Audit and Assurance I Acct 318 Group 3

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AUDIT AND ASSURANCE I ACCT 318

GROUP 3

LECTURER: DR JERRY KWARBAI

TOPIC:
AUDIT QUALITY AND
PROFESSIONAL SKEPICISM

GROUP MEMBERS
1. DURU DAVID CHIDI 21/0987
2. AJAKAYE OLAYEMI ESTHER 21/2370
3. AZUKA GIFT ONYINYECHI 21/0304
4. NIHINOLA RERELOLUWA HONOUR 21/0798
5. AFOLABI OLUWANIFEMI OLUWATAMILORE 21/2755
6. AJAO OLUWAFERANMI DAVID 21/0286
7. HANDU IBRAHIM OLATUNBOSUN 212770
8. OGUNFOWORA OLUWATONI BOWOFOLUWA 21/1069
9. ANDE RIYINN MUSA 21/0027
10. OGUNWANDE OLUWABUKUNMI 21/0583
11. UMEKEJE CHINONSO STEPHANIE 21/1359
12. OLAJIDE PRECIOUS ANUOLUWAPO 21/0731
13. IBINE FRANCIS AYODELE 21/0694
14. OLARINOYE PRAISE INIOLUWA 21/0028
15. OLADAPO VICTOR IYANUOLUWA 210986
WHAT IS AUDIT QUALITY?
Audit quality refers to the standard of work performed by auditors in assessing and reporting on financial
statements. It encompasses factors such as the auditor's competence, independence, objectivity, due care,
and adherence to professional standards and regulations. High audit quality ensures that financial
statements provide reliable and transparent information to stakeholders, enhancing confidence in the
accuracy and integrity of the reported financial data. Audit quality refers to matters that contribute to the
likelihood that the auditor will:
● achieve the fundamental objective of obtaining reasonable assurance that the financial report as a
whole is free of material misstatement, and
● ensure material deficiencies detected are addressed or communicated through the audit report.
This includes appropriately challenging key accounting estimates and treatments that can materially affect
the reported financial position and results.

This view is consistent with the objective of the audit (see paragraph 11 of Auditing Standard ASA 200
Overall objectives of the independent auditor and the conduct of an audit in accordance with Australian
auditing standards).

TYPES OF AUDIT QUALITY.


1. Compliance Audit Quality: A compliance audit quality is a comprehensive review of an
organization’s adherence to regulatory guidelines. Audit reports evaluate the strength and
thoroughness of compliance preparations, security policies, user access controls and risk
management procedures over the course of a compliance audit. This type of audit quality ensures
that the audit is conducted in accordance with relevant laws, regulations, and auditing standards.

2. Reporting Audit Quality: This type of audit quality focuses on the accuracy and completeness of
the audit report, ensuring that it provides a fair representation of the entity’s financial position and
performance. It describes how the audit firm’s leadership, through its tone at the top, emphasizes
audit quality and holds itself accountable for the audit firm’s system of quality control and to the
public interest by devoting sufficient and appropriate resources.

3. Procedural Audit Quality: This type of audit quality refers to the effectiveness and efficiency of
the audit procedures used by the auditor, ensuring that the audit is conducted in a thorough and
systematic manner. These are steps performed by auditors to get all the information regarding the
quality of the financials provided by the company, which enable them to form an opinion on
financial statements whether they reflect the true and fair view of the organization’s financial
position.

4. Independence Audit Quality: This type of audit quality ensures that the auditor remains
independent and unbiased throughout the audit process, avoiding conflicts of interest and
maintaining objectivity. Audit quality greatly depends on auditor independence and has been
defined as the probability that the auditor will uncover and report any breach in the accounting
system.
5. Competence Audit Quality: This type of audit quality focuses on the knowledge, skills, and
experience of the auditor, ensuring that the audit is performed by qualified professionals capable
of fulfilling their responsibilities effectively. The more competent auditors are the higher the
quality of audits they provide. This shows a positive relationship between competence and audit
quality conducted by the auditor.

6. Ethical Audit Quality: This type of audit quality focuses on the ethical behaviour and integrity of
the auditor, ensuring that they adhere to ethical standards and conduct themselves with honesty
and integrity throughout the audit process. Auditor can promote their audit quality by adopting
and applying the ethical requirements embodied in objectivity, prudence, confidentiality,
independence, competence, and integrity

OBJECTIVE OF AUDIT QUALITY


An objective is to ensure that audits are conducted with the highest standards of professionalism,
integrity, and accuracy.

Another aim of audit quality is to provide reasonable assurance that the financial statements are free from
material misstatements. This means that the auditors carefully examine and assess the financial records,
transactions, and internal controls of a company to determine if they are presented fairly and accurately.

