Question

obtain a copy of the report by the global public policy committee, "enhancing auditor professional skepticism" (november 2013) at http://www.thecaq.org/docs/research/skepticismreport.pdf. answer the following questions. a. explain the professional skepticism continuum and articulate how it relates to the extent of audit evidence collection and documentation. b. what are some threats to individual auditor professional skepticism? how can these threats be mitigated? c. what are some common human judgment tendencies that can weaken individual auditor professional skepticism?

Answer 1

Professional Scepticism :

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 evidence.

Auditor’s exercise of professional skepticism → document

• ISA requirements : audit evidence on planning / performing / matters arising / judgments
• Significant decisions reached during discussion audit team
• Identified or suspected non-compliance with laws and regulations as result of discussions with management
• Basis of auditors conclusions
• Inconsistent information – significant matter – how addressed?
• Basis for conclusion on reasonableness subjective judgment
• Authenticity or not after further investigation

Individual Auditor − Pertains to each individual auditor on any given engagement.

Threats − Some of the potential threats to professional skepticism that may exist at the Individual Auditor level include:

• Judgment traps and biases, lack of knowledge and expertise
• Deadline pressure, inherited preferences and expectations
• Auditor character, and personal and cultural attributes
• Performance and compensation metrics and incentives that do not appropriately encourage professional skepticism

Mitigating Factors − Some of the measures in place to foster and encourage the appropriate application of professional skepticism at the individual auditor level include:

• Professional licensing and continuing education requirements
• Supervision, mentoring, review, and inspection of work and performance evaluations
• Effective planning and audit programs, including expectation setting
• Performance metrics that reward people for high quality work
• Stringent recruiting requirements
• Effective engagement partner and leadership messaging
• Training on core competencies, professional judgment, and other subjects

Common Judgment Tendencies that Can Lead to Weaken Skepticism

Overconfidence — The tendency of decision makers to overestimate their own abilities to perform tasks or make accurate assessments of risk or other judgments and decisions. Overconfidence can lead to underinvesting in understanding issues and audit objectives; insufficient challenging of management’s preferences, views, and reporting choices; limited consideration of the nature of the audit procedure and potential alternatives; or truncating evidence search, all of which can manifest themselves in terms of a suboptimal level of professional skepticism. Confirmation — The tendency to seek and overweight confirming information in the information-gathering and evaluation steps, and to favor conclusions that are consistent with initial beliefs or preferences. The confirmation tendency can bias a wide variety of auditor judgments, ranging from an auditor only seeking evidence that is consistent with a supervisor’s or client’s explanation for an unusual pattern in financial data, to placing disproportionate weight on audit evidence that is consistent with a preferred outcome.

Anchoring — The tendency to make assessments in gathering and evaluating information by starting from an initial value and then adjusting insufficiently away from that initial value in forming a final judgment. Anchoring is commonly exhibited when auditors begin the audit of a specific account by viewing the account details from the previous year or by examining unaudited balances. The auditor may be inappropriately influenced by those numbers or the auditor may unknowingly fail to sufficiently adjust away from an initial starting point, resulting in a lack of objectivity in assessing transactions, estimates, and account balances.

Availability —The tendency for decision makers to consider information that is more readily available from memory as being more likely, relevant, or more important for a judgment. The tendency limits alternatives considered or information gathered to those alternatives or information that readily come to mind. Availability can be especially common as auditors typically work with several clients. Information from recent events and audits may be fresh in the mind, and an auditor may unconsciously attempt to apply less relevant information or conclusions from prior situations to the current audit.