03
Oct
12

Professional skepticism and auditing – inseparable twins?

In the initial years of my career, I have worked for an audit practitioner who often kept reminding me the importance of exercising professional skepticism in my audit assignments. At a certain point of time, I was even fed up hearing that word. But over a period of time, I understood its significance. Today I keep reminding my team to exercise professional skepticism in their assignments.

Recently (in March 2012), the Auditing Practices Board of the Financial Reporting Council, (the United Kingdom’s independent regulator responsible for promoting high quality corporate governance and reporting) issued a paper that sets out its views on the nature of professional skepticism and its role in auditing.

As internal auditing profession around the world faces the tough challenge of maintaining its credibility and quality in their assurance and consulting assignments from its various stakeholders, I was specially drawn towards this subject of professional skepticism. This paper broadened my thinking and understanding of the need for and meaning of skepticism in auditing. Though the paper was aimed at addressing external auditing, I feel that the principles are equally applicable to internal auditing as well and there is a lot to learn from the regulator’s analysis. The paper prescribes certain attributes for individual auditors, engagement teams, audit functions, audit committees and management. I would like to highlight here the prescriptions developed for individual auditors and audit functions.

Individual auditors:

  • Develop a good understanding of the organization and its business.
  • Have a questioning mind and are willing to challenge management assertions.
  • Assess critically the information and explanations obtained in the course of their work and corroborate them.
  • Seek to understand management motivations for possible lapse in internal control, risk management and governance.
  • Investigate the nature and cause of deviations or lapses identified and avoid jumping to conclusions without appropriate audit evidence.
  • Are alert for evidence that is inconsistent with other evidence obtained or calls into question the reliability of documents and responses to inquiries.
  • Have the confidence to challenge management and the persistence to follow things through to a conclusion – even if predisposed to agree with management’s assertion, the auditor should actively consider the alternative views and challenge management to demonstrate that they are not more appropriate.

Audit functions:

  • The culture within the audit functions emphasizes the importance of:
    • understanding and pursuing the perspective of stakeholders in making audit judgments;
    • coaching less experienced staff to foster appropriate skepticism;
    • sharing experiences about difficult audit judgments within the audit function;
    • consultation with others about difficult audit judgments;
    • supporting Chief Audit Executive (CAE) when they need to take and communicate difficult audit judgments.
  • Skepticism is embedded in the audit function’s training and competency frameworks used for evaluating and rewarding CAE and staff performance.
  • The audit function requires rigorous engagement quality control reviews that challenge engagement teams’ judgments and conclusions.
  • The audit function methodologies and review processes emphasize the importance of, and provide practical support for auditors in:
    • developing a thorough understanding of the entity’s business and its environment, sufficient to enable the auditor to carry out a robust risk assessment through their own fresh eyes;
    • identifying issues early in the planning cycle to allow adequate time for them to be investigated and resolved;
    • rigorously taking such steps as are appropriate to the scale and complexity of internal control, risk management and governance practices to identify unusual trends;
    • changing risk assessments, materiality  and the audit plan in response to audit findings;

Simple but basic truths. Yet a much needed reminder for me and my audit department.

Reference: This post is based on the Paper published by Auditing Practices Board of the Financial Reporting Council on “Professional Skepticism: Establishing a common understanding and reaffirming its central role in delivering audit quality” in March 2012.

Question: Do you have any other ideas to demonstrate the appropriate degree of professional skepticism by the audit fraternity? Please share them by leaving a comment to this post.

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