the management although the auditing standards require us to test the accuracy of data provided by the management. There is an increased risk that the data can be manipulated.

Incorporate necessary consultations in critical and contentious areas and involve expert services where applicable to check the work performed by management expert

The audit engagements should be effectively planned and adequately supervised and reviewed at regular intervals to make sure that any areas which require special focus are not missed out.

Effective communication need to be held amongst the audit team and issues should be highlighted without time delays.

The audit team should communicate with all levels of client staff specially the below management staff and the internal audit department to get an indication of a possible management bias.

The engagements should involve a review by an independent partner of the firm and he/she should be a involved in the engagement from inception to the end.

The engagement managers and the staff planning team should keep a closer eye on the familiarity threat that may exist in case where an engagement team or the senior members thereof are being repeated over a number of years and consequently the members of the team develop a level of familiarity which may jeopardize their ability to challenge the audit evidence, information and assumptions available.

The firm should have an independent risk management team that should critically assess the level of fees charged to the particular client and the degree to which the same may result in self-interest threat to the audit firm or the engagement partner, such threats may be reduced by applying necessary safeguards.

All in all, professional skepticism is about dealing with the audit in a manner that challenges the management point of view and critically assessing the information at hand. This in the true sense is what an audit is all about. Checking the information from an inquiring and skeptic perspective is primarily a behavioral concern and can be achieved if the audit engagement is trained and developed in a manner that instills such behavior in their perspectives of looking at things.