Audit and Assurance Report: Professional Skepticism in Auditing

This report delves into the critical role of professional skepticism within the audit and assurance domain. It emphasizes professional skepticism as an integral aspect of the audit profession, highlighting its importance in detecting material misstatements caused by errors or fraud. The report discusses the ethical principles related to professional competence and due care and how professional skepticism aids in maintaining audit quality. It explores the barriers to implementing professional skepticism, such as overconfidence and confirmation bias, and examines how auditing standards, particularly ISA 240, guide auditors in applying skepticism. The report concludes by underscoring the significance of professional skepticism in maintaining audit quality and addressing fraud risks.

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Table of Contents
Introduction......................................................................................................................................2
Importance of Professional Skepticism...........................................................................................2
Barriers and Application of Professional Skepticism......................................................................4
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
Professional Skepticism is considered as an integral part in the audit profession (Bowlin,
Hobson and Piercey 2015). Professional Skepticism is considered as the particular attitude of the
auditors that includes questioning mind and to be alert that is important in detecting material
misstatements caused by errors or fraud; this is also helpful in the assessment of audit evidences.
The main aim of this report is to analyze and evaluate the increasing importance of professional
skepticism in achieving audit ethical principles (Hurtt et al. 2013). The report also sheds light on
legislative guidance in the process of applying professional skepticism.
Importance of Professional Skepticism
In the audit profession, Professional Competence and Due Care are considered as one of
the major ethical principles. In the presence of professional competence and due care, it is the
obligation on the auditors to maintain skills and professional knowledge while providing
professional services (Grenier 2015). At the same time, they are required to act diligently by
complying with the required laws and regulations of auditing. Most importantly, all these aspects
together help in maintaining the quality of the audit operations. In this context, it needs to be
mentioned that there is a relation between professional competence and due care and
professional skepticism. At the time of providing the auditing services, the auditors are required
to apply professional judgment in order to deal with different kinds of auditing circumstances. In
the presence of professional skepticism, the auditors of the companies become able in the
application of different kinds of professional judgments in the making of different audit
decisions like the development of audit strategies, assessment of the audit evidences, evaluation
of the judgment of the management and many others (Glover and Prawitt 2014). Thus, in the

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absence of professional skepticism, the auditors will not be able to challenge and remain alert to
certain situations and inconsistencies indicating towards the happening of material misstatements
caused by fraud or errors. Professional skepticism helps the auditors in the identification of audit
evidences contradicting other obtained audit evidences. At the same time, the auditors can also
become able to identify the audit information raising questions on the reliability of different
financial documents and the conditions indicating towards the occurrence of fraud. Most
importantly, in the presence of professional skepticism, the auditors can identify the
circumstances demanding different audit procedures as per the auditing standards (Robinson,
Curtis and Robertson 2013).
The main intention of the audit is to provide the investors with the opinion on whether the
financial statements of the companies have prepared and presented fairly and they are free from
material misstatements. Professional skepticism makes the managers in the planning and
performing of different audit procedures to find the presence material misstatements in the
financial statements (Carpenter and Reimers 2013). At the time of performing this, the auditors
are required to exercise professional due care to plan and perform audit operations along with the
preparation of audit report. Professional due care demand the auditors to exercise professional
skepticism. It needs to be mentioned that professional skepticism has major importance in some
of the specific areas inclosing the management judgment and transactions outside the normal
course of business; they are nonrecurring reserves, different financial transactions, large
measures of assets, desired accounting outcome and others. At the same time, the importance of
professional skepticism cannot be denied in the consideration of audit fraud (Kang, Trotman and
Trotman 2015). The managements of the companies have the abilities to perpetrate fraud as they
are in the position of manipulating different financial accounts of the companies. In the presence

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of this, it is the integral responsibility of the auditors to apply the concept of professional
skepticism in order to plan and perform relevant audit procedures in order to address the fraud
risks. It is required for the auditors not to be satisfied with less than persuasive evidence in the
presence of the belief the honesty of the management. Some of the important example of the
application of professional skepticism in the audit procedures are the modification of the audit
procedures in order to obtain reliable audit evidence, collection of reliable audit evidences to
confirm the explanation provided by the management about the representation of important
aspects and others (Peytcheva 2013). Thus, based on the above discussion, it can be said that
professional skepticism has major importance in achieving professional due care in auditing.
Barriers and Application of Professional Skepticism
The above discussion sheds light on the importance of professional skepticism in the
professional competence and due care. In this aspect, one most important aspect is the
application of professional skepticism by the auditors. It is the prime responsibility of the
auditors to apply various aspects of professional skepticism in the audit procedures (Brazel et al.
2016). In the application of professional skepticism, there are some major threats and these
threats need to be eradicated in the smooth application of professional skepticism.
Overconfidence is considered as a major threat of professional skepticism in the individual level
of auditing. Overconfidence refers to the tendency of the auditors to overestimate their own
abilities and not to do sufficient critical thinking about the financial information of the
companies (Knechel and Salterio 2016). At the same time, confirmation is considered as another
major threat of professional skepticism and it is the tendency of seeking the kind of information
to support the initial beliefs of the auditors. This is also an individual level threat of professional
skepticism. At the same time, threats of professional skepticism can be seen in audit engagement

