The Importance Of Professional Skepticism In Achieving Audit Ethical Principles

Professional Skepticism and the Audit Profession

Discuss About The Influence Account On Professional Skepticism.

Professional Skepticism is considered as an integral part in the audit profession (Bowlin, Hobson and Piercey 2015). Professional Skepticism is considered as the particular attitude of the auditors that includes questioning mind and to be alert that is important in detecting material misstatements caused by errors or fraud; this is also helpful in the assessment of audit evidences. The main aim of this report is to analyze and evaluate the increasing importance of professional skepticism in achieving audit ethical principles (Hurtt et al. 2013). The report also sheds light on legislative guidance in the process of applying professional skepticism.

In the audit profession, Professional Competence and Due Care are considered as one of the major ethical principles. In the presence of professional competence and due care, it is the obligation on the auditors to maintain skills and professional knowledge while providing professional services (Grenier 2015). At the same time, they are required to act diligently by complying with the required laws and regulations of auditing. Most importantly, all these aspects together help in maintaining the quality of the audit operations. In this context, it needs to be mentioned that there is a relation between professional competence and due care and professional skepticism. At the time of providing the auditing services, the auditors are required to apply professional judgment in order to deal with different kinds of auditing circumstances. In the presence of professional skepticism, the auditors of the companies become able in the application of different kinds of professional judgments in the making of different audit decisions like the development of audit strategies, assessment of the audit evidences, evaluation of the judgment of the management and many others (Glover and Prawitt 2014). Thus, in the absence of professional skepticism, the auditors will not be able to challenge and remain alert to certain situations and inconsistencies indicating towards the happening of material misstatements caused by fraud or errors. Professional skepticism helps the auditors in the identification of audit evidences contradicting other obtained audit evidences. At the same time, the auditors can also become able to identify the audit information raising questions on the reliability of different financial documents and the conditions indicating towards the occurrence of fraud. Most importantly, in the presence of professional skepticism, the auditors can identify the circumstances demanding different audit procedures as per the auditing standards (Robinson, Curtis and Robertson 2013).

The Relationship between Professional Competence and Due Care and Professional Skepticism

The main intention of the audit is to provide the investors with the opinion on whether the financial statements of the companies have prepared and presented fairly and they are free from material misstatements. Professional skepticism makes the managers in the planning and performing of different audit procedures to find the presence material misstatements in the financial statements (Carpenter and Reimers 2013). At the time of performing this, the auditors are required to exercise professional due care to plan and perform audit operations along with the preparation of audit report. Professional due care demand the auditors to exercise professional skepticism. It needs to be mentioned that professional skepticism has major importance in some of the specific areas inclosing the management judgment and transactions outside the normal course of business; they are nonrecurring reserves, different financial transactions, large measures of assets, desired accounting outcome and others. At the same time, the importance of professional skepticism cannot be denied in the consideration of audit fraud (Kang, Trotman and Trotman 2015). The managements of the companies have the abilities to perpetrate fraud as they are in the position of manipulating different financial accounts of the companies. In the presence of this, it is the integral responsibility of the auditors to apply the concept of professional skepticism in order to plan and perform relevant audit procedures in order to address the fraud risks. It is required for the auditors not to be satisfied with less than persuasive evidence in the presence of the belief the honesty of the management. Some of the important example of the application of professional skepticism in the audit procedures are the modification of the audit procedures in order to obtain reliable audit evidence, collection of reliable audit evidences to confirm the explanation provided by the management about the representation of important aspects and others (Peytcheva 2013). Thus, based on the above discussion, it can be said that professional skepticism has major importance in achieving professional due care in auditing.                                

The above discussion sheds light on the importance of professional skepticism in the professional competence and due care. In this aspect, one most important aspect is the application of professional skepticism by the auditors. It is the prime responsibility of the auditors to apply various aspects of professional skepticism in the audit procedures (Brazel et al. 2016). In the application of professional skepticism, there are some major threats and these threats need to be eradicated in the smooth application of professional skepticism. Overconfidence is considered as a major threat of professional skepticism in the individual level of auditing. Overconfidence refers to the tendency of the auditors to overestimate their own abilities and not to do sufficient critical thinking about the financial information of the companies (Knechel and Salterio 2016). At the same time, confirmation is considered as another major threat of professional skepticism and it is the tendency of seeking the kind of information to support the initial beliefs of the auditors. This is also an individual level threat of professional skepticism. At the same time, threats of professional skepticism can be seen in audit engagement team level. The pressure to maintain a good relationship with the audit clients can become a major barrier in the way to apply professional skepticism in the audit procedures. The latest developments in PCAOB and IAASB have designed the standards in order to ensure the fact that the auditors will apply various aspects of professional skepticism in the audit process and they will not develop any relationship with the audit clients (Westermann, Cohen and Trompeter 2014). Apart from the above, there are many other threats of professional skepticism in audit. All these threats crate significant barriers in the application of professional skepticism while conducting the audit operations in the companies.

