ISA 200 deals with external auditors’ responsibilities relating the conducting the audit of financial statements. There are several objectives this standard sets to follow during the process. Similarly, it seeks to explain the nature and scope of an audit designed to enable auditors to meet those responsibilities. Among these, ISA 200 sets out various other criteria for auditors and their engagements.
One of the crucial parts of this standard is to set out the objective of audit engagements. ISA 200 starts that auditors need to exercise their professional judgment and maintain professional skepticism throughout their audits. This criterion applies to both the planning stage and any work performed during the audit process. The standard further elaborates on professional skepticism as follows.
What is Professional Skepticism in Auditing?
As mentioned, ISA 200 elaborates on professional skepticism. The standard states:
“The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated”.
However, the above statement does not define what professional skepticism in auditing is.
The definition for professional skepticism comes from the same standard. It defines the term as follow:
“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 audit evidence”.
In short, professional skepticism in auditing relates to how auditors work during the audit process.
For auditors, professional skepticism relates to both their professional work and ethical standards. It requires auditors to develop and maintain a questioning mind. Due to the nature of work that auditors perform, this mindset is highly crucial. Overall, it relates to how auditors must conduct their audits while also maintaining independence of mind.
How Does Professional Skepticism in Auditing Work?
As mentioned, professional skepticism relates to auditors’ mindset during audit engagements. By its definition given above, there are several criteria of which it requires auditors to be aware. These include being alert to conditions that may lead to misstatements due to fraud or error. Similarly, it requires auditors to assess their obtained audit evidence critically. But, most importantly, it also relates to auditors developing a questioning mindset.
During audit engagements, auditors may find themselves in various distinct circumstances where professional skepticism may be crucial. For example, auditors may come across evidence that contradicts other evidence. Similarly, they may come across situations where the sufficiency and appropriateness of the audit evidence may be questionable.
During these circumstances, being professionally skeptical will be highly necessary. If auditors fail to be critical of these situations, it may hinder their opinion. Similarly, they may overlook anomalies in the evidence or use unsuitable audit procedures. Ultimately, failing to apply professional skepticism may lead them to provide an inappropriate audit opinion.
Why is Professional Skepticism Important in Auditing?
There are several reasons it is crucial for auditors to have a questioning mind and be professionally skeptical. If they fail to do so, it can cause severe consequences, as mentioned above. Professional skepticism begins from the planning process. From there, it applies throughout the audit engagement. As mentioned, it also relates to the auditors’ ethical standards.
Professional skepticism is a critical part of audit engagements. Due to the nature of their work, auditors will often come across misinformation. Sometimes, this misinformation may come due to errors. During other times, the client’s management may actively try to distribute wrongful information to the auditors. In this case, it occurs due to fraud.
If auditors do not apply professional skepticism, they will allow this misinformation to affect their opinion. Based on that, they may reach an inappropriate conclusion. Even when auditors do not suspect to receive misinformation, professional skepticism can apply to the audit. By doing so, auditors do not disregard the management’s integrity. However, it is crucial to reach an appropriate conclusion.
How Can Auditors Apply Professional Skepticism in Auditing?
Professional skepticism has an application in various audit areas. The most vital of these is when obtaining and evaluating audit evidence. Auditors always need to consider audit evidence skeptically. When presented with information, auditors must be ready to challenge the management. This requirement is even more crucial when the evidence relates to complex areas.
Similarly, it is crucial for auditors to use professional skepticism when performing risk assessment procedures. This process occurs during the planning stage and can dictate the whole course of an audit engagement. Auditors may receive an explanation from the management during this process. Therefore, they need to treat those explanations with professional skepticism.
Lastly, professional skepticism may also be necessary when undertaking new engagements. This stage occurs before planning. When considering new clients, auditors must be skeptical of the client’s management and their integrity. Similarly, they must also consider other matters that may impact their professional skepticism.
Conclusion
Auditing standards require auditors to be professionally skeptical during audit engagements. Professional skepticism in auditing relates to having a questioning mind and being alert to events that may indicate fraud or error. It also relates to how auditors handle audit evidence. Professional skepticism is highly crucial during any audit engagement.