ACC802

TOPIC 2: 

Auditor Duties and

Responsibilities

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Professional Skepticism, Judgment, Decision Making and Audit Quality.

Professional scepticism
1. questioning mind,
2. being alert to misstatement due to error or fraud,
3. critical assessment of audit evidence.

Professional scepticism MUST be maintained and exercised throughout the

planning and performance of an audit.

Need to:
> question the sufficiency and appropriateness of audit evidence
> question the reliability of documents, information, explanations provided
by management
> being alert to contradictory evidence identifying and responding to risks
of fraud
> critically challenging management judgments 2
Professional Skepticism, Judgment, Decision Making and Audit Quality.

Another aspect of defining

skepticism is whether it
fundamentally consists of a set of
skills and behaviors, or whether it
also involves knowledge and
expertise or personality traits.

While some scholars lean more

toward skill and others toward
personality trait,

Best by considering professional

skepticism in terms of a
combination of personal traits,
knowledge, and skill. 3
Professional Skepticism, Judgment, Decision Making and Audit Quality.

A key to understanding, evaluating, and

appropriately addressing factors that may
either threaten or enhance professional
skepticism is to recognize that different
factors come into play at different structural
levels of the professional setting.

Research has found that auditors’ judgments

can be flawed because, like all people,
sometimes they do not consistently follow a
sound judgment process and they fall prey to
systematic, predictable traps and biases.

People, including experienced professionals

such as doctors, attorneys, and accountants,
often unknowingly use mental “shortcuts” and
simplifying strategies to efficiently navigate
complexity. 4
Professional Skepticism, Judgment, Decision Making and Audit Quality.

lack of knowledge and experience can affect the appropriate exercise of professional
skepticism.

use of the apprenticeship model in public accounting involves the use of relatively
inexperienced junior auditors whose lack of relevant knowledge and process expertise
can limit their ability to effectively apply professional skepticism.

Junior auditors in some circumstances struggle to understand technical accounting

and auditing standards, audit firm policies and procedures, jargon, terms, or underlying
economics.

substantial cognitive effort applied to simply understand the issues and apply an audit
methodology they adopt an “understanding mindset” rather than a “challenging” or
“questioning” mindset and may have difficulty challenging management’s views and
preferences.

This threat points to the importance of mentoring junior auditors and maintaining a
rigorous level of supervision and review by more experienced auditors
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Professional Skepticism, Judgment, Decision Making and Audit Quality.

Auditors need to be alert to:

audit evidence that contradicts other audit evidence obtained;

 information that brings into question the reliability of documents

and responses to inquiries to be used as audit evidence;

conditions that may indicate possible fraud;

intentional or unintentional management bias;

possible management override of internal controls; and

other circumstances or changes in circumstances that suggest the

need for audit procedures in addition to those initially planned. 6
Professional Skepticism, Judgment, Decision Making and Audit Quality.

Professional scepticism is critical in auditing

estimates and in considering the appropriateness of
accounting treatments and policies under
International Financial Reporting Standards (IFRS).

Auditors are required to evaluate whether the key

assumptions used by management in developing
estimates are reasonable and appropriate.

Presentation of Financial Statements requires

specific disclosures in financial reports for sources
of estimation uncertainty and management's
judgments about accounting policies with the most
significant impact on amounts in the financial
report
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 Professional Skepticism, Judgment, Decision Making and Audit Quality.

Professional scepticism often

involves changing the nature and
extent of audit procedures and it is
important that partners and staff do
not compromise professional
scepticism and audit quality in the
effort to meet deadlines and
budget pressures.

It is also important to properly

document the work undertaken,
the conclusions reached and the
reasons supporting those
conclusions.
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Professional Skepticism, Judgment, Decision Making and Audit Quality.

The IAASB’s International Standards on

Auditing (ISAs) recognize the importance of
professional skepticism.

Adopting and applying a skeptical mindset is

ultimately a personal and professional
responsibility to be embraced by every
auditor.