Audit quality aims to build trust and confidence in the financial reporting process. When stakeholders,
such as investors, lenders, and regulators, have confidence in the accuracy and reliability of the financial
statements, they can make informed decisions based on that information.

Another objective is to enhance audit quality. Regulatory bodies, professional organizations, and auditing
firms continuously work together to establish and enforce auditing standards, provide training and
education, and conduct quality control reviews.

The main aim of audit quality is to provide assurance to stakeholders that the financial statements are a
true and fair representation of the company's financial position, performance, and cash flows. It plays a
crucial role in maintaining the integrity and transparency of the financial reporting process.

IMPORTANCE OF AUDIT QUALITY


Audit quality is essential for auditors to ensure that financial reports are free of material misstatements
and that any deficiencies are addressed or communicated. This involves challenging accounting estimates
and treatments that could impact the financial position and results. The following are the importance of
audit quality:
1. The quality of financial reports is crucial for confident markets and investors. Independent audits
aim to provide assurance in the quality of financial reports. Improving audit quality is essential
for maintaining confidence in the assurance they provide. If a company fails but its financial
report does not accurately reflect its financial position, questions may arise about the role of
directors and auditors. Directors are responsible for the financial report quality, supported by the
audit. It is important for directors and audit committees to support the audit process by ensuring
timely and quality financial information and adequate audit resources. Auditors must ensure
financial reports are free of material misstatement, apply skepticism to accounting estimates, and
address any deficiencies to instil confidence in the information they contain.
2. Audits provide clarity and reassurance to stakeholders by evaluating the efficiency of a business
and identifying areas for improvement. Quality audits drive growth by assessing strategies and
identifying root causes of deviations. Compliance, process, and product audits are essential for
quality management. Audits can generate value by improving systems and products, assessing
cost-effectiveness, measuring effectiveness of programs, increasing productivity, and allowing
employees to report inadequacies.
3. Reliable financial statements are essential for stakeholders like investors, creditors, and regulators
to make informed decisions. Investors use them to assess a company's profitability and growth
potential, while creditors evaluate its ability to repay debt. Regulators rely on financial statements
to ensure compliance with standards and protect investors. Company management uses them to
assess performance and make strategic decisions. Overall, the reliability of financial statements is
crucial for maintaining trust, facilitating informed decision-making, and promoting transparency
in financial reporting.
4. A high-quality audit is essential for building trust and confidence in the financial reporting
process. Stakeholders rely on auditors to provide an independent assessment of a company's
financial statements, which is crucial for making informed decisions. Trust in financial reporting
is not just about numbers; it is about integrity and accountability. Companies that prioritize
transparent and accurate financial reporting build stronger relationships with stakeholders and
attract investors, customers, and partners more easily. Ultimately, trust in financial reporting is a
strategic asset that drives the prosperity of companies and economies.
5. Audits are crucial for ensuring compliance with regulations and accounting standards,
maintaining transparency and integrity in financial reporting. Auditors must adhere to established
standards, regulations, and legal requirements to ensure consistency, reliability, and credibility in
their work. Compliance extends to regulatory oversight and legal obligations, such as the
Sarbanes-Oxley Act, to avoid legal liabilities and protect the reputation of audit firms. Quality
control procedures are implemented to monitor and improve audit engagements, enhancing
effectiveness and efficiency. Independence and objectivity are also key for audit quality, as they
ensure impartiality and credibility in audit reports. Overall, compliance with auditing standards,
regulatory requirements, quality control procedures, and independence principles is essential for
achieving high-quality audits and building trust among stakeholders in financial reporting
integrity.
6. Audits help organizations identify and assess risks in financial processes, providing
recommendations for improvement to mitigate risks and strengthen internal controls. Risk
management in audits involves identifying, assessing, and addressing potential risks that could
impact the accuracy of financial statements, including fraud, errors, and regulatory changes.
Auditors allocate resources effectively, evaluate internal controls, gather evidence, and
communicate with management throughout the audit process. Continuous monitoring and
adjustment of the audit approach ensures ongoing risk management and enhances the reliability
of financial reporting for stakeholders.

7. High audit quality is essential for protecting investors by ensuring that financial statements are
accurate and free from fraud. This is crucial for maintaining the integrity of capital markets.
Auditors play a key role in verifying financial information, detecting fraud, ensuring compliance
with regulations, disclosing risks, and maintaining independence. Timely and transparent audits
enhance investor confidence and help them make informed decisions.

8.Audits are essential for effective corporate governance, ensuring that management acts in the best
interests of shareholders. The board of directors plays a key role in overseeing financial reporting and the
external audit process. An independent audit committee can enhance audit quality by selecting qualified
auditors and facilitating communication between auditors and the board. Strong internal controls are
crucial for reliable financial reporting, while a culture of integrity and ethical behaviour promotes audit
quality. Auditor independence is maintained through mechanisms like audit firm rotation and oversight by
the audit committee or board.

