Key Auditing Terms and Concepts

Key Auditing Terms
Auditing Concepts
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Key Auditing Terms
To: Margaret Beresford
From: John Willy
Re: Understanding of Key Auditing Terms
Dear Ms. Beresford,
I am writing this to you in regards to the research carried in relation to the key audit terms i.e.
professional scepticism, earnings management and discretionary accruals and the relation of
these concepts with the audit quality. The further section gives the clear understanding of the
said auditing terms.
Professional scepticism
Professional scepticism is an attitude that is required by the auditor to be maintained during
the entire course of the professional engagement. It requires the auditor to remain alert to all
such conditions that indicates the possibility of misstatement as a result of error or fraud on or
due to management of the entity (Hurtt, 2010). As a part of fulfilling the professional
engagements in the auditing engagement auditor must have a questioning mind to anything
that is unusual or unreasonable that he comes across while performing the audit procedures.
The application of professional scepticism enhances the ability of auditor to identify the risks
of material misstatements and also to respond adequately to all the identified risks. The
concept of professional scepticism is in close relation with basic ethical considerations of
principles of objectivity and independence. An audit engagement which is performed without
the use of concept of professional scepticism will not result in achieving the high quality
standards of auditing practice. Maintenance of professional scepticism in auditing practices
helps in ensuring that auditor do not ignore the unusual situations or oversimplify the
outcomes of audit procedures or make use of inappropriate assumptions while determining
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Key Auditing Terms
the response to the risks that are identified during the performance of auditing obligation. The
auditor must apply professional scepticism to all the phases of auditing engagement such as
acceptance of client, risk assessment procedures are performance, obtaining and evaluating
the audit evidences and so on (Nelson, 2009). The detection risk in audit is ultimately
reduced with the use of professional scepticism because the said attitude will improve the
audit procedure’s effectiveness and thereby minimises the possibility of reaching at the
inappropriate conclusion or opinion while evaluating the findings of audit procedures. The
adoption and application of a sceptical mind-set is the ultimate responsibility of every auditor
to safeguard the overall audit quality and to raise audit opinion’s credibility (Hurtt, et. al.,
2013).
Earnings management
The term earnings reflect the net income of the business in a particular period of time. It is
the most important element of financial statement of an entity as it helps the readers to assess
the financial performance as well as the financial position of the business of the reporting
entity. The stakeholders and potential investors of the company base its earnings as an
important criteria for their decision making process in relation to the matters in which they
are associated with the company. Given the significance of earnings for the business and the
users of financial statements, it can be said that the management of the entity has a great
interest in how these earnings are reported. Earnings management literally means reasonable
as well as legal decision making in relation to financial reporting so as to achieve stable
financial results. Earnings management is often confused with the illegal activities in the
areas of manipulation of financial statements so as to achieve the results that do not reflect
the true economic performance of the business. However, the concept of earnings
management typically involves selection of those generally accepted accounting procedures
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