It is an integral part of the auditor’s skill set

and is closely interrelated to the fundamental
concepts of auditor independence and
professional judgment and contributes to
audit quality.
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Professional Skepticism, Judgment, Decision Making and Audit Quality.

Professional skepticism – essential attitude

needed by auditor’s i.e. ability to identify
and respond to conditions that may
indicate possible misstatement.

Being alert for audit evidence that

contradicts other audit evidence or that
brings into question the reliability of
information obtained from management
and those charged with governance
(TCWG).

This critical assessment is necessary in

order for the auditor to draw appropriate
conclusions.
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Professional Skepticism, Judgment, Decision Making and Audit Quality.
In forming an opinion, the auditor demonstrates
professional skepticism by critically assessing
audit evidence to determine if the financial
statements are free from material misstatement .

Evaluation includes consideration of the

qualitative aspects of the entity's accounting
practices, including indicators of possible bias in
management's judgments (Forming an Opinion
and Reporting on Financial Statements).

Auditors need to apply a questioning mind to

reduce the risk that the auditor will fail to detect
and appropriately respond to indications of fraud,
management bias, or material misstatement.
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Professional Skepticism, Judgment, Decision Making and Audit Quality.

Today’s financial reporting seeks to address

information that is more relevant to users.

More judgment and increased subjectivity is

involved – management’s accounting and
reporting decisions (for example in relation to
some fair value measurements).

Entities today face difficult economic conditions

that lead to unique financial reporting and
auditing challenges.

The importance of professional skepticism by

auditors, especially in areas of financial reporting
that are complex or highly judgmental.
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Professional Skepticism, Judgment, Decision Making and Audit Quality.

Aftermath of the 2008 – 2009 global

financial crisis, recent audit inspection
reports in various jurisdictions have noted
areas, such as fair values, related party
transactions, and going concern
assessments – regulators and oversight
bodies believe that auditors should have
more clearly demonstrated professional
skepticism.

It is therefore in the public interest to re-

emphasize to both auditors and others the
important role that professional skepticism
has to play in audits of financial
statements. 13
Professional Skepticism, Judgment, Decision Making and Audit Quality.

The meaning of professional judgment

and its application in an audit
environment continue to be subjects of
interest – by auditing and accounting
faculty, students, standard setters,
regulators and auditing professionals
alike.

Accounting frameworks calls for

increased judgment by preparers of
financial statements, the auditor assessing
those judgments will in turn need to
apply his or her professional judgment. 
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Professional Skepticism, Judgment, Decision Making and Audit Quality.

Phrase “professional judgment” is not new to the

accounting and auditing profession;

Increased emphasis on the importance of professional

judgment as a result of regulation, standard setting,
inspections, and a move toward more principles – based
accounting and auditing standards. 15
Professional Skepticism, Judgment, Decision Making and Audit Quality.

what characteristics distinguish an

exceptional professional from one who is
just average?

One key distinguishing feature is the

ability to consistently make high-quality
professional judgments, the bedrock of
the accounting and auditing professions.

additional knowledge about common

threats to good judgment, together with
tools and processes for making good
judgments, can improve the professional
judgment abilities of both new and
seasoned professionals 16
Professional Skepticism, Judgment, Decision Making and Audit Quality.

Professional judgment – process used

1.Reach a well-reasoned conclusion
2.Based on the relevant facts and circumstances available at that time.

A fundamental part of the process is the involvement of individuals with

sufficient knowledge and experience.

Professional judgment involves the identification, without bias, of

reasonable alternatives;
careful and objective consideration of information that may seem
contradictory to a conclusion is key to its application.

Professional judgment is not an arbitrary decision, a substitute for

professional skepticism, or a method to rationalize a particular result.
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Professional Skepticism, Judgment, Decision Making and Audit Quality.

Professional judgment – critical to

efficiently and effectively planning,
performing, and concluding in an
audit.

Auditors use professional judgment to

focus on the most important aspects of
an audit; to determine the nature,
timing, and extent of audit procedures;
and to appropriately challenge the
accounting, reporting, and other
conclusions reached and financial
statement assertions made by
management. 18
Professional Skepticism, Judgment, Decision Making and Audit Quality.
Due to auditor’s professional
responsibilities and the regulatory
environment – judgments will most likely be
challenged.