AUDIT AND AUDIT QUALITY


Audit quality refers to matters that contribute to the likelihood that the auditor will achieve the
fundamental objective of obtaining reasonable assurance that the financial report as a whole is free of
material misstatement, and ensure material deficiencies detected are addressed or communicated through
the audit report, while an audit is an "independent examination of financial information of any entity,
whether profit oriented or not, irrespective of its size or legal form when such an examination is
conducted with a view to express an opinion thereon.

DRIVERS OF AUDIT QUALITY


What are drivers? These are factors that work together to ensure that audits are conducted with high
quality and integrity. The Importance of “quality” has increased in every aspect, especially in the field of
auditing and accounting; since human recognized quality as a weapon for fighting in competitive world
and gain advantages by improving quality (Beck et al., 2019). We have inputs and output audit quality
drivers.
The input audit quality drivers are:
1.Leadership: This is a process of social influence, in which a leader seeks the subordinates’ voluntary
participations in an effort to achieve the organizational goals (Budur, 2020). It is important in audit
quality because there has to be a leader that will be accountable for the management of the firm.

2.Risk management: Risk in auditing refers to the auditor's level of Skepticism regarding the reliability of
the evidence, the efficiency of the client's internal control system, and the veracity of the financial
statements fair presentation when the Audit is finished by the planned procedures and with the required
professional standards.

3.Appropriate training: Up-skilling your people enhances the overall quality of the services performed by
the audit profession, reduces risk of non-compliance and material misstatement within not only your audit
practice but within the audit profession as a whole.

4.Performance evaluation: This is an important audit quality drive because it is a formal and productive
procedure to measure an employee's work and results based on their job responsibilities.
After the input audit drivers have been worked on, the output audit quality drivers are next to ensure that
audit quality is achieved.

The output audit quality drivers are:


1.Informative and reliable audit report: Reliable information should be free from material misstatement
and bias and that they can be depended upon by users to represent faithfully that which they claim to
represent or could reasonably be expected to represent.

2.Job satisfaction for audit staff: Job satisfaction among employees plays a vital role in an organization
because they will help to ensure optimum productivity of an organization. It is important for auditors to
be satisfied with their jobs so as to prevent material misstatement and promote good audit skills.

3.Well informed management and audit committee: An audit committee is a sub-group of a company's
board of directors responsible for the oversight of the financial reporting and disclosure process. To be
successful, the audit committee should be aware of the processes and internal controls in the organization.

QUALITY CONTROL
In auditing, quality control is the process of ensuring all the quality protocols of professional standards
have been followed while performing auditing. The process is based on objectivity. All the results
provided by this review are unbiased and based on facts. The firm gets sure that it has complied with all
the quality parameters throughout an audit. The overall goal of this review is to check whether the firm
complies with professional and organizational standards of quality control or not. This process enables the
auditor to issue a clean audit report.

Quality Control Procedures


Auditors need to work on different quality control procedures to maintain audit quality. Here is the list
describing the elements of quality control in auditing:

1. Independence, Integrity, and Objectivity:

The audit team must discharge professional responsibilities with independence. The team shouldn’t only
be independent but appear to be independent of the audit client. Integrity refers to performing tasks with
personal honesty. Although, it’s a personal trait. However, it can be nourished to ensure the adequacy of
an audit. Objectivity means that the task should be performed on facts neglecting personal intuitions and
biases. So, compliance with this policy can effectively ensure quality. This element of quality control
review deals with different factors that the audit team must ensure.

Personnel Management:

Personnel management is an important aspect of designing quality control policies and procedures. This
factor contains the nature of supervision that should be provided to personnel. It should be effective and
drive the personnel to perform their responsibilities at their best. Other than nature, the extent of
supervision should also be taken care of. Too much extra supervision might generate negative outcomes,
so as much-avoided supervision. Personnel management also involves practices such as hiring, assigning
of tasks, professional development, etc.

3.Acceptance and Continuation of Clients and Engagements:

Client acceptance is another important aspect of quality control. An audit firm needs to ensure they are
independent of the client. Further, they have sufficient resources to assure on the risk brought by a new
audit client. For instance, insurance companies, financing companies, and banks carry higher audit risks.
So, the firms need to assess if they have sufficient resources, time, and competence to ensure they would
be able to cover the risk. Generally, audit firms assess internal risk assessments with internally designed
forms. This helps them ensure risk is appropriately assessed before client acceptance. Usually, senior
managers are assigned to assess risk as it’s a strategic matter. Likewise, policies should also be designed
to assess whether a relationship with a client should be continued. Lastly, it explains the performance of
an engagement with a client.

