The questioning mind: Best practices for ensuring professional skepticism in the audit process
By Lana Richards, Contributing Writer, Sageworks
Auditors tend to get a lot of eye rolls from client personnel. After all, no one likes to have their work questioned or their errors pointed out to their bosses. Yet that questioning is foundational to the audit practice. If auditors are not appropriately skeptical—seeking only to corroborate management’s assertions, perhaps, or rationalizing evidence that doesn’t make sense — then their opinion loses its value to investors.
The PCAOB says auditors should assess “what could go wrong” with their clients’ financial statements and obtain “sufficient appropriate evidence,” which is not necessarily the most easily attainable evidence. Professional skepticism, “an attitude that includes a questioning mind,” must be applied throughout all phases of the audit and by all team members.
Subjectivity and judgment are more prevalent than ever, given the migration toward more principles-based accounting standards and the increasefd use of fair values in financial reporting. Professional skepticism is especially important in areas where judgment has been applied, since there are more opportunities for management biases to creep in and misstatements to occur. It also is critical in an auditor’s consideration of fraud, since those who would intentionally misstate a company’s financials likely would also try to conceal their tactics.
Challenges to professional skepticism
Using their critical thinking skills to apply context and perspective to clients’ financial statements is how CPAs add value to the audit process. But when busy season hits, most auditors find it challenging to shut the door and put their thinking caps on. Even if they did have the time, more thinking could lead to more questioning (read: more work).
In addition to workload demands, the following circumstances can impede auditors’ application of professional skepticism, according to the PCAOB:
• Pressures inherent in the audit process (e.g., incentives to maintain client relationships, keep audit costs down or avoid conflicts with management)
• Trust in management, which is particularly common in long-term client relationships
• Lack of training and expertise, as auditors must know what to question
All of these situations can cause CPAs to take a client-favoring, as opposed to investor-protecting, approach. As a result, they may work too quickly, question less, obtain insufficient evidence or fail to discover material misstatements. If these circumstances aren’t caught in internal reviews, then audit firms can get “dinged” in peer reviews. And in fact they do, quite often—so often that the PCAOB issued a staff audit practice alert to address the topic: SAP No. 10.
The PCAOB and Center for Audit Quality direct auditors to bolster professional skepticism with the following best practices.
Optimize audit firm quality control systems.
Audit firm quality control systems should include:
• A tone at the top that emphasizes the importance of professional skepticism. A firm’s culture can directly influence whether or not auditors dig deeper when something doesn’t look right.
• Compensation and promotion programs that promote (not discourage) professional skepticism. When auditors know their compensation and promotions hinge on maintaining key clients, they may be less likely to question management’s assertions.
• Professional training and proper engagement staffing. Though audit teams commonly assign the bulk of the field work to younger staff, senior staff should be available to answer questions and review work in a timely manner. Firms also should train their staff on how to apply appropriate professional skepticism in an audit.
• Policies and procedures that assure appropriate audit documentation—especially in areas involving significant judgment. Audit work programs and checklists should remind auditors of the level of detail required in their work papers. Having to explain in writing the how they developed an expectation for an analytical procedure, for example, will prompt auditors’ application of professional skepticism (more on this below).
• Consistent monitoring for appropriate use of professional skepticism. Quality control systems should constantly check for a critical assessment of audit evidence—and take corrective action as needed.
Appropriately design and document analytical procedures.
Analytical procedures can bolster professional skepticism when auditors design them to detect material misstatements—as opposed to just corroborating management’s assertions. As mentioned previously, these evaluations prompt auditors to think critically and consider why certain comparisons look the way they do, given other factors. The challenge is in how auditors respond to that prompt.
Especially when workload demands are high, auditors may pass too quickly through an area simply because the analytics “checked out,” putting audit quality and compliance at risk. The good news is that technology can boost efficiency. Automating routine calculations and analyses can give auditors more time for areas requiring research and judgment. Audit technologies also can provide relevant, reliable data such as industry benchmarks, deviations from which may indicate a need to dig a little deeper.
Professional skepticism is an individual, team and firm-wide responsibility. Applying these best practices and taking advantage of time-saving tools and technology will help encourage professional skepticism in audits—and improve compliance, efficiency and effectiveness.
Request information here to learn more about software that can streamline analytical procedures and give auditors more time to apply professional judgment in critical areas.
Lana Richards, a contributing writer for Sageworks, is a writer, editor and content marketing strategist for professional services firms. She is a former accountant and has a master’s degree in accounting.