Knowledgeable, experienced, and objective

persons can reach different conclusions in
applying professional standards despite
similar facts and circumstances.

Does not mean that one conclusion is right

& other is wrong.

Appropriate questioning to understand the

procedures performed and basis for
conclusions reached .    19
Professional Skepticism, Judgment, Decision Making and Audit Quality.

FIJIAN CONTEXT: When we check the

new 2015 Companies Act for Fiji we find
that both auditors and directors must
display Professional Scepticism.

The Act clearly states that after one has

become a director or auditor of a
company – the decisions he/she made
during their tenure with the company will
be held against them.

Therefore directors and auditors need to

display professional skepticism to avoid
prosecution of failed ventures or
decisions they instigated. 20
 Considerations When Applying Professional Judgment
IDENTIFY ISSUE:

Identify the accounting or auditing issue requiring the use of

professional judgment. Consider the following:
Has the issue been sufficiently framed?

Are there any related issues that need to be considered in the

process?
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Considerations When Applying Professional Judgment
Evaluation of evidence
(e.g., does the evidence
obtained from
confirmations, combined
with other audit evidence,
provide sufficient
appropriate audit evidence
to determine whether
accounts receivable is
fairly stated)

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 Considerations When Applying Professional Judgment.
GATHER THE FACTS:
Objectively obtain a thorough understanding of
the relevant facts and information available
concerning the transaction, event, or situation.
Consider the following:
Have source documents & other materials
been examined, knowledgeable client personnel
interviewed & other available sources of
information considered?
Were the appropriateness and reliability of the
assumptions and data to be used in the analysis
of the transaction or situation sufficiently
assessed, tested, and objectively challenged by
obtaining sufficient competent evidence?
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Considerations When Applying Professional Judgment.
REVIEW RELEVANT LITERATURE:
Identify the accounting or auditing literature (or
other standards and rules) relevant to the issue and
the different sources of professional auditing and
attestation pronouncements. Consider the following:
•Has the relevant accounting or auditing standard
been identified and reviewed, recognizing that
reference to more than one authority may be
appropriate to address the issue?
•Have the underlying principles in the relevant
accounting or auditing literature been considered?
•One particular authority may not address the issue
directly, have other pronouncements or literature, by
analogy, been considered as appropriate?
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 Considerations When Applying Professional Judgment

ANALYZE ISSUE:
Apply the applicable accounting or auditing literature to
the relevant facts and other information concerning the
transaction, event, or situation and assess the most
appropriate accounting treatment or auditing approach
under the circumstances.

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Considerations When Applying Professional Judgment

Estimating probabilities (e.g.,

determining whether the
probability-weighted cash flows
used by a company to determine
the recoverability of long-lived
assets are reasonable) •

Deciding between options (e.g.,

audit procedure choices, such as
inquiry of management,
inspection, or confirmation)

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 Decision Making and Audit Quality.

The auditor is expected to

a.gather evidential matter,
b.analyse complex systems
c.come to difficult decisions about
ethical and accounting matters.

One might assume then that educators

would prepare auditing students for
this demanding role – however
because of the school curriculum,
students are only taught theory with
little or no hands on experience.
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Decision Making and Audit Quality.
The quality of financial data is
generally higher than that of other
data, because these data are collected
according to professional accounting
rules and are subjected to strong internal
controls and a formal audit regime.

The quality of nonfinancial data can be

more variable, because internal controls
for their recording and preparation are
often less developed.

There is often also less ownership of this

data by those charged with governance.
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 Decision Making and Audit Quality.
Good quality data are the essential
ingredient for reliable performance and
financial information.

The data must be fit for purpose,

representing in an accurate and timely
manner an organisation’s activity.

At the same time, a balance must be

achieved between the importance of
the information need and the cost of
collecting the supporting data with the
necessary accuracy, detail and
timeliness.
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Decision Making and Audit Quality.
Capability of audit judgment enhances auditors'
decision-making more accurately and timely
under uncertainty, risk and solution
effectiveness for auditors' opinion.