4-.Engagement Performance:

The engagement personnel needs to comply firm’s quality protocols and overall professional standards.
Policies and procedures should be designed to enhance these policies. As the name of the element
suggests, engagement performance is a broader concept and covers all the phases from planning to
execution of the engagement. The control policies are developed by keeping in mind the applicable
professional standards. Usually, these policies involve supervision, communication, planning, and other
stuff related to engagement execution.

5.Monitoring:

Monitoring is one of the crucial elements while establishing procedures for quality control. It aims to
ensure appropriateness, effectiveness, and compliance of the audit processes and achievement of
objectives. Effectiveness is equally important to assure that there is no wasted resources and results are
optimized. Further, continuous professional development activities should also be monitored to evaluate
whether processes are effective or not. The above-discussed elements make the policies and procedures of
quality protocols more effective. A firm’s audit department can reach new heights by ensuring that its
policies have these elements. All the loopholes of auditing practices can be limited by implementing
policies with these elements.

KEY PERFORMANCE INDICATOR OF AN AUDITOR

Key Performance Indicators (KPIs) for Audit Quality: They are indicators which are used to evaluate the
quality of audit work and adherence to professional standards. Examples: Audit findings accuracy,
adherence to audit methodology, compliance with regulations.

1) Audit Completion Rate:


a) Definition: The percentage of planned audit engagements completed within the specified
period.
b) Importance: High completion rates indicate efficient execution and adherence to audit
schedules.
2) Accuracy of Audit Findings:
a) Definition: The precision of audit conclusions and identification of material
misstatements.
b) Measurement: Compare audit findings against subsequent evidence or management
responses.
3) Timeliness of Reporting:
a) Definition: The speed at which audit reports are issued after completing fieldwork.
b) Impact: Timely reporting ensures relevant information reaches stakeholders promptly.
4) Quality of Documentation:
a) Criteria: Clear, concise, and well-organized working papers.
b) Assessment: Review the completeness and relevance of documentation.
5) Adherence to Professional Standards:
a) Measurement: Evaluate compliance with auditing standards (e.g., International Standards
on Auditing).
b) Importance: Consistency with standards ensures audit quality.
6) Risk Assessment Accuracy:
a) Definition: The effectiveness of risk identification and assessment.
b) Assessment: Compare identified risks with subsequent audit findings.
7) Follow-up Completion Rate:
a) Measurement: Percentage of audit recommendations implemented by management.
b) Significance: Effective follow-up ensures corrective actions are taken.
8) Client Satisfaction Surveys:
a) Method: Collect feedback from audit clients regarding communication, responsiveness,
and overall satisfaction.
b) Impact: Satisfied clients are more likely to trust audit results.
9) Audit Team Competence:
a) Assessment: Evaluate qualifications, certifications, and ongoing professional
development of audit team members.
b) Importance: Competent auditors enhance audit quality.
10) Effective Communication with Stakeholders:
a) Criteria: Clarity, relevance, and usefulness of audit reports.
b) Impact: Well-communicated findings enhance stakeholder confidence.

11) Compliance with Regulations

a. Definition: Compliance with regulations refers to an organization’s adherence to laws, rules, and
legal requirements relevant to its business operations.
b. Importance:
c. Legal Boundaries: Compliance ensures that organizations operate within legal boundaries and
follow prescribed protocols.
d. Risk Mitigation: Proper compliance minimizes the risk of legal violations, penalties, and
reputational damage.
e. Stakeholder Trust: Complying with regulations enhances stakeholder trust and confidence.
12) Adherence to Audit Methodology
a. Definition: Adherence to audit methodology refers to how closely auditors follow established
guidelines, procedures, and best practices during the audit process.
b. Importance:
a. Consistency: Following a standardized methodology ensures consistent audit execution
across different engagements.
b. Quality Assurance: Adherence to methodology enhances the quality and reliability of
audit work.
c. Risk Management: Proper methodology minimizes the risk of overlooking critical audit
steps..

These KPIs collectively contribute to audit quality by emphasizing accuracy, efficiency, adherence to
standards, and stakeholder satisfaction. Auditors should continuously monitor and improve their
performance based on these indicators. Remember that audit quality is a collaborative effort involving the
entire audit team and the organization’s commitment to transparency and reliability.

Audit Quality Indicators


Audit Quality Indicators (AQIs) are quantitative measures about the external audit process. They are
context-specific, and can be quantitative or qualitative. When assessed together with relevant qualitative
information, they provide insights about factors that may influence audit quality. Common AQIs include:

 Timing of audit execution: This refers to the efficiency and effectiveness of completing audit
procedures within the planned timeline. Timely execution ensures that audit procedures are
conducted when they are most effective and helps prevent delays in reporting.

