Professional Skepticism in Auditing 15/12/2023

Overview

Professional skepticism is defined in the International Standards on Auditing (ISAs) as “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.”

Guidance on the importance of adopting a professional skepticism mindset and how auditors should do so can be found in ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing. ISA 200 sets out specific requirements concerning professional skepticism, stating that auditors must plan and perform an audit with professional skepticism, recognizing that circumstances may exist that cause the financial statements to be materially misstated.

Why is Professional Skepticism Important in Audits of Financial Statements?

Professional skepticism is a critical component of an auditor’s skill set and is essential to conducting a high-quality audit. It plays several key roles in the audit process:

Interrelationship with Professional Judgment: Professional skepticism is closely related to professional judgment. Both are crucial for correctly conducting an audit and ensuring its quality.
Determining the Nature, Timing, and Extent of Audit Procedures: Professional skepticism helps auditors decide what audit procedures to perform, when to perform them, and how extensive they should be.
Evaluating Audit Evidence: It ensures that auditors gather enough relevant audit evidence and determine if additional work is necessary to meet the objectives of the ISAs.
Assessing Management’s Judgments: It is vital in evaluating management’s judgments when applying the applicable financial reporting framework.
Decision-Making Based on Audit Evidence: Professional skepticism guides decisions based on the evidence obtained, such as assessing the reasonableness of management’s estimates in the financial statements.

At What Stage in the Audit Process is Professional Skepticism Necessary?

Professional skepticism is relevant and necessary throughout all stages of the audit process. For example:

Engagement Acceptance: When considering factors like the integrity of the company and its management.
Identifying and Assessing Risks of Material Misstatement: In evaluating potential risks that could lead to material misstatements.
Assessing Audit Evidence: When planning the scope, timing, and nature of additional audit procedures based on identified risks.
Expressing an Opinion: When forming a view on whether the financial statements comply with the applicable financial reporting framework in all material respects.

What Role Does Professional Skepticism Play in an Auditor's Responsibilities Regarding Fraud?

Professional skepticism is crucial in fulfilling an auditor’s responsibilities concerning fraud. The unique characteristics of fraud, such as the potential for carefully orchestrated schemes to conceal it or the possibility of collusion, make professional skepticism essential when assessing the likelihood of a material misstatement caused by fraud.

ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, places a particular emphasis on professional skepticism. It requires auditors to maintain professional skepticism throughout the audit, especially considering the potential for material misstatement due to fraud, even if the auditor has prior knowledge of the honesty and integrity of the entity’s management and those charged with governance (TCWG).

Additionally, ISA 240 mandates that auditors investigate any circumstances found during the audit that suggest a document may not be genuine or that specific terms in a document have been altered without disclosure. This approach ensures that auditors remain vigilant and responsive to potential fraud risks throughout the audit process.