Model of Determinants of Professional Skepticism in Audit Performance

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Model of Determinants of Professional Skepticism in Audit Performance

An overview of a simple model of professional skepticism is shown in Figure 1 that conform prior work by several authors. At the center of the model is the idea that there is a difference between skeptical judgment and skeptical action (link 1). As indicated in the definition of professional skepticism provided in the auditing standards (AU 230), professional skepticism is a product of auditors’ judgment, but professional skepticism is revealed by skeptical behavior, and therefore is an attribute of auditor performance.



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Evidential Input (Link 2)

Evidential input provides an important input to the judgment process (link 2). As including any information collected and considered in the course of the audit, Nelson view audit evidence broadly. Professional skepticism can influence the choice of audit opinion, when the evidential input consists of all evidence accumulated as part of the audit process and also can influence the initial audit planning, when the initial evidential input may consist only the background information about the client.

Other inputs to the judgment process include the auditor’s knowledge (link 3), other non-knowledge attributes that Nelson refer to all as auditor traits (e.g., intelligence, tendency to doubt, self-confidence; link 4), and auditor incentives (link 5).Nelson has follow Libby and Luft (1993) in viewing the auditor knowledge as resulting from a combination of traits (link 6) and prior experience (which includes training; link 7), and in viewing traits as fixed by the time an auditor begin their audit training and practice.

Various problems, such as difficulty in recognizing patterns of evidence, applying previous knowledge to the current judgment task, weighting evidence appropriately, and preventing incentives from influencing judgment in unconscious ways has been identified that auditor’s judgment are vulnerable which from the previous research in psychology and accounting.

Professional skepticism judgments translate into professional skepticism actions depends not only on the extent to which judgments reflect professional skepticism, but also on aspects of the auditor’s incentives (link 8), traits (link 9), and knowledge (link 10). The idea that professional skepticism must reach some threshold before it is sufficient to promote action because of this distinction between judgment and action and that whether an auditor actually appears to have exercised professional skepticism is also influenced by aspects of knowledge (e.g., knowledge of constraints provided by accounting and auditing standards), traits (e.g., self-confidence), and incentives (e.g., whether pressures to stay within time-budget or avoid displeasing the client discourage the auditor from taking particular actions, holding constant the professional skepticism reflected in their judgment).

The amount or nature of evidence can be used by the auditor is alter by the skeptical action. Then the auditor must reconsidered and choose which part can becomes their experience and knowledge. Therefore, this model is recursive, with evidence being assimilated and judged, action taken, further evidence resulting from action taken (link 11), that evidence becoming part of the auditor’s experience (link 12), and that evidence becoming future input (link 13) to the process.

Various perspectives in previous accounting and psychology research has been conform by the model. For example, Hurtt (2007), drawing on professional standards and the philosophy literature, focuses on the relation between traits of skeptical people and various skeptical behaviors

Traits (Link 4)

Traits are non-knowledge attributes of the auditor that can influence the auditor’s professional skepticism. Nelson has categories professional skepticism related trait research into three parts, which is problem-solving ability, ethics/moral reasoning, and skepticism scales.

The first part of the professional skepticism related trait identified in previous research is problem-solving ability. The fundamental idea of problem-solving ability is that raw intelligence will help auditors to identify potential misstatements. Bonner and Lewis (1990), Bonner et al. (1992), Bonner and Walker (1994), and Libby and Tan (1994) all assess problem-solving ability via responses to GRE questions, and Bierstaker and Wright (2001) assess problem-solving ability using a scale that is based on responses to scenarios. In general, these studies find significant relations between ability and performance of professional skepticism relevant audit tasks (identifying errors via ratio analysis, earnings-manipulation detection), particularly when those tasks are unstructured (Bierstaker and Wright 2001), but do not address whether greater problem-solving ability.