 Use of specialists: Specialists are experts in particular fields (e.g., tax, valuation, IT) whose
knowledge and skills are utilized during the audit to address complex or specialized areas. Their
involvement enhances the quality of audit procedures and ensures accurate evaluation of financial
statement components.

 Partner/manager leverage: This involves the appropriate allocation of responsibilities between


partners and managers. Adequate involvement of partners ensures oversight and strategic
direction, while managers handle day-to-day operations. The right balance optimizes resource
utilization and enhances quality.

 Experience of engagement team: Audit quality also improves as auditors gain experience in
conducting audits. First-year auditors are not expected to know as much about the audit process
as the audit partner who has been performing audit engagements for many years.
 Management deliverables: These are the documents and information provided by management to
the audit team. Completeness, accuracy, and timeliness of these deliverables are crucial for
conducting a comprehensive and reliable audit.

 Audit hours by areas of significant risk: Allocating audit hours based on the level of risk in
different areas helps prioritize efforts where the risk of material misstatement is highest.
Adequate time spent on high-risk areas ensures thorough examination and enhances the reliability
of audit findings.

AQIs should be use to ensure:

 A better understanding among management, the audit committee and the external auditor of their
respective roles in the audit and responsibilities related to audit quality, and their expectations of
others.
 More efficient and effective interactions between the audit committee and the auditor, as
discussions are focused on the most important areas of the audit.
 Improved knowledge and engagement in the audit process and audit quality by all members of the
audit committee due to increased information on the most important areas of the audit.
 Improved project management over the audit, including coordination and collaboration in audit
execution.
 Better information for the purposes of auditor evaluation.

MEASURING AUDIT QUALITY


Measuring audit quality involves assessing the reliability and trustworthiness of financial statement
audits. Researchers often distinguish between output-based and input-based measures of audit quality.
Output-based measures include discrepancy adjustments (DA), abnormal accruals, total accruals, and
restatement rates, while input-based measures involve factors such as audit fee ratios, partner
specialization, and audit firm size. To validate these measures, scholars analyze audit deficiencies
reported in Accounting and Auditing of high audit quality.

It is essential to recognize that measuring audit quality remains challenging because of the complexity of
the subject matter and the potential limitations of available data sources. The International Auditing and
Assurance Standards Board (IAASB) has developed an international framework called "Audit Quality
Indicators" (AQI). This framework aims to help regulators, standard setters, audit firms, and other
interested parties identify and understand key aspects related to audit quality.

The AQI focuses on four main areas:

1. Independence: Fostering independence through appropriate governance structures, policies, and


procedures within audit firms.

2. Competence and capability: Encouraging continuous professional development among staff members
and ensuring adequate resources are allocated to deliver high-quality services.
3. Quality control: Implementing robust internal controls over the audit process, including monitoring and
review mechanisms.

4. Professional skepticism: Promoting a culture where professionals critically evaluate evidence and
challenge assumptions during their work. These components serve as foundational elements for
evaluating audit quality. However, it should be noted that there isn't one single metric or indicator that can
accurately capture all facets of audit quality. Instead, a combination of different measures is typically
used to gain a more comprehensive understanding of audit quality.

Additionally, research suggests that certain characteristics of audit engagements might influence audit
quality. For instance, larger audit teams, higher levels of client involvement, and greater use of
technology have been associated with better audit outcomes. Furthermore, the presence of multiple
partners working on an engagement has also shown to positively impact audit quality. Measuring audit
quality requires considering a variety of factors, both qualitative and quantitative. While no perfect
solution exists, the AQI framework provides valuable guidance for those seeking to improve audit quality
assessment practices. It emphasizes the importance of fostering independence, promoting competency,
implementing strong quality controls, and encouraging professional skepticism throughout the entire audit
process

HOW TO CONDUCT AUDIT QUALITY


To conduct a quality audit, there are several steps that should be followed:

1.Define clear objectives and develop an audit plan that includes the audit scope, criteria, team, schedule,
methods, and resources. The audit plan should be reviewed and approved by the appropriate authorities
and communicated to all relevant stakeholders

2.To conduct a thorough document review and use a risk-based approach to identify areas that need to be
audited

3. To execute the audit by collecting information from the processes, departments, or products examined
and interviewing employees who are closely related to the quality management processes

4.To report and follow up on the audit results by preparing an audit report that summarizes the audit
objectives, scope, criteria, team, activities, findings, conclusions, and recommendations
The audit report should be reviewed and approved by the appropriate authorities and distributed to the
relevant stakeholders

In essence, corrective actions or improvement actions should be agreed upon by the auditee and
monitored and verified for implementation and effectiveness It is also important to maintain
independence, objectivity, and impartiality throughout the audit process

WAYS TO IMPROVE AUDIT QUALITY


1. Enhance professional skepticism and objectivity: Auditors should maintain a questioning mindset and
critically evaluate evidence. For example, they can challenge management's assumptions and
independently verify financial information.

