Explain meaning of professional judgement and professional skepticism

Professional Judgement and Professional Skepticism

Professional Judgment:  It means making informed decisions by a professional accountant
about the courses of actions that are appropriate in the circumstances during an audit
engagement, in the context of auditing, accounting and ethical standards and by applying the
relevant training, knowledge and experience.
Why Professional Judgment is necessary;
Professional judgment is essential to the proper conduct of an audit. This is because
interpretation of relevant ethical requirements and the ISAs and the informed decisions
required throughout the audit cannot be made without the application of relevant knowledge
and experience to the facts and circumstances.
Professional judgment is necessary in particular when taking decisions about:
 Materiality and audit risk
 The nature, timing and extent of audit procedures used to meet the requirements of the
ISAs and gather audit evidence.
 Evaluating whether sufficient appropriate audit evidence has been obtained to achieve
the objectives of the auditor.
 The evaluation of management’s judgments in applying the entity’s applicable
financial reporting framework and accounting policies.
 The drawing of conclusions based on the audit evidence obtained, for example,
assessing the reasonableness of the estimates made by the management in preparing the
financial statements

PROFESSIONAL SKEPTICISM:
Professional Skepticism: It refers to 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. However, it does not mean that the auditors should
disbelieve everything they are told, but they should view what they are told with a skeptical
attitude, and consider whether it appears reasonable and whether it conflicts with any other
evidence. The auditor should always maintain an attitude of professional skepticism
throughout the audit: Although the auditor cannot be expected to disregard past experience of
the honesty and integrity of the entity’s management and those charged with governance, the
auditor’s attitude of professional skepticism is particularly important in considering the risks
of material misstatement on account of changes in circumstances.
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Discuss their important to the audit work and how to improve them?

Professional Skepticism and Professional Judgment both are required to conduct the

assurance engagements properly. But both are two separate requirements and are not one and
the same and are different in their meaning and also in their application. But surely both
complement each other in auditor’s work.

Professional Skepticism

The auditor is required to maintain an attitude of professional skepticism while planning and
performing the audit engagement. Professional skepticism refers to the state of mind which
auditor must maintain to help himself in conducting audit engagement appropriately. Skeptic
mind enables auditor to recognize that circumstances may exist that cause the financial
statements to be material misstated so he should be alert and remain cautious about
such information and events that indicate the existence of material misstatement in the
financial statements.

However, skeptic state of mind does not amount to investigative state of mind. With the
skeptic mind auditor starts off with the assumption that everything is fine until something
contrary is found for which he is always alert. Whereas investigative mind starts
off straight away with doubting everything and thus requires confirmation for every
information which is not the case with skepticism. Skepticism suggests that auditor can
accept the information obtained by him unless he obtains another information which
contradicts the old information or expectation the auditor has established and only then he
should start investigating and not before.

According to the definition of professional skepticism given in ISA 200 professional

skepticism also refers to critical assessment of audit evidence. Again, critical assessment
does not mean doubting the information right at first place. Auditor places doubt on any
information only when contradictory or conflicting information is obtained.

Lastly, professional skepticism does not also mean placing doubt on the honesty of the
management. If auditor in past has found management personnel honest and integral then in
the new assignment he should not forget that. However, honest management does not release
the auditor from being skeptic in attitude.

Professional skepticism means alert to what? (ISA 200 – para A18)

Professional skepticism includes being alert to, for example:

 Audit evidence that contradicts other audit evidence obtained.

 Information that brings into question the reliability of documents and responses to
inquiries to be used as audit evidence.
 Conditions that may indicate possible fraud.
Circumstances that suggest the need for audit procedures in addition to those
required