In the discussions of audit that have accompanied the global financial turmoil of the past few years, the term “professional scepticism” has found its way into the mainstream.
Many, including this writer, may identify an uncle or other relative who could well be named a professional sceptic – but that’s not the kind of scepticism that the auditing standards are asking for.
Resorting to a rough analogy, there is an art and a science to auditing. Professional scepticism falls squarely into what could be called the art of auditing. Like good art, professional scepticism is hard to define and recognize, yet easy to criticize. In the debate over the past few years, this term seems to have become a surrogate for perceived shortcomings in audits that cannot be more specifically identified.
Professional scepticism does not belong exclusively to auditors - the capacity to assume and apply this mindset is an essential skill in almost any professional or custodial role. This would include chief executive officers and other managers, directors, regulators, public officials –the list goes on and on.
Although its importance is clear, how to adopt and apply professional scepticism in real-world situations that auditors and other professionals face is a perennially challenging and subjective matter. Much of the available guidance for auditors approaches the subject from a technical perspective, based firmly in auditing standards. However, professional scepticism at its core is a mindset, and is as much if not more a matter of behaviour and psychology, as it is of standards.
Professional scepticism is an essential skill in almost any professional role.
The auditing standards describe professional scepticism as:
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.
Compare this with modern philosophers, who would normally define a sceptic as: Someone who thinks that a belief ought to be proportional to the amount of evidence supporting it.
The philosophical view is useful in thinking about what professional scepticism means. Appropriate audit conclusions are beliefs based on the evidence obtained during the audit. An important aspect of professional scepticism is suspending judgment until there is adequate evidence to support an appropriate conclusion.
A common point of difficulty in understanding professional scepticism is distinguishing it from a suspicious or investigative mindset, which is generally accepted as not being the purpose of an audit. The philosophical definition of a sceptic makes this distinction – appropriate beliefs or conclusions are based on the evidence. This is not about rejecting the financial statements, or management’s assertions outright or, as Groucho Marx said, “Whatever it is, I’m against it!”
Recognizing the importance of professional scepticism for audit, and in many other professional spheres, CPA Australia
is undertaking a series of projects this year aimed at extending knowledge, understanding and ability in applying this essential skill, including training initiatives and research.
We are interested in holistically discussing and mapping out the challenges auditors and other professionals face in adopting professional scepticism; and how knowledge from a variety of fields, including experienced audit professionals, psychology and behavioural science, can contribute to addressing these challenges in a practical way. With further work, professional scepticism will be far easier to agree on than good art.
What does professional scepticism look like?
The auditing standards describe professional scepticism as an attitude, or mindset. This mindset is fostered in order to facilitate decisions and actions in the audit that are conducive to meeting audit objectives.
Amir Ghandar is CPA Australia's policy adviser for audit assurance.