2. Stay updated with auditing standards and regulations: Auditors should be aware of the latest guidelines
and regulations issued by relevant authorities. For instance, they can regularly review updates from
professional accounting bodies and regulatory agencies.

3. Conduct thorough risk assessments: Auditors should identify and assess the risks that could impact the
financial statements. They can analyze industry trends, internal control weaknesses, and economic factors
to determine the areas of highest risk.

4. Perform robust audit procedures: Auditors should design and execute audit procedures that provide
sufficient evidence to support their conclusions. This can involve testing the accuracy and completeness
of transactions, verifying account balances, and confirming the existence of assets.

5. Foster a culture of integrity and ethical behavior: Auditors should promote ethical conduct within their
organizations and maintain independence from clients. For example, they can establish policies that
prohibit conflicts of interest and encourage open communication about ethical dilemmas.

6. Invest in ongoing training and development for auditors: Auditors should continuously enhance their
knowledge and skills through training programs and professional certifications. This ensures they are
equipped to handle complex accounting issues and emerging risks.

7. Implement quality control measures to monitor and enhance audit processes: Auditing firms can
establish internal quality control systems to review and assess the effectiveness of their audit
engagements. This can involve conducting internal inspections, peer reviews, and implementing feedback
mechanisms.

PROFESSIONAL SKEPTICISM
Professional skepticism is an essential mindset and skill for auditors and other professionals involved in
evaluating information or making judgments. It involves maintaining a questioning attitude, being alert to
potential biases or misstatements, and critically assessing the evidence obtained during an audit or
investigation. Professional skepticism requires auditors to approach their work with a healthy degree of
doubt, challenging assumptions and seeking corroborating evidence to support conclusions.

It helps ensure that auditors remain vigilant and thorough in their examination of financial information,
reducing the risk of overlooking errors or fraudulent activities. Exercising professional skepticism is a
critical part of conducting quality audits. The auditor must critically assess, with a questioning mind, the
validity of the audit evidence obtained and management’s judgements on accounting estimates and
treatments.
Auditors should not:
● be over-reliant on, or readily accept, the explanations and representations of the management of
audited entities without challenging matters such as key underlying assumptions, or
● seek out evidence to corroborate estimates or treatments rather than appropriately challenging the

CHARACTERISTICS OF PROFESSIONAL SKEPTICISM.

1.Questioning Mind: Many studies in accounting equate this notion with such terms as suspicion,
disbelief, doubt, all of which have some aspects of questioning

2.Suspension of Judgement: Withholding judgment until there is an appropriate level of evidence for
conclusions is being recognised as a second important characteristic of a professional skepticism.

3.Search for Knowledge: Searching for knowledge is another trait-dependent characteristic which is
directly connected with the former one. Suspending judgment implies searching for knowledge through
collecting evidence in order to achieve deeper understanding of things. It differs from questioning mind as
this term contains some sense of doubt or disbelief. Skeptics are truly interested in broadening their
knowledge in general and they are not interested in searching for simple answers while verifying
conclusions.

4.Interpersonal Understanding: Interpersonal understanding is a fourth characteristic of the professional


skepticism. However, in contrast to the previous three, this one is not associated with how an auditor
evaluates evidence. It deals with understanding the integrity and motivation of individuals who provide
evidence. There are many incentives and opportunities for such personnel to commit fraud or provide
distorted evidence. A skeptical auditor should take into consideration that a communication with client’s
employees may be less than truthful.

5.Autonomy: This is being indicated in all well recognized auditing standards as a foundation of an
auditor profession. For example, ISA 200 states that “The auditor shall comply with relevant ethical
requirements, including those pertaining to independence, relating to financial statement audit
engagements” supporting the attribute of autonomy while performing auditing procedures.
Other auditing standards, as AU 230.08 and ISA 700.33 indicate that the auditor should remain
autonomous evaluating evidence and making decision whether collected evidence is sufficient to
render a judgment [IAASB 2010b]. Auditing researchers also underline the autonomy as an
essential attribute of an auditor.
6.Sufficient level of Self –Esteem: This enables the auditor to resist persuasion and challenge opinions of
the others. In fact, self-esteem is necessary factor allowing an auditor to remain autonomous while
performing auditing procedures. This often requires face-to-face interactions with evidence providers and
skeptics should be able to explicitly identify and acknowledge
ATTRIBUTES OF PROFESSIONAL SKEPTICISM
1. Independence: Skeptical auditors maintain independence from the parties they are auditing, ensuring
they can assess audit evidence objectively and without bias.

