- Auditing Standards define professional scepticism 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’.
- This definition suggests that scepticism influences the scope of the work, helps the auditor evaluate audit findings and ultimately conclude whether sufficient appropriate audit evidence has been obtained to enable a ‘true and fair view’ opinion to be expressed on an entity’s financial statements .
- ‘Professional scepticism’ is a phrase commonly associated with the auditor, and refers to the attitude of ‘doubt’ with which they are expected to approach an engagement. Professional scepticism is established as a recognised ‘ideal’ for audit investigation, providing the rationale for drawing on its philosophical foundations to normatively pose an idea of ‘best’ audit practice.
- Audit is essential to public and investor confidence in companies. It is far from easy to do well, requiring judgement and technical competence, often in complex circumstances. The application of an appropriate degree of professional scepticism is a crucial skill for auditors. Unless auditors are prepared to challenge management’s assertions they will not act as a deterrence to fraud nor be able to confirm, with confidence, that a company’s financial statements give a true and fair view. However, scepticism can be taken too far; challenging everything in a well run company will slow down the publication of its financial statements and risks unnecessary costs.
- The challenge for audit firms is to identify, develop and retain people with the necessary skills and to deploy them appropriately.What examples have you identified through your inspections of auditors not exercising sufficient scepticism in key audit areas? How widespread do you think this problem is?
- Professional scepticism is key to maximising the usefulness of audit, and is an issue for auditors worldwide. In the US, research[i] has shown that the failure to demonstrate an appropriate level of scepticism was a deficiency found in 60% of the cases where the SEC brought fraud related actions against auditors. The UK’s Audit Inspection Unit in their 2009/10 Annual Report6 reported that audit firms are not always applying sufficient professional scepticism in relation to key audit judgements This has prompted UK regulators to examine this issue carefully.
What do you consider to be the likely or possible underlying causes of partners and staff failing to exercise sufficient scepticism in practice? What types of actions do you think firms need to take to address them?
- It is widely acknowledged that a sceptical attitude of mind is essential if an audit is to be rigorous and performed with due professional care; however, auditing literature is less forthcoming about the degree of scepticism to be applied in practice. The degree of scepticism to be applied is important because it influences both the effectiveness and the efficiency of an audit. Too little scepticism endangers audit effectiveness; too much risks unnecessary cost.
- Auditing Standards establish requirements in relation to the need to perform additional work in reaction to negative findings . However, judgement is required when determining what findings are ‘negative’ and what additional work needs to be performed in the context of the particular circumstances encountered. While the personal traits of individual auditors are also likely to influence judgements and the actions taken to respond to concerns identified, subsequent behaviour is also likely to be influenced by auditors working collectively as a team and by the audit firm’s policies and procedures.
[i] M.S. Beasley,J.V.Carcello & D.R.Hermanson,2001 Top 10 audit deficiencies. Journal of Accountancy 191 (4): 63-66.
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