What is professional skepticism in audit?

An Independent Auditor’s job is to give reasonable assurance that a company’s financial statements give a true and fair view. Reasonable assurance is a high level of assurance but not the absolute level of assurance due to the inherent limitations of an audit.

To achieve a high level of assurance, the International Standards of Auditing (ISA) instructs the auditor to perform professional skepticism throughout the audit.

It is essential for auditing to be able to obtain accurate evidence and assess the risk factors rightly.

Definition:

Performing professional skepticism involves having a questioning mind, critically analyzing the audit evidence, being alert to any information or behavior that indicates misstatement – either by fraud or error.

It is a behavior that is essentially required to test and verify the authenticity and preciseness of audit evidence obtained.

Without professional skepticism, the audit has low worth and doesn’t provide a high level of assurance by the auditor.

Every auditor or accountant must practice professional skepticism religiously, i.e., have a questioning mind. It is a skill used by auditors to ensure that:

• Risks of failure to notice unusual situations are lowered
• Risks of generalizing the audit opinion based on information obtained are reduced
• The assumptions made regarding the extent of audit, nature, and timing of audit procedures are appropriate for the audit engagement

Audit planning of every entity varies based on its circumstances and is made from scratch. To opt for the correct audit plan and procedures, the auditors need to have a skeptical mind.

Hence, the auditor needs to stay alert, question, and analyze the audit evidence and information received from the management and those charged with governance.

ISA 200 requires the external auditor to skeptically evaluate the reliability and truthfulness of the documents and answers to the auditor’s inquiries obtained from management and those charged with governance.

Professional skepticism is also used in evaluating the sufficiency and appropriateness of the audit evidence based on the current circumstances of the entity.

For example, audit evidence received from the warehouse manager regarding administrative expenses is inappropriate and unreliable.

Due to the time constraint of an audit, it is practically impossible for the auditor to verify all the transactions made by an entity throughout the year.

Hence, the audit is done on a sample basis, and it depends on the auditor what quantity the audit evidence must be.

While auditing, the auditor must use professional skepticism to decide on a sample quantity based on the entity’s circumstances.

Uses of professional scepticism:

The auditor can accept the information and documents as audit evidence as long as there is no contradictory information.

On the off chance that isn’t the case, the auditor shall use professional skepticism, have a questioning and alert mind to investigate the problem and figure out the solution to such contradiction.

He shall add further audit procedures to the plan to ensure the issue is resolved.

ISA 200 instructs the auditor to keep skeptical behavior during audit even if the auditor’s client has proven to be honest and integral in the past.

The auditor shall not disregard the honesty and integrity of the management and those charged with governance yet still maintain a questioning behavior to ensure nothing is overlooked because a possibility of fraud still exists due to changes in circumstance.

Conclusion:

Professional skepticism facilitates the base of the audit plan and audit procedures. It is crucial to be maintained throughout the audit since it enables the auditor to identify risks of material misstatement and how to respond to it – which is the whole point of the audit.