Professional Skepticism: The Heart of Audit

Katharine Bagshaw | September 6, 2018 | 1

Most of us who trained as auditors never really lose the urge to question numbers. The temptation to ask on what basis they were calculated, to generally prod and poke around, and to make sure that they are what they appear to be, becomes instinctive.

Skepticism it not just at the heart of auditing, it is in the heart of most auditors, a fact that is not obvious to outsiders given the various calls for auditors to exercise more skepticism, particularly when the pressures of deadlines and budgets are brought to bear and doing the right thing becomes more of a challenge. 

Firms are well aware of this. They use the insights of behavioral psychology, particularly as relates to the various forms of bias, to build checks and balances into the system to ensure that skepticism is in fact applied consistently throughout the audit and across the practice. 

The ICAEW’s report, Scepticism: The Practitioners’ Take, aims to move forward the debate on skepticism by offering insights from real auditors and people who work with them. Based on a series of interviews with practicing auditors, training providers and audit regulators, the report sets out the views of those with first-hand audit experience who deal with the pressures of deadlines and budgets.

It explores who is responsible for skepticism, how to improve it, and what firms are already doing to try and encourage it. These are some of the key messages:

  • Professional skepticism is at the heart of what auditors do - Without it, the audit has little value. However, the urge to use lack of skepticism as a catch-all classification for anything that is wrong in auditing or financial reporting, should be resisted. Simply calling for 'more' skepticism is neither realistic not helpful. Auditors cannot go on asking questions for ever, nor should they.  
  • There is a shared responsibility for skepticism – Professional skepticism needs to be exercised by all professional accountants, not just auditors. Preparers, in particular, need to exercise skepticism themselves before handing information over to external auditors. Outdated practices of 'gaming' the auditors, to see how far they can be pushed, is no longer acceptable. Audit committees and internal auditors need to challenge themselves, the controls they put in place, and the quality of the information they produce, before handing it over to external auditors. It is not for the auditors to prove management wrong, it is for management to support its assertions.  
  • An effective sceptic is neither a cynic nor a dupe - Exercising skepticism means not accepting the first answer at face value without following up, even if it sounds plausible. It also means not asking questions ad infinitum because real audits have deadlines. It’s about asking the right questions, following up answers and knowing when to move on.
  • Auditor working practices need to support and encourage skepticism in the field - Budgets, deadlines, working practices and methodologies should not impede the exercise of skepticism. Firms need to find better ways, including potentially using technology, to teach inexperienced junior staff what can go wrong.

ICAEW will continue to explore this issue, including seeking further examples of ‘what good looks like’, in terms of how preparers and auditors identify areas in which more skepticism needs to be applied, and what they do in such cases that they would not do otherwise.

 

Scepticism: The Practitioners’ Take is available at https://www.icaew.com/technical/audit-and-assurance/scepticism-the-practitioners-take

*This is an excerpt from a previously published article in the ICAEW publication Audit & Beyond

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Katharine Bagshaw

Deputy Chair

Katharine Bagshaw became a member of the IFAC Small and Medium Practices Committee in 2013. She was nominated by the Institute of Chartered Accountants in England and Wales (ICAEW).Ms. Bagshaw oversees ICAEW’s work on International Standards on Auditing (ISAs). She is a chartered accountant with 20 years of experience specializing in UK and international auditing standards.She wrote some of the first UK training materials on ISAs in the mid-1990s. After qualification with Ernst & Young, she worked in professional training for eight years before returning to practice with the Big 4 in Warsaw. For three years, Ms. Bagshaw acted as auditing examiner for the Association of Chartered Certified Accountants (ACCA). Since 2000, she has worked with and for the ICAEW on ISA-related projects, including the drafting of all of the ICAEW‘s responses to the International Auditing and Assurance Standards Board on its clarity exposures and the ICAEW’s ISA implementation work.Ms. Bagshaw provides input for the ICAEW to the Fédération des Experts Comptables Européens (FEE) on ISA-related matters. She is secretary to ICAEW’s ISA Implementation sub-group and its Public Company Accounting Oversight Board (PCAOB) panel. She is the author of numerous articles and publications on ISAs.

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Thembelani Kayira October 23, 2018

Well presented article here on a critical subject. Was coaching a junior today on the same after reviewing work where professional skepticism was not exercised.

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