Professional skepticism is a perspective that involves an inquisitive mind and being on the lookout for situations that may likely illustrate misstatement due to fraud or error. One also needs to have a keen examination of the available evidence prior to making any meaningful decision. Professional skepticism entails being alert to a number of things. These aspects include knowledge that questions the reliability of the documents intended for use as evidence in the audit process, situations that may illustrate the possibility of fraud, audit evidence that is different from the other appraisal data obtained and situations that may suggest the need for the auditing process. Questions are asked by auditors so as to determine future consequences. Auditors also ask questions to make thorough assessments of the financial transactions in an organization.
Notably, professional skepticism is significant during auditing and planning. It enables the auditor to create an opinion whether the financial documents such as the journal entries give real and exact oversight as at a particular day. It is important in various areas of an audit that involve the use of judgment and operations outside the normal business course. Professional skepticism is important in addressing the risk of fraud. It also enhances the appropriate application of the professional judgment by the auditor. This will involve decisions concerning, the timing, nature, and extent of the procedures of auditing to be performed and if indeed enough audit evidence has been obtained.
Delegate your assignment to our experts and they will do the rest.
There are many barriers to applying skepticism. The auditors may be swayed by the company through large payments in a means that is detached from the shareholders. The auditors having little or no contact with the shareholders throughout the process hinders skepticism. Strong working relationships between the auditors and the management of companies can lead to the development of trust such that the auditors will see no need for applying skepticism. The closeness or familiarity between auditors and the business management should always be considered before auditing. Most auditing firms work hard to build lasting relationships with the firms which the audit. This leads to the auditors putting their interests first instead of those of the stakeholders. This usually leads to self- interest motivation between the auditor and audit firm and also trust and this tends to lead to a compromise in the willingness to challenge the management of the company to the level that is required.
In case study A, I would report the discrepancies in the sum of monies leaving the accounts and the amount that was actually spent in the management of the Big Four accounting firm. I would also advise the management to relieve the Chief Financial Officer since the CFO is involved in directing funds away from the company and also he would be a barrier to the auditing process as he would, intentionally, conceal the much needed information. I would further push for the management to set policies against fraud commitment and see to it that the rules are followed. In case an individual breeches the laid down guidelines, then, he/she ought to be reprimanded and a fair punishment imposed. In the case study B, since the manipulation of financial documents involves the CEO, I would report to the governing body of the company. If though professional skepticism I determine that the governing body as also involved in the alteration of the financial documents, I would engage the services of a lawyer so as to know the way forward. I would also inform the lenders and creditors to this organization about the real situation. Regarding case study C, I would report the unrealistic figures about the journal entries to the management of the company.
The key elements to apply in professional skepticism include the auditor’s attributes, approach, mindset, and eventual action to be taken. Regarding the auditor attributes, the audit should be done by an individual having the professionalism and technical knowledge of an auditor. Auditors should, therefore, be assigned tasks based on their ability, skills, and knowledge. Regarding the auditor's mindset, the auditor should not imagine that the management dishonest nor should the auditor assume its honesty without questioning. The auditor should only be swayed by evidence that is persuasive. The auditor should not base skepticism based on past judgments about the company or organization. For example, if a past audit of a company did not indicate fraud, it does not mean that a current audit will not discover misstatement due to fraud. Regarding action, evaluation of the audit evidence gathered should be done objectively by considering the sufficiency and competency of the evidence. Since evidence is being gathered throughout the process, thus professional skepticism should be done throughout the audit process.