The professional judgement of auditors may be shaped by many things. What’s required by standards such as those on auditing and ethics, an audit firm’s culture and resources and the personal characteristics and behaviours of individual auditors, are just a few examples. Clearly, an auditor’s technical skills and expertise are vital to the application of professional judgement with scepticism, but so is having the right mindset – particularly when making more intuitive judgements. 

When the Financial Reporting Council (FRC) published its Professional Judgement Guidance in 2022, mindset was at the centre of the Professional Judgement Framework it introduced. The FRC guidance highlights five aspects of mindset that are especially relevant to exercising professional judgement in an effective manner:

1. appreciation of the purpose of audit and its public interest benefits;
2. professional scepticism;
3. understanding biases and other relevant psychological factors;
4. sensitivity to uncertainty; and
5. commitment to quality.

Training and education can help to make a professionally sceptical attitude part of the auditor’s DNA. Raising awareness of the potential biases of auditors (and management of an entity being audited) plays an important role in this and, when assimilated, it can improve thoughtfully considered judgement processes as well as quicker and more intuitive judgements. 

Types of bias

There are many conscious and unconscious biases that can influence the judgement processes of even the most skilled and experienced auditors, and the FRC guidance highlights some for consideration:

• Availability bias: a tendency to place more weight on events or experiences that immediately come to mind or are readily available than on those that are not; 
• Confirmation bias: a tendency to place more weight on information that corroborates an existing belief than information that contradicts or casts doubt on that belief; 
• Groupthink: a tendency to think or make decisions as a group that discourages creativity or individual responsibility; 
• Overconfidence: a tendency to overestimate one’s own ability to make accurate assessments of risk or other judgements or decisions; 
• Anchoring bias: a tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed; and 
• Automation bias: a tendency to favour output from automated systems, even when human reasoning or contradictory information raises questions as to whether such output is reliable or fit for purpose. 

There are other biases that may also be relevant to the audit process, as highlighted in Professional scepticism and cognitive biases in audit: lessons learned from inspection findings and in Banishing bias? Audit, objectivity and the value of professional scepticism. Some of these are:

• Authority bias: a tendency to be more influenced by the opinion of an authority figure, unrelated to its actual content. The hierarchical nature of audit firms and teams makes this a long-standing problem; it also needs to be considered in relation to (audit and management) experts;
• Recency: a tendency to overemphasise the importance of the most recent information. Evidence from the last accounting period, for example, may be seen as more relevant than trends over several years when deciding which management assertions to challenge; and

• Conjunction bias: a tendency to think of specific circumstances as being more probable than general ones. This could, for example, reduce the auditor’s ability to determine which areas require greater professional scepticism, when assessing the risk of material misstatement.

In addition, selective perception, stereotyping, cognitive blind spots, cultural bias, source credibility bias, status quo bias, hindsight bias and outcome bias may merit consideration. 

The FRC notes in its Professional Judgement Guidance that when attempting to understand and mitigate the biases of individuals, various psychological factors may be important. 

Some personality traits may be detrimental to the exercise of good judgement, such as an undue fear of conflict, unwillingness to challenge figures of authority where appropriate, impatience or stubbornness. Some personality traits may support the making of effective judgements, such as perceptiveness and a willingness to consult and listen. Feelings and beliefs will also play a role in an auditor’s judgements.

Ways to manage and mitigate bias

Understanding factors that may influence conscious and unconscious bias can assist audit firms and the individual auditor in developing strategies to mitigate or cultivate such factors, as appropriate – and firms are increasingly aware of the need to proactively do so. The FRC has shared the following examples of good practices by firms and possible actions for firms: 

• introducing training modules that focus on the auditor’s mindset and behaviours, considering issues such as how to avoid confirmation bias, assessing alternative scenarios and conflicting evidence;
• using hot reviews of ongoing audits and/or a second reviewer to challenge audit judgements and probe for potential biases;
• requiring hot reviewers to focus on the culture of challenge;
• using an aide-memoire covering types of bias, red flags that could indicate insufficient challenge, and reminders of what evidence of challenge is expected; 
• explicitly alerting the engagement team to instances or situations when vulnerability to unconscious or conscious auditor biases may be greater, such as in areas involving greater judgement; and
• encouraging the auditor to actively consider the case for conclusions other than the one they have preliminarily reached, as a strategy for uncovering and mitigating biases.

Other practical approaches taken by firms include:

• making training related to the identification of bias a necessary part of the auditor’s professional development;
• psychometric assessments to help partners better understand their personality, behaviours and biases; 
• building a culture of challenge within the firm and audit teams as a technique to minimise the risks of poor judgements caused by bias; 
• using language to influence thinking. For example, by discouraging references to management as ‘the client’ and encouraging references to the ‘audited entity’, and replacing ‘confirm’ with ‘evaluate’ in audit programmes;
• increasing diversity in the firm’s intake to bring more varied life experience to audit teams and minimise groupthink;
• broadening the pool of people at the entity that auditors speak to; and 
• giving audit teams more knowledge on their own potential biases (and management incentives and biases) and their potential to hinder objective reasoning and intuitive judgement making.

EY has taken steps to ensure that the potential role of biases in professional scepticism is understood and routinely considered, by building this into its Active Scepticism Framework. This is used by all audit teams, to raise awareness of potential biases in their own decision-making and in management of the audited entity. Bob Forsyth, a Partner at EY, says: “We want our people to understand where their mind is and ask whether this is where it ought to be.”