02. Professional Skepticism and Professional Judgment in Auditing
Professional Skepticism
- Definition: An attitude that includes a questioning mind and a critical assessment of audit evidence.
- Key features:
- Recognize the possibility of material misstatement due to error or fraud.
- Do not assume management is dishonest, but do not assume unquestioned honesty either.
- Remain alert to contradictory audit evidence, conditions indicating fraud, or information that calls into question the reliability of documents.
- Applied throughout the audit, from planning to reporting.
- Especially important when evaluating management estimates, unusual transactions, and risk of fraud.
Professional Judgment
- Definition: The application of relevant training, knowledge, and experience in making informed audit decisions.
- Key features:
- Required when making decisions about materiality, risk assessment, audit procedures, and evaluation of evidence.
- Involves considering alternatives and choosing among them based on audit standards.
- Essential in determining the nature, timing, and extent of audit procedures.
Differences and Relationship
| Aspect | Professional Skepticism | Professional Judgment |
|---|---|---|
| Focus | Attitude of doubt and critical assessment | Reasoned decision-making process |
| Main function | To question evidence and management claims | To choose appropriate audit actions |
| When applied | Continuously throughout the audit | At specific decision points during the audit |
| Relationship | Foundation for sound judgment | Should incorporate skepticism |
Sample Questions
Question 1
Which of the following best describes professional skepticism?
A. The ability to make sound accounting estimates.
B. An attitude of trust in the reliability of management's assertions.
C. A questioning mind and a critical assessment of audit evidence.
D. A process for selecting audit procedures.
Answer: C
Explanation: Professional skepticism requires a questioning mind and ongoing critical assessment of audit evidence, especially in situations involving potential fraud or management bias.
Question 2
During an audit, the engagement partner uses prior experience and knowledge to determine the appropriate level of materiality. This is an example of:
A. Professional skepticism
B. Professional judgment
C. Audit sampling
D. Audit planning documentation
Answer: B
Explanation: Applying knowledge and experience to determine materiality reflects the use of professional judgment. This process is distinct from professional skepticism, which involves maintaining an alert and questioning mindset.