The application of professional judgement and professional scepticism are critical to high-quality audits. Nevertheless, they are repeatedly identified as areas of weakness during audit quality monitoring activities by the UK’s Financial Reporting Council (FRC) and ICAEW’s Quality Assurance Department (QAD). So, they have increasingly become a focus of attention and initiatives from regulators and from audit firms. 

There are many reasons for recurring weaknesses. The development, application and demonstration of appropriate professional judgement and scepticism are shaped by many factors. As well as auditing and accounting principles and standards, factors may range from the personal characteristics, mindset and behaviours of an auditor, to audit firm culture, resources, training, processes and other environmental factors – as well as barriers within the entity being audited.

Recent FRC and QAD outputs offer insights and improvement opportunities that may help auditors to adopt good practices and address many of the factors that may create impediments to the exercise of professional judgement and scepticism. But before we explore some of these, it’s worth remembering what’s required of auditors by the International Standards on Auditing (ISAs).

Solid foundations

ISA 200 sets out the requirements for the audit to be planned and performed with ‘professional scepticism’ and ‘professional judgement’ and explains their meanings for the purposes of the ISAs.

Professional judgement is defined as: “The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.”

Professional scepticism is defined as: “An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.”

Recent amendments to ISAs reinforce the need for the application of professional scepticism. For example, ISA 540, ISA 570, ISA 315 and ISA (UK) 240 all include specific requirements for the auditor to perform a ‘stand back’ and/or perform audit procedures in a manner that is not biased towards obtaining audit evidence that may be corroborative or towards excluding evidence that may be contradictory. 

Guidance from regulators

Many auditors will benefit from the information and insights in FRC papers on aspects of professional judgement and scepticism, which offer examples of behaviour drivers, good practices and practical approaches taken by firms. 

• Professional Judgement Guidance and Professional Judgement Framework (published 2022);
• What Makes a Good Environment for Auditor Scepticism and Challenge (published 2022); and
• What Makes a Good Audit (published 2021).

A March 2023 Audit & Beyond article on scepticism and challenge considers these and other resources (from the FRC and from ICAEW) that may assist auditors to strengthen and support the development and application of professional judgement and scepticism (and other resources follow this article). In many of these resources, culture and mindset loom large as potential enablers – and potential impediments.

Books and experience can help auditors to learn and develop scepticism and judgement, but there are also intangible factors to consider, such as mindset, culture and environment.

Shaping culture

An audit firm needs to establish a culture within which professional scepticism can thrive. The engagement partner needs to emphasise the importance of exercising professional scepticism to each member of the engagement team.

The engagement team briefing meeting provides an opportunity to discuss the possibility of material misstatement arising because of fraud or error, with particular attention paid to complex and difficult areas such as estimates, going concern, group considerations and related parties. Such discussions must be held with an appropriate mindset; no company is beyond reproach. Audit teams should remember that their main contact in an audited entity is often the person in the strongest position to commit a fraud.

Firms need to be consistent in their approach. Staff at all levels should be encouraged to exercise professional scepticism; they should be allowed to raise questions. As noted in the FRC’s publication ‘What Makes a Good Audit’: “To enable more junior members of the audit team to learn, team members need to feel empowered to ask questions and challenge internally.”

All team members – including the least experienced – can use their common sense to identify areas that may not immediately make sense. In addition, more senior team members should also use their professional experience to identify issues and assess the implications. Audit teams should persist in challenging management if audit concerns are not addressed. The involvement of experts or consultation with specialists must be considered when auditors face difficult areas, such as complex accounting estimates. 

Shaping mindset

The FRC’s scepticism and challenge paper includes the following comment: “Exercising judgement requires a mindset of professional scepticism and challenge and an environment that promotes auditors to exercise this mindset.”

This FRC paper also draws attention to various types of bias that can affect the application of professional judgement (and biases are explored in Intuitive judgement making and ways to improve it). For instance, it is very easy to fall into the trap of ‘availability bias’ – obtaining audit evidence that is readily available and corroborates a balance in the financial statements. However, as set out in the recently updated ISAs, the auditor cannot ignore contradictory evidence. 

There are lots of resources that provide an indication of how scepticism can be exercised and how it should be documented on the audit file, including those available from the FRC (see above) and ICAEW (see box, ‘Further resources’, below). Auditors would do well to consider these carefully: the audit team may be missing an opportunity to demonstrate how they have shown scepticism and addressed impediments to this. 

Practical barriers

The application guidance in ISA 220 also offers practical examples of some impediments to the exercise of professional scepticism, such as:

• budget constraints;
• tight deadlines;
• lack of cooperation by management;
• lack of understanding of the entity;
• difficulties in obtaining access to records; and
• overreliance on automated tools and techniques.

Auditors may find that their implementation of the revised ISA 200 and the new International Standards on Quality Management (ISQMs) may aid firms in addressing some of these barriers (as may the resources highlighted in ISQM 1 – tools for the journey). 

There are many practical steps that firms may take. Examples include: 

• communicating with entities before/early in/during an audit on what to expect overall and from particular phases such as audit closedown; 
• encouraging and reinforcing good practices, such as resisting pressure to sign off when the audit partner is not yet ready;
• considering How to improve audits with project management, workflow tools and using Audit project management software; and 
• learning from steps that a range of firms are taking to retain talent.  

While many firms will be working under pressure, due to a lack of resources, applying professional scepticism throughout an audit is essential to comply with auditing standards and to avoid costly and time-consuming mistakes. 

Making changes within the firm to remove some of these barriers should help to enable the development and application of professional scepticism that is so vital to each auditor’s professional judgement and to audit quality – and to overcome some of the potential impediments.

Simon Kettlewell, Director, HAT Group of Accountants