Professional Skepticism

An attitude that includes a questioning mind and a critical assessment of the audit evidence (Arens et al. 2010)

What is Professional Skepticism?

A. A skeptical auditor is one who "neither assumes that management is dishonest nor assumes unquestioned honesty. (AU Section 230.09) B. Skepticism means the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or brings into question the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. IFAC (ISA 200.16) C. Professional skepticism is the opposite of trust (e.g., Choo and Tan 2000; Shaub 1996; Shaub and Lawrence 1996, 1999; Quadackers 2007) which implicitly equates skepticism with distrust. D. Professional skepticism is the propensity of an individual to defer concluding until the evidence provides sufficient support for one alternative/explanation over others. Hurtt (2010) E. All of the above.
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Auditing Standards states:

The auditor should plan and perform the audit with an attitude of professional skepticism. The discussion among the audit team members should emphasize the need to exercise professional skepticism throughout the engagement, to be alert for information or other conditions that indicate that a material misstatement due to fraud or error may have occurred, and to be rigorous in following up on such indications.

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Professional Skepticism in Auditing Most auditors, whether internal or external, are very willing to think skeptically and to test. Questioning and confronting are more problematic.

You may be seen as killing efficiency. You may be seen as distrustful or impugning peoples integrity.

Suspicion, or harm prevention, is lived out by the auditor as professional skepticism. Professional skepticism is the assumption of the auditors duty to think about, test, question, and confront assertions made by management.
Adapted from Shaub 2004
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Common biases in decision making

It is important to consider biases that you and others may have in reaching judgments. By making yourself aware of these biases, and reminding yourself of them as you make key judgments, you can more effectively combat these biases and improve your decisionmaking process. These are biases to be examined in your own decisions as well as others decisions.
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Common biases in decision making

Some prominent biases that may impact judgments include:

Availability/interference Confirmatory trap Overconfidence Anchoring Groupthink Motivated reasoning

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Common biases in decision making

Availability/interference focus on information that can easily be recalled and related to a particular issue, or allow others views to influence how you address an issue. This can prevent you from considering other alternatives that may not be as readily available but that may confirm or disconfirm a particular position. Confirmatory trap Once a preliminary conclusion is developed or a view is expressed, it is easy and efficient to only consider confirmatory information and avoid information that will disconfirm or discredit this preliminary conclusion, especially when under time pressure. It is important to consider the existence of and follow up on information identified that may conflict with information used in 7 making a decision. Professional Skepticism 3/20/2013

Common biases in decision making

Overconfidence In some cases, you can be so confident in your decisions that you fail to recognize that there may be alternative points of view or consider evidence that is contrary to your thinking. Overconfidence may increase as you become more familiar with making a particular judgment. Anchoring This form of bias is exhibited when we place too much reliance on one piece of information or set of circumstances. To avoid this bias, suspend your judgment until you have considered all the alternatives.
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Common biases in decision making

Groupthink relates to situations where members of groups place a lot of emphasis on positions asserted by certain individuals, especially if they are in charge, or held by the majority of a group. can adversely impact your decision-making process by not allowing for the opportunity to identify and vet multiple positions and/or alternative points of view. Motivated reasoning When you develop preferred outcomes early in the process, you become susceptible to forms of bias that can have a significant impact on your judgment.

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Do auditors exercise sufficient professional skepticism?

SEC enforcement actions between 1987-1997 cited auditors failed to exercise due professional care in 71% of the enforcement cases and to maintain an attitude of professional skepticism in 60% of the cases. In general, this failure on the auditors part can be found throughout the sanctioned audit engagements (Beasley et al. 2001) PCAOBs 2008 review of first four years of inspections of eight largest accounting firms found deficiencies attributable, at least in part, to lack of professional skepticism when performing audit procedures and performing audit tests.
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AUDITOR CLIENT RELATIONSHIP

Biases that are inherently created by the structure of the auditor-client relationship can be amplified by other aspects of human nature.

Familiarity: People are naturally more willing to act in a way contrary to another wishes if that other person is a stranger. Clearly, this aspect of human nature can impact the professional skepticism exercised by an auditor toward a long-term client.

Personal connections only exacerbate this bias. While in some circumstances it may be true that familiarity breeds contempt, it also creates relationships and most of us are reluctant to disturb long-standing relationships.
UNCONSCIOUS HUMAN NATURE AFFECTING PROFESSIONAL SKEPTICISM, Kayla Gillan PCAOB Board Member, 1/23/07 11 Professional Skepticism 3/20/2013

Research finds:

Audit staff are the most willing to confront. Seniors are much less willing to confront, but become more willing in high risk of fraud situations. Managers are uniformly less willing to confront, and particularly so when the risk of fraud is high. Partners are sensitive to fraud motivations, except in situations where the client is very important to the firm for fees or referrals. This suggests, at a minimum, the need for auditors to be trained in effective client confrontation.
Adapted from Shaub 2004
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Enhancing Professional SkepticismCombating biases

Delay final judgment

deferring final judgment until all key facts have been gathered and evaluated allows you to objectively identify and evaluate the issue. can help prevent you from inadvertently focusing on one particular set of facts or a singular outcome. the process of changing the way an issue or thought is presented.

Generate alternatives:

Reframing

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Enhancing Professional SkepticismCombating biases

Counterfactual reasoning

Exploring what might have happened had such events not occurred can help you evaluate whether your reasoning is sound and can help identify alternative points of view. As you identify and evaluate facts, you should consider what others could reasonably argue contrary to your positions as well as why you supported one set of potential outcomes over others, as opposed to simply documenting evidence that supports your conclusion.

Document reasons and counter reasons

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