2. Ethical Conduct: They adhere to high ethical standards and maintain integrity in their audit work, even
when faced with difficult audit decisions.

3. Continuous Improvement: Auditors with skepticism are always looking for ways to improve their audit
processes and methodologies, which helps them stay ahead of emerging risks and challenges.

4. Communication Skills: They are effective communicators, able to articulate their audit findings and
recommendations clearly and persuasively to stakeholders.

5. Awareness of Bias: They are aware of their own biases and work to mitigate them, ensuring that their
audit judgments are based on audit evidence and not influenced by personal beliefs or preferences.

6. Adaptability: They are adaptable and able to adjust their audit approach based on new audit evidence or
changing audit circumstances.

7.Resilience: They are resilient in the face of audit challenges and setbacks, maintaining a positive
attitude and a commitment to excellence in their audit work.

Professional skepticism is characterized by inquisitiveness, analytical thinking, and a doubtful approach


in the context of auditing. Its attributes include independence, ethical conduct, continuous improvement,
communication skills, awareness of bias, adaptability, and resilience, all of which are essential for
auditors to ensure the integrity and reliability of their audit work.

How does the auditor apply professional skepticism?


The auditor is likely to apply professional scepticism at various stages from client acceptance
and at various points during the audit process, and some typical examples are given below:

 When assessing engagement acceptance – at this stage the auditor should consider
whether the management of the intended audit client acts with integrity and whether there are
any matters that may impact on the auditor being able to act with professional skepticism if they
accept the engagement, such as ethical threats to objectivity.
 When performing risk assessment procedures – an auditor should be skeptical when
performing risk assessment procedures at the planning stage of the audit. For example, when
discussing the results of analytical procedures with management, the auditor should not accept
management’s explanations at face value, and should obtain corroboratory evidence for the
explanations offered.
 When obtaining audit evidence – the auditor should be ready to challenge management,
especially on complex and subjective matters and matters that have required a degree of
judgement to be exercised by management. The reliability and sufficiency of evidence should be
considered, especially where there are risks of fraud. There may also be specific issues arising
during an audit which impacts on professional skepticism – for example, if management refuses
the auditor’s request to obtain evidence from a third party. The auditor will have to consider how
much trust can be placed on evidence obtained from management – for example, evidence in the
form of enquiry with management or written representations obtained from management. ISA
200 states that ‘a belief that management and those charged with governance are honest and have
integrity does not relieve the auditor of the need to maintain professional skepticism or allow the
auditor to be satisfied with less than persuasive audit evidence when obtaining reasonable
assurance’.
 When evaluating evidence – the auditor should critically assess audit evidence and be
alert for contradictory evidence that may undermine the sufficiency and appropriateness of
evidence obtained.

The auditor should also apply professional scepticism when forming the auditor’s opinion, by
considering the overall sufficiency of evidence to support the audit opinion, and by evaluating
whether the financial statements overall are a fair presentation of underlying transactions and
events.
Ultimately, the application of professional scepticism should reduce detection risk because it
enhances the effectiveness of applied audit procedures and reduces the possibility that the auditor
will reach an inappropriate conclusion when evaluating the results of audit procedures.

PRIMARY COMPONENTS OF PROFESSIONAL SKEPTICISM

In order to achieve the overall audit objective which is to obtain assurance that financial statements are
free from material misstatements, ISA 200 requires that the auditor needs to plan and perform the audit
with professional skepticism and apply professional judgement, recognizing that circumstances may exist
that cause the financial statements to be materially misstated. The professional standards define
professional skepticism as “an attitude that includes a questioning mind, being alert to conditions that
may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.
Skepticism involves the validation of information through probing questions, the critical assessment of
evidence, and attention to inconsistencies.
The three elements of professional skepticism are:
1. Auditor’s attributes
2. Auditor’s actions
3. Auditor’s mindset
They permeate the entire audit process and are integral to audit quality.
1. Attributes (knowledge, skills and abilities) –the audit is to be performed by a person or persons
having adequate technical training and proficiency as an auditor. Auditors should be assigned to tasks and
supervised commensurate with their level of knowledge, skills, and abilities so that they can evaluate the
audit evidence they are examining.
2. Mindset (an attitude) –the auditor neither assumes that management is dishonest nor assumes
unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less
than persuasive evidence because of a belief that management is honest. The auditor should conduct the
engagement with a mindset that recognizes the possibility that a material misstatement due to fraud could
be present, regardless of any past experience with the entity and regardless of the auditor’s belief about
management’s honesty and integrity.
3.Actions (a critical assessment)–gathering and objectively evaluating audit evidence requires the auditor
to consider the competency and sufficiency of the evidence. Since evidence is gathered and evaluated
throughout the audit, professional skepticism should be exercised throughout the audit process.

