3/4/2020 The Three Key Elements of Professional Skepticism

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The Three Key Elements of Professional Scepticism

By Hernan Murdock | December 04, 2018

Professional scepticism is a critical

component of an internal auditor's duty
of care that applies throughout any
engagement.  It's an attitude that
includes a questioning mind and a
critical assessment of the
appropriateness and su ciency of audit
evidence.  It requires being alert to
conditions that may indicate possible
misstatement due to error, neglect or
fraud, and a critical assessment of audit
evidence. 
Professional care, which is closely linked to professional scepticism, is critical
during the planning, performance, and while preparing the report for every
engagement.  Auditors use their knowledge, skills, and abilities to diligently
perform, in good faith and with integrity, the gathering and objective evaluation of
evidence.
The scandals at Enron, WorldCom, Tyco, Stanford International Bank, many of the
dealings that caused the 2008 nancial collapse, and the more recent issues
a ecting Mitsubishi Materials, Kobe Steel, Wells Fargo, Theranos, and Volkswagen,
among others, have raised questions about whether auditors and inspectors have

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been su ciently sceptical in their work. The concerns of the public, some
regulators, and other stakeholders have been highlighted in the media and
continue to feed that debate.
Professional scepticism is fundamental to the role and performance of internal
auditors, and it is a crucial aspect of audit quality.  It has three elements:
1. Attributes: This refers to the knowledge, skill and overall ability of the auditor. 
Internal auditors must possess the knowledge, skills, and other competencies
needed to perform their responsibilities. 
2. Mindset: This relates to the integrity and good faith of the auditor who does not
assume honesty or dishonesty on the part of the audit client, but also recognizes
the possibility of fraud, misstatement or misrepresentation of essential facts. 
Although internal auditors can generally assume that management and
employees are honest, these same auditors should not be satis ed with less than
persuasive evidence.
3. Action: This element refers to the importance of performing a robust risk
assessment, planning the engagement based on the risks involved, ensuring
vigorous engagement supervision, and the diligent gathering and evaluation of
audit evidence.
Internal auditing best practices make it clear that objectivity and professional
scepticism are a crucial attribute of the capabilities of internal audit rms and their
sta .  This is also essential when applying the requisite judgment in selecting the
audit procedures, choosing the sampling (or 100 percent testing) methodology,
evaluating results, formulating conclusions, and the overall conduct of the audit
work.
Among the auditable areas and topics that require internal auditor scepticism are:
•    Gaining an understanding of the methods and assumptions used to determine
fair value estimates for assets and nancial instruments.
•    Evaluating the procedures over asset impairment, work in progress, and
percentage of completion calculations.
•    Examining variance and sensitivity analyses.
•    Reviewing management assumptions for calculating inventory reserves.
•    Reviewing production gures and system-generated reports.

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These procedures require more robust procedures than mere inquiry, such as
careful corroboration through document inspection, mathematical analysis,
observation, and recalculation.
While planning and conducting eldwork, internal auditors should perform
procedures and conduct testing commensurate with the related risks and key
controls, instead of making their decision based on evidence that is easier to
obtain.  The focus should be on the evidence that is more relevant and reliable,
getting enough of it (i.e., su ciency) and use corroborating information rather
than merely using, or giving undue weight to con rming evidence.
Although internal auditors are reminded to foster a positive relationship with their
clients, they should not allow the fear of con icts with management, the desire for
high post-audit satisfaction ratings, or maintaining a long-term audit client to
cloud their thinking.  Neither should deadlines, the desire to keep audit costs low
or pressure to remain within budget limit the rigor of their work. 
Third party internal audit service providers should also follow rigorous testing
procedures based on the circumstances, even though they may desire to cross-
sell, or up-sell services to their audit clients. 
Internal audit managers should encourage the audit team to con dently, yet
professionally, challenge management representations, and be actively involved in
planning, directing, and reviewing the work of the audit team.  Since most internal
audit managers have many years of experience, this expertise, experience, and
general knowledge should be leveraged during the planning, eldwork, and
reporting phases. 
Since professional scepticism is a critical component of e ective internal audits
and an essential ingredient of audit quality, internal auditors should verify through
appropriate audit procedures the veracity of the information provided and
examined.  Proper care is always required and neither time and cost constraints,
or familiarity with the client, should reduce the degree of scepticism applied. 
Internal auditors should always remain vigilant.

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