Principles of Auditing: Professional Skepticism - L4 - Professor Helen Brown Liburd

Principles of Auditing: Professional Skepticism
Lecture 4
Professor Helen Brown Liburd
February 7th, 2014
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TIME STAMPS
0:22 What is professional skepticism?
4:09 Auditing standards state . . .
5:32 Professional skepticism in auditing
6:25 Common biases in auditing
7:45 Common biases in decision making
9:32 Do auditors exercise sufficient professional skepticism?
10:22 Auditor-Client relationship
10:25 Research finds
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of the audit evidence.
A skeptical auditor is one who neither assumes that management is dishonest nor assumes unquestioned honesty. 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. Professional skepticism is the opposite of trust, which implicitly equates skepticism with distrust. Professional skepticism is the propensity of an individual to defer concluding until the evidence provides sufficient support (aka sufficient appropriate evidence) for one alternative / explanation over others.
Auditing standards state that 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 indicates that a material misstatement due to fraud or error may have occurred, and to be rigorous in following up on such indications.
Most auditors, whether internal or external, are very willing to think skeptically and to test certain items. Questioning and confronting, however, are more problematic, and are often seen as killing the client's efficiency and generally regarded as a distrustful person, impugning people's integrity. Suspicion, or harm prevention, is lived out by the auditor as professional skepticism. Professional skepticism is the assumption of the auditor's duty to think about, test, question, and confront assertions made by management.
It is crucial to consider biases that you (as an auditor), and others may have had 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 decision-making process. These are biases to be examined in your own decisions as well as others' decisions.
Common biases in the decision-making process that may impact judgments include availability / interference, confirmatory trap, overconfidence, anchoring, groupthink, and motivated reasoning.
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. PCAOB's 2008 review of first four years of inspections of the eight largest accounting firms found deficiencies attributable, at least in part, to lack of professional skepticism when performing audit procedures and performing audit tests.
Research finds that audit staff are the most willing to be confrontational. 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.
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