Implying to auditors who are constrained

themselves to credibility and reliability audit
report as expertise judgment will increase
acceptance from financial statement users who
are concerned with the audit success.

On every engagement, the auditor judge matters

like the competency of the auditor's
management, effectiveness of the auditor's
information system architecture, and the
significance (materiality) of elements of the
financial statements. 30
 Decision Making and Audit Quality.
Making decisions is, not easy as there is so much accumulated
information and tying it all together can be a challenge. Decision
making can be hard. Most decisions involves some conflict or
tradeoff.

The challenging part – selecting the best decision given the

information that you have gathered to assist with the decision.
Tendency is to put off the decision by concluding that you need more
information causing the audit to drag on and can ultimately cause the
auditor to feel pushed to the wall as they now must make a decision
because the client needs their financial statements immediately.

Clients want their auditor to be strong and effective decision makers.

Waffling around causes the client to lose confidence in their auditor.

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 Decision Making and Audit Quality.
There are six key characteristics of good
quality data:

Accuracy
Validity
Reliability
Timeliness
Relevance
Completeness

While assurance about the quality of

data can also be obtained by testing the
data themselves, the results of such data
testing can provide only a snapshot of
the quality of a small amount of data at a
specified point in time 32
Decision Making and Audit Quality.

Public bodies can show their

commitment to data quality by
taking seriously the process of
preparing reported information,
particularly for external reporting.

The most fundamental step is to

ensure that data supporting
reported information are actively
used in the decision making
process, rather than being
produced as a secondary
administrative requirement
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 Propose the factors pertaining to the quality of an audit
The turbulent events of the global financial crisis
have highlighted the critical importance of
credible, high - quality financial reporting, and
have demonstrated the importance of audit quality.

The external audit plays a major role in

guaranteeing the quality of financial reporting
around the world, whether in the context of the
capital markets, the public sector or the private or
non-public sector.

In addition, it constitutes an important part of the

regulatory and supervisory infrastructure, and is
consequently an activity of significant public
interest, being a significant part of the financial
environment because it aims to provide
stakeholders with a true and fair view of the
veracity of a company’s annual reports
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Propose the factors pertaining to the quality of an audit

Audit quality plays an essential

role in maintaining an efficient
market environment: external
audits performed in accordance
with high quality auditing
standards can promote
appropriate implementation of
accounting standards by reporting
entities and help ensure that their
financial statements are reliable,
transparent and useful to the
market place, thus enhancing
market confidence.
35
 Propose the factors pertaining to the quality of an audit
Palmrose (1988) considers audit
quality in terms of levels of assurance.
Starting from the premise that the audit
is carried out to provide assurance
regarding financial statements, audit
quality is an indicator of the likelihood
that financial statements are free of
material misstatements.

Effectively, this definition takes the

results of the audit, and uses the
reliability of the audited financial
statements as a reflection of audit
quality
36
Propose the factors pertaining to the quality of an audit
Audit size, auditor tenure, industrial
expertise, audit fees, economic
dependence, reputation and costs of capital
have all been used as a measure of audit
quality.

Ghosh and Mood (2005) claimed that

auditor tenure might have a negative effect
on audit quality, as long-serving auditors
may compromise their independence to
maintain the relationship with their
clients, while Wooten (2003) finds that
firms with several clients in the same
industry have a greater insight into the
specific audit risks particular industry may
be subject to. 37
 Propose the factors pertaining to the quality of an audit
FIJIAN CONTEXT:
For audit to be of quality, auditors must
follow the 2015 Companies Act (CA).

The 2015 Act stipulates that all accounts

to be prepared in accordance to FIA
requirements.

Current FIA directive states that all

accounts to be prepared using IFRS.

So in addition to International Audit

Standards – need to be in line also with
2015 CA, RBF policies, SPSE listing
public companies & IFRS 38
 QUOTE

'Live as if you were to die tomorrow. Learn as

if you were to live forever’

Mahatma Gandhi……
 ACC802

End of TOPIC 2

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