Professional Skepticism and Professional Judgment both are required to conduct the assurance engagements properly. But both are two separate requirements and are not one and the same and are different in their meaning and also in their application. But surely both complement each other in auditor’s work.
The auditor is required to maintain an attitude of professional skepticism while planning and performing the audit engagement. Professional skepticism refers to the state of mind which auditor must maintain to help himself in conducting audit engagement appropriately. Skeptic mind enables auditor to recognize that circumstances may exist that cause the financial statements to be material misstated so he should be alert and remain cautious about such information and events that indicate the existence of material misstatement in the financial statements.
However, skeptic state of mind does not amount to investigative state of mind. With the skeptic mind auditor starts off with the assumption that everything is fine until something contrary is found for which he is always alert. Whereas investigative mind starts off straight away with doubting everything and thus requires confirmation for every information which is not the case with skepticism. Skepticism suggests that auditor can accept the information obtained by him unless he obtains another information which contradicts the old information or expectation the auditor has established and only then he should start investigating and not before.
According to the definition of professional skepticism given in ISA 200 professional skepticism also refers to critical assessment of audit evidence. Again, critical assessment does not mean doubting the information right at first place. Auditor places doubt on any information only when contradictory or conflicting information is obtained.
Lastly, professional skepticism does not also mean placing doubt on the honesty of the management. If auditor in past has found management personnel honest and integral then in the new assignment he should not forget that. However, honest management does not release the auditor from being skeptic in attitude.
Professional skepticism means alert to what? (ISA 200 – para A18)
Professional skepticism includes being alert to, for example:
- Audit evidence that contradicts other audit evidence obtained.
- Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.
- Conditions that may indicate possible fraud.
- Circumstances that suggest the need for audit procedures in addition to those required by the ISAs.
Why maintaining professional skepticism is necessary? (ISA 200 – para A19)
Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of:
- Overlooking unusual circumstances.
- Over generalizing when drawing conclusions from audit observations.
- Using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and evaluating the results thereof.
Auditor is required to decide about many things while conducting assurance engagement. To decide appropriately audit is required to apply his professional judgment to the matter under consideration. Professional judgment is a skill that auditor acquires overtime and only after acquiring such skill he can apply professional judgment. Auditor acquires this skill by obtaining relevant:
- skill; and
That is why application of professional judgment also means application of the training, skill and experience of the auditor. And only such auditor is expected to have acquired professional judgment whose training, knowledge and experience has enabled him to gain such competency level that allows him to achieve reasonable judgments in a given circumstances. In short professional judgment is circumstantial based and not every auditor is expected to be competent for every assignment.
Application of professional judgment is essential in interpretation of relevant laws and standards as well under particular circumstances. Professional judgment is necessary in particular regarding decisions about:
- Materiality and audit risk.
- The nature, timing and extent of audit procedures in accordance with auditing standards.
- Evaluating whether sufficient appropriate audit evidence has been obtained, or further procedures are required to meet the audit objectives and the requirements of standards.
- The evaluation of management’s judgments in applying the entity’s applicable financial reporting framework.
- The drawing of conclusions based on the audit evidence obtained.
However, professional judgment does not mean that auditor can reach or form conclusions on his own. Auditor always makes conclusions based on facts which are known to the auditor. Thus it also means that professional judgment does not mean that auditor is capable of discovering such events and misstatements in respect of which he was unable to obtain information after applying reasonable audit procedures. Professional judgment does not mean that auditor possess the knowledge of unknown.