Other than problem solving ability, ethical development or "moral reasoning is another trait that investigated by many previous studies. (for a review see Jones et al. 2003). Ethical development identifies the extent to which auditors’ professional skepticism related judgments and actions are influence by their incentives. Most of these studies are based on Kohlberg’s (1969) ‘‘theory of cognitive development.’’ Kohlberg identified three levels of ethical reasoning that is ‘‘pre-conventional,’’ where ethical judgments are based on consequences, ‘‘conventional,’’ where ethical judgments are based on expectations of others and are dictated by rules and laws, and ‘‘post-conventional,’’ where ethical judgments are based on overriding ethical principles. These sorts of papers tend to assess auditors’ moral reasoning using assessment instruments like Rest’s (1986) Defining Issues Test to develop scales like the ‘‘P score’’ that identify the stage of ethical development that people have reached, and correlate that score with ethical judgments and/ or behaviors (analogous to PS judgments and actions). The general result of these studies is that auditors at higher stages of moral development appear more sensitive to information about client competence and integrity (Ponemon 1993; Ponemon and Gabhart 1993), are better able to identify potential inappropriate behavior (Bernardi 1994) and are less likely to engage in inappropriate behavior (Ponemon and Gabhart 1993). For example, auditors with higher DIT scores appear less likely to underreport time (Ponemon 1992b) and compromise assessments (Falk et al. 1999). Auditors’ moral reasoning scores increase when assessed using a more auditing-specific instrument (Massey 2002). Also, early studies identify an inverse relation between auditor experience and moral development as measured by P scores (e.g., Ponemon 1988; 1992a), but later work provides evidence that these results are an artifact of research design, and that instead auditors’ moral development increases with time and that firms tend to retain auditors with higher levels of moral development (Bernardi and Arnold 2004).

The last part of the trait is skepticism scales. Other research is attempts to rate professional skepticism more directly and relate those ratings to audit judgments and actions but results are somewhat inconsistent. For example, Shaub (1996) assesses general propensity to be skeptical using two scales developed by Wrightsman (1974) that assess belief that people are reliable (moral and responsible) and independent (resisting group pressures and follow their own beliefs), as well as a client trust scale that assesses the general tendency for auditors to trust their clients. More recently, Hurtt (2007) has developed and tested an auditing focused professional skepticism scale. She bases the scale on six separate characteristics of skeptics that are distinct from knowledge and ethics. She supports those characteristics from the philosophy literature and auditing standards, as follows:

  • Suspension of judgment: Philosophers view skeptics as unwilling to simply accept assertions and claims, and instead as keeping an open mind and critically evaluating evidence (e.g., Hallie 1985; Kurtz 1992). In the auditing standards, SAS No. 1 indicates the importance of suspending judgment until sufficient evidence is collected.
  • Questioning mind: The philosophy literature includes probing, proving assertions, active questioning, and inquisitiveness among the characteristics of skeptics (Stough 1969; McGinn 1988; Bunge 1991; Kurtz 1992; Fogelin 1994). In the auditing standards, SAS Nos. 82 and 99 include a questioning mind in their definitions of PS.
  • Search for knowledge: Philosophers view a more general search for knowledge as an important characteristic of skeptics (Naess 1969; Johnson 1978; Bunge 1991; Popkin and Stroll 2002). In the auditing literature, Mautz and Sharaf (1961) identify the importance of general curiosity.
  • Self-confidence: Philosophers recognized the need for skeptics to challenge others and value their own insights (Linn, de Benedictis and Delucchi 1982). In the auditing literature, Mautz and Sharaf (1961) identify the need for auditors to have professional courage. Marketing research shows that skepticism about advertising claims is positively associated with self-esteem (Boush et al. 1994).
  • Self-determination: Philosophers view skeptics as withholding conclusion until they are satisfied that they have enough evidence and are personally convinced (Bunge 1991). In the auditing standards, SAS No. 1 requires that auditors acquire sufficient evidential matter.

When viewed the all, these characteristics seize the idea that skeptics keep an open mind and question possible conclusions, searching for evidence, considering the potential that the evidence is biased, and aggressively questioning until they personally arrive at a conclusion.


Auditing firms enhance professional skepticism through several processes such like:

a) Hiring

During the hiring process and when marketing the accounting profession, the auditing firm could disseminate the importance of professional skepticism traits in the hopes of discouraging applicants who have low professional skepticism traits from applying, similar to self-selection devices used in other areas (Salop and Salop 1976).

Currently, knowledge of new staff is screen by firm based on college performance, quality of undergraduate institution and so on. Hiring more experienced staff also allows screening based on passing the CPA exam and prior experience. While it is conceivable that firms could examine curriculum to identify those most likely to emphasize professional skepticism, the standardized CPA exam ensures relatively standardized foci of accounting programs.

b) Training

Training influence professional skepticism by affecting knowledge, but also influence professional skepticism through incentives by providing auditors with knowledge of incentives. Previous research provides evidence that training can be used to enhance auditors’ knowledge of frequencies and error categories (Butt 1988; Nelson 1993; Nelson et al. 1995; Bonner et al. 1996, 1997), suggesting that professional skepticism could be enhanced by having training highlight errors as opposed to non errors. Training about fraud indicators increases performance of students (Choo and Tan 2000; Carpenter et al. 2002) and experienced auditors (Fullerton and Durtschi 2005).