The Importance of Professional Skepticism in Achieving Professional Due Care in Auditing

Hence, it can be seen that there are different kinds of threats involved in the application of professional skepticism. However, it needs to be mentioned that the accounting and auditing bodies have developed different kinds of auditing standards in order to guide the auditors in proper application of professional skepticism in the audit operations. According to these standards and principle, the auditors must apply professional skepticism in certain circumstances of auditing. It is clearly stated in ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements that the it is the duty of the auditors to apply professional skepticism at the time of obtaining reasonable assurance (Persellin, Schmidt and Wilkins 2014). According to ISA 240.12, at the time of the application of professional skepticism, the auditors should not consider the past honesty and integrity of the audit client. The same section also states that the auditors must apply professional skepticism throughout the audit process by considering the possibility of material missstements due to error and fraud (Cohen, Dalton and Harp 2014). Apart from this, the same standard also states that it is the responsibility of the auditors to apply professional skepticism at the time of checking the reliability of obtained information to be used as audit evidence. According to the same act, the auditors must apply professional skepticism at the time of the evaluation of the management’s report on different kinds of audit related issues. Thus, from the above discussion, it can be seen that there are different kinds of standards available that provide the auditors with the idea where to apply professional skepticism (Farag and Elias 2012). It is the responsibility of the auditors to apply the principles of professional skepticism in the provided situation of auditing. The application of professional skepticism helps the auditors to maintain the quality of audit operations.

Conclusion

The above discussion states that it is one of the major responsibilities of the auditors to apply professional skepticism in different kinds of audit circumstances as application of professional skepticism has vast importance in maintain professional competence and due care. At the same time, the above discussion also shows that there are some specific barriers or threat in the application of professional skepticism. For this reason, the existence of different kinds of audit standers and regulations can be seen for the correct application of professional skepticism in the audit procedures.

References

Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4), pp.1363-1393.

Brazel, J.F., Jackson, S.B., Schaefer, T.J. and Stewart, B.W., 2016. The outcome effect and professional skepticism. The Accounting Review, 91(6), pp.1577-1599.

Carpenter, T.D. and Reimers, J.L., 2013. Professional skepticism: The effects of a partner’s influence and the level of fraud indicators on auditors’ fraud judgments and actions. Behavioral Research in Accounting, 25(2), pp.45-69.

Cohen, J., Dalton, D. and L Harp, N., 2014. The Effect of Professional Skepticism on Job Attitudes and Turnover Intentions within the Audit Profession.

Farag, M.S. and Elias, R.Z., 2012. The impact of accounting students’ professional skepticism on their ethical perception of earnings management. In Research on professional responsibility and ethics in accounting (pp. 185-200). Emerald Group Publishing Limited.

Glover, S.M. and Prawitt, D.F., 2014. Enhancing auditor professional skepticism: The professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.

Grenier, J.H., 2015. Encouraging professional skepticism in the industry specialization era.

Hurtt, R.K., Brown-Liburd, H., Earley, C.E. and Krishnamoorthy, G., 2013. Research on auditor professional skepticism: Literature synthesis and opportunities for future research. Auditing: A Journal of Practice & Theory, 32(sp1), pp.45-97.

Kang, Y.J., Trotman, A.J. and Trotman, K.T., 2015. The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates. Accounting, Organizations and Society, 46, pp.59-76.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.

Persellin, J., Schmidt, J. and Wilkins, M.S., 2014. Auditor perceptions of audit workloads, audit quality, and the auditing profession.

Peytcheva, M., 2013. Professional skepticism and auditor cognitive performance in a hypothesis-testing task. Managerial Auditing Journal, 29(1), pp.27-49.

Robinson, S.N., Curtis, M.B. and Robertson, J.C., 2013. A person-situation approach to the examination of professional skepticism: consideration of time pressure and goal framing.

Westermann, K.D., Cohen, J. and Trompeter, G., 2014. Professional Skepticism in Practice: An Examination of the Influence of Accountability on Professional Skepticism. Working paper, California Polytechnic State University, San Luis Obispo, Boston College, and University of Central Florida.