CONCEPTS OF PROFESSIONAL SKEPTICISM


1. Nature of Professional Skepticism: This concept defines professional skepticism as an attitude
that includes a questioning mind and a critical assessment of audit evidence.

2. Importance of Professional Skepticism: It highlights the significance of professional skepticism


in ensuring auditors maintain an objective and impartial attitude throughout the audit process.

3. Objectivity and Independence: Professional skepticism emphasizes the need for auditors to
maintain objectivity and independence in their judgments and decisions.

4. Risk Assessment: Auditors are required to assess the risk of material misstatement due to fraud or
error, which requires a skeptical mindset to identify and address potential risks.

5. Evidence Evaluation: Auditors should critically evaluate the sufficiency and appropriateness of
audit evidence, considering its source, reliability, and relevance.

6. Professional Judgment: Professional skepticism requires auditors to exercise professional


judgment in evaluating audit evidence and forming conclusions.

7. Documentation: Auditors should document their professional skepticism, including any concerns
raised and how they were addressed, to demonstrate compliance with auditing standards.

8. Challenges and Mitigation Strategies: The concept acknowledges the challenges auditors face in
maintaining professional skepticism and suggests strategies to overcome these challenges.

9. Regulatory Requirements: Professional skepticism is often mandated by auditing standards and


regulations, which require auditors to apply a skeptical mindset in their work.

10. Continuous Professional Development: Auditors are encouraged to engage in continuous


professional development to enhance their understanding and application of professional
skepticism.

BARRIERS TO PROFESSIONAL SKEPTICISM


Professional skepticism is crucial in various fields, including auditing, journalism, and scientific research.
However, several barriers can impede the effective implementation of professional skepticism:
1. Confirmation Bias: Individuals may have a tendency to seek or interpret information in a way that
confirms their preexisting beliefs. This confirmation bias can hinder objective evaluation and critical
analysis, preventing professionals from approaching information with the necessary skepticism.

2. Overconfidence: Professionals might become overly confident in their own judgments and abilities,
leading to a lack of questioning or challenging assumptions. This overconfidence can blind individuals to
potential errors or alternative perspectives.

3. Cognitive Dissonance: When faced with conflicting information, professionals may experience
cognitive dissonance, which is the discomfort arising from holding contradictory beliefs. This discomfort
can discourage individuals from critically examining evidence that contradicts their established views.

4. Pressure to Conform: In group settings, there may be pressure to conform to the majority opinion or
organizational culture. This conformity bias can suppress dissenting voices and hinder the expression of
skepticism, especially when challenging prevailing norms or accepted practices.

5. Time Constraints: Professionals often face time constraints, especially in fast-paced environments. This
pressure can compromise the thoroughness of their analysis and encourage shortcuts, reducing the time
available for critical questioning and skepticism.

6. Fear of Retaliation: Expressing skepticism might lead to negative consequences, such as being
ostracized, facing professional backlash, or even job loss. Fear of retaliation can deter individuals from
openly questioning decisions, procedures, or information.

7. Lack of Training: In some cases, professionals may not receive adequate training in critical thinking
and skepticism. A lack of skills or awareness regarding how to apply skepticism in their field can be a
significant barrier.

BENEFITS OF PROFESSIONAL SKEPTICISM

Professional skepticism is a critical mindset that helps professionals in various fields, such as accounting,
auditing, and consulting, to maintain objectivity and question information or assumptions. Here are some
benefits of professional skepticism:

1. Enhanced Decision-Making:
Professional skepticism helps professionals make more informed decisions by questioning assumptions,
challenging biases, and considering alternative perspectives. This can lead to better outcomes and reduced
risks.

2. Increased Reliability: By maintaining a skeptical mindset, professionals are more likely to identify
errors, inconsistencies, or potential fraud, leading to more reliable information and reports.

3. Improved Quality of Work: Professionals who are skeptical are more likely to conduct thorough
investigations, perform detailed analyses, and verify information, which can lead to higher-quality work
products.

4. Risk Management: Professional skepticism helps identify potential risks and vulnerabilities, enabling
professionals to take proactive measures to mitigate these risks and protect their organizations.

5. Ethical Conduct: A skeptical mindset promotes ethical behavior by encouraging professionals to


question the validity and integrity of information and to act with integrity in their decision-making
processes.

6. Client Trust: Clients are more likely to trust professionals who demonstrate professional skepticism, as
it shows that the professionals are diligent, thorough, and committed to providing accurate and reliable
information.

7. Continuous Improvement: By questioning assumptions and seeking alternative perspectives,


professionals can identify areas for improvement and strive for continuous learning and development.

Overall, professional skepticism is a valuable mindset that can lead to better decision-making, increased
reliability, improved quality of work, effective risk management, ethical conduct, client trust, and
continuous improvement.

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