Another potential area for training involves negotiation techniques. If auditors could persuade the client to book corrections of all questionable items while remaining the firm’s client, rather than conceding that potentially important misstatements not be booked or reaching an impasse that results in less attractive outcomes like audit qualification or client loss, professional skepticism would be enhanced.

c) Performance Evaluation and Promotion

Performance evaluation can screen for professional skepticism traits, knowledge, and action. Ensuring that staff understands that professional skepticism is emphasized in the performance-evaluation process also influence staff incentives.

The value of the evaluation process to enhancing professional skepticism is depends on the accuracy of performance evaluations. Evaluation performance appears to improve with experience, with more experienced auditors better able to predict the judgments of other auditors with respect to highly judgmental accounting treatments (Jamal and Tan 2001), and higher performing managers less likely to allow their evaluations of subordinates’ work to be influence by subordinates’ reputations (Tan and Jamal 2001).

An interesting question is the extent to which the performance-appraisal and promotion process explicitly or implicitly assesses and rewards professional skepticism. Evidence that tacit managerial knowledge differentiates audit managers could be driven by that group having high technical skills, but it also could suggest that a primary focus of performance evaluation of managers is efficiency, which could potentially undermine professional skepticism. Having the performance-appraisal process elicit and reward actions that demonstrate professional skepticism could create an incentive that affects judgment (via motivated reasoning) and action.

d) Review and Consultation

Audit firms have hierarchically organized review processes that could be used to enhance professional skepticism in the audit process (Solomon 1987). Reviewers should be more likely to have traits, knowledge and judgment processes that favor professional skepticism (of course, the opposite is true if the promotion process emphasizes efficiency and retaining clients over professional skepticism) if the promotion process rewards professional skepticism. As a consequence, a review allows the reviewer to augment the professional skepticism of reviewees.

Evidence of the offsetting knowledge benefits of review is provide in the previous research. Reviewers who are managers detect relatively more conceptual errors and fewer mechanical errors than do those who are seniors (Ramsay 1994). Reviewees tend to focus on evidence that supports their conclusion, and reviewers attend more to evidence that conflict a reviewee’s conclusion (Libby and Trotman 1993; Reimers and Fennema 1999).

Other consultation arrangements may also enhance professional skepticism. For example, SAS No. 99 requires that audit teams brainstorm to identify fraud risks. Carpenter (2007) provides evidence that such sessions reduce the quantity of ideas, but not the number of high-quality ideas, and that fraud risk assessments are higher after such brainstorming sessions, particularly when fraud is present.

e) Decision Aids

By programming particular reactions to evidence that reflect desired traits, knowledge and judgment, decision aids can enhance professional skepticism. They can address effects of incentive if decision aids are not overruled. Many decision aids augment knowledge or facilitate its retrieval. For example, simple aids like red-flag checklists ensure that no questions are overlooked, but may in fact discourage professional skepticism by omitting or under-emphasizing some negative indicators (Pincus 1989; Asare and Wright 2004).

In order to encourage professional skepticism, simple instructions also can be used for. For example, instructions to form independent expectations can be used to control anchoring on client-provided book values in analytical review (McDaniel and Kinney 1995). A prompt to consider the strength of evidence can discourage over-reliance on the results of weak analytical procedures (Glover et al. 2005).

f) Changing Incentives

Incentives can influence judgment in at least two ways. First, to the extent that professional skepticism is reduced by judgmental mistakes that are caused by lack of effort, incentives can be used to increase effort and therefore reduce mistakes. For example, recency effects in belief revision can be reduced by accountability (Kennedy 1993), anticipation of review (Messier and Tubbs 1994), and requirements to document (Cushing and Ahlawat 1996). Second, as discussed previously, incentives can affect judgment via motivated-reasoning processes that drive evidential search, evaluation and weighting to outcomes that are favored by the incentives.

g) Changing Tasks and Institutions

Because of hard-wired judgment difficulties, some judgment mistakes that reduce professional skepticism is occur and therefore are not responsive to incentives.(Kennedy 1995). In those circumstances it may be preferable to change the task, for example by removing access to book values when auditors form expectations in analytical review to prevent them from anchoring on them and therefore giving too much credence to management representations (McDaniel and Kinney 1995).

When auditors interact with clients on a long-term basis, more frequent auditor rotation can be used by firms who desire to reduce incentive problems that might occur. Of course, a concern is that more frequent auditor rotation could reduce client-specific knowledge that allows the auditor to anticipate audit problems and thus maintain professional skepticism. Similarly, different contracting arrangements could influence professional skepticism by changing incentives. For example, Ronen (2002) advocates a system in which auditor are hired by insurance companies rather than their clients.