Professional Skepticism: The Heart of Audit

Professional Skepticism is basically an attitude of questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud. It also includes critical assessment of audit
evidence.

So most of us professional auditors develop the instinct to question numbers, the basis on which they
were calculated and do they make sense. Skepticism in essence means not to accept any answer on its
face value and verifying that same with some plausible justification.

Auditing standard 1015 entails the responsibility of the auditors to exercise professional Skepticism. It
requires the auditor to neither assume the management as dishonest Nor to assume them as being
unquestionably honest. The standards require the auditors not to be satisfied with less than persuasive
audit evidence just because the management is honest.

So what do us, as auditors do in our professional lives, do we exercise professional Skepticism? The
answer is not that simple and it depends on number of factors. In practical life, there are always
constraints which may impede the exercise of professional Skepticism such as budgets, deadlines etc.
Nowadays auditors are under constant pressures to meet deadlines, to remain within budgets which
makes it difficult for them exercise professional Skepticism in its true essence. Developing personal and
working relationships may also lead the auditors to develop trust which may result in reduced
Skepticism.

However, being to skeptic is also not the answer, there has to be a limit to the questions u asked. This
may result in over – auditing which may ultimately lead to failure to meet deadline. So the key is to
achieve a right balance. An effective auditor needs to know when to move on. The essence is to ask the
right questions, keep following up on answers and know when is the right time to move on and draw a
conclusion.

Another important aspect is how do we show in a tangible manner that professional Skepticism was
exercised. The audit documentation may be a tool to demonstrate the exercise of professional
Skepticism, they should reflect all the questions that arose during the audit and how they were
answered. Another tool may be the rationalization of the conclusion that is drawn.

What are the perquisites of developing appropriate professional Skepticism, first and foremost is a good
understanding of the entity being audit, the environment in which it operates. Assessment of risk is also
important to identify critical risks that are faced by the entity being audited.

Another important aspect is whether the responsibility to exercise professional Skepticism lies on the
shoulders of the auditors? The answer is that it is a shared responsibility and external auditor’s
professional Skepticism may be facilitated by internal auditors and Audit committees of the respective
entities by asking the right question from the management.
Keeping in view the changing environment of financial reporting and need for
enhanced audit quality, an understanding of and an ability to exercise proper
professional skepticism is important for all stakeholders who are involved in the
financial reporting process.