Professional skepticism and why it is important to monitor stakeholders

 

In auditing, the concept of professional skepticism is ubiquitous. Just as a Jedi in Star Wars is constantly trying to hone his understanding of the "force," an auditor is constantly developing his ability to apply professional skepticism. It is professional skepticism that provides the basis for decision-making when making an attestation engagement.

A brief definition

Professional standards define professional skepticism as "an attitude that includes a questioning mind, alertness to conditions that may indicate possible misstatement due to fraud or error, and a critical evaluation of audit evidence." Given this definition, it is quickly understood that professional skepticism is not easily measured. Nor is it something that is cultivated overnight. It is a skill developed over time and one that auditors must constantly develop and refine.

Recently, the extent to which professional skepticism is employed has received much criticism. In particular, regulators argue that auditors are not sufficiently skeptical in carrying out their duties. However, as indicated in the white paper entitled Skepticism: the taking of practitioners, published by the Institute of Chartered Accountants in England and Wales, simply asking for more skepticism is not a practical solution to this problem, nor is it necessarily always desirable. There is an inevitable tug-of-war between professional skepticism and audit efficiency. The more skeptical the auditor is in general, the longer it takes to complete the audit.

Why does it matter? Audit quality.

First, how your auditor applies professional skepticism to your audit has a direct impact on the quality of your service. Applying an appropriate level of professional skepticism increases the likelihood that the auditor will understand your industry, lines of business, business processes, and any nuances that differentiate your company from others, as it naturally causes the auditor to ask questions that they might not otherwise ask. could be raised. .

These questions not only help the auditor apply professional standards correctly, but also help the auditor gain a deeper understanding of your business. This will allow the auditor to provide insights and value-added services that an auditor who does not apply the correct degree of skepticism will never be able to identify.

Therefore, as the white paper points out, audit committees, management, and investors need to ask themselves "How pressured are our auditors with fees, and what effect does this have on audit quality?" If your auditor is overly concerned with completing the audit within a set budget, professional skepticism and ultimately the quality of the audit may suffer.

Apply skepticism internally

By definition, professional skepticism is a concept that applies specifically to auditors and is not relevant when dealing with other audit stakeholders. This is because the definition implies that the individual applying professional skepticism is independent of the information he is analyzing. Other audit stakeholders, such as members of management or the board of directors, are naturally supportive of the organizations they manage and direct and therefore cannot be considered independent, whereas an auditor is required to remain independent.

However, instead of auditing stakeholders applying professional skepticism as such, these other stakeholders should apply an impartial and diligent mindset to their work and the information they review. This allows the audit stakeholder to remain an advocate for their organization while applying critical skills similar to those applied in the exercise of professional skepticism. This nuanced distinction is necessary to maintain the limited scope to which the definition of professional skepticism applies: the auditor.

Specifically for the financial reporting function, these stakeholders should evaluate financial information and ask questions that can help prevent or detect failures in the financial reporting process. For example, when considering significant estimates, management must ask: Are we considering all relevant information? Are our estimates fair? Are there any alternative accounting treatments that we have not considered? Can we justify our selected accounting treatment? Essentially, management must begin by asking: What questions would we expect from our auditor?

It is also important to be critical of your work and never settle for it. This may be the most difficult kind of skepticism to apply, as most of us don't like to have our work criticized. However, critically reviewing your work, essentially as an informal first level of review, will allow you to step back and look at it from a different point of view, which in turn can help catch errors that might otherwise go unnoticed. . Essentially, you need to consider both the evidence that supports the initial conclusion and the evidence that may be contradicting that conclusion.

The discussion in audit circles about professional skepticism and how to apply it appropriately continues. It is a challenging notion that is difficult to adequately articulate. Although it receives a lot of attention in the audit profession, it is a concept that, slightly modified, can be useful to other audit stakeholders. This will help you build a stronger relationship with your auditor and ultimately improve the quality of the financial reporting process and the resulting outcome.