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team level. The pressure to maintain a good relationship with the audit clients can become a
major barrier in the way to apply professional skepticism in the audit procedures. The latest
developments in PCAOB and IAASB have designed the standards in order to ensure the fact that
the auditors will apply various aspects of professional skepticism in the audit process and they
will not develop any relationship with the audit clients (Westermann, Cohen and Trompeter
2014). Apart from the above, there are many other threats of professional skepticism in audit. All
these threats crate significant barriers in the application of professional skepticism while
conducting the audit operations in the companies.
Hence, it can be seen that there are different kinds of threats involved in the application
of professional skepticism. However, it needs to be mentioned that the accounting and auditing
bodies have developed different kinds of auditing standards in order to guide the auditors in
proper application of professional skepticism in the audit operations. According to these
standards and principle, the auditors must apply professional skepticism in certain circumstances
of auditing. It is clearly stated in ISA 240, The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements that the it is the duty of the auditors to apply professional
skepticism at the time of obtaining reasonable assurance (Persellin, Schmidt and Wilkins 2014).
According to ISA 240.12, at the time of the application of professional skepticism, the auditors
should not consider the past honesty and integrity of the audit client. The same section also states
that the auditors must apply professional skepticism throughout the audit process by considering
the possibility of material missstements due to error and fraud (Cohen, Dalton and Harp 2014).
Apart from this, the same standard also states that it is the responsibility of the auditors to apply
professional skepticism at the time of checking the reliability of obtained information to be used
as audit evidence. According to the same act, the auditors must apply professional skepticism at

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the time of the evaluation of the management’s report on different kinds of audit related issues.
Thus, from the above discussion, it can be seen that there are different kinds of standards
available that provide the auditors with the idea where to apply professional skepticism (Farag
and Elias 2012). It is the responsibility of the auditors to apply the principles of professional
skepticism in the provided situation of auditing. The application of professional skepticism helps
the auditors to maintain the quality of audit operations.
Conclusion
The above discussion states that it is one of the major responsibilities of the auditors to
apply professional skepticism in different kinds of audit circumstances as application of
professional skepticism has vast importance in maintain professional competence and due care.
At the same time, the above discussion also shows that there are some specific barriers or threat
in the application of professional skepticism. For this reason, the existence of different kinds of
audit standers and regulations can be seen for the correct application of professional skepticism
in the audit procedures.

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References
Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation, professional
skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4),
pp.1363-1393.
Brazel, J.F., Jackson, S.B., Schaefer, T.J. and Stewart, B.W., 2016. The outcome effect and
professional skepticism. The Accounting Review, 91(6), pp.1577-1599.
Carpenter, T.D. and Reimers, J.L., 2013. Professional skepticism: The effects of a partner's
influence and the level of fraud indicators on auditors' fraud judgments and actions. Behavioral
Research in Accounting, 25(2), pp.45-69.
Cohen, J., Dalton, D. and L Harp, N., 2014. The Effect of Professional Skepticism on Job
Attitudes and Turnover Intentions within the Audit Profession.
Farag, M.S. and Elias, R.Z., 2012. The impact of accounting students’ professional skepticism on
their ethical perception of earnings management. In Research on professional responsibility and
ethics in accounting (pp. 185-200). Emerald Group Publishing Limited.
Glover, S.M. and Prawitt, D.F., 2014. Enhancing auditor professional skepticism: The
professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.
Grenier, J.H., 2015. Encouraging professional skepticism in the industry specialization era.
Hurtt, R.K., Brown-Liburd, H., Earley, C.E. and Krishnamoorthy, G., 2013. Research on auditor
professional skepticism: Literature synthesis and opportunities for future research. Auditing: A
Journal of Practice & Theory, 32(sp1), pp.45-97.

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Kang, Y.J., Trotman, A.J. and Trotman, K.T., 2015. The effect of an Audit Judgment Rule on
audit committee members’ professional skepticism: The case of accounting
estimates. Accounting, Organizations and Society, 46, pp.59-76.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Persellin, J., Schmidt, J. and Wilkins, M.S., 2014. Auditor perceptions of audit workloads, audit
quality, and the auditing profession.
Peytcheva, M., 2013. Professional skepticism and auditor cognitive performance in a hypothesis-
testing task. Managerial Auditing Journal, 29(1), pp.27-49.
Robinson, S.N., Curtis, M.B. and Robertson, J.C., 2013. A person-situation approach to the
examination of professional skepticism: consideration of time pressure and goal framing.
Westermann, K.D., Cohen, J. and Trompeter, G., 2014. Professional Skepticism in Practice: An
Examination of the Influence of Accountability on Professional Skepticism. Working paper,
California Polytechnic State University, San Luis Obispo, Boston College, and University of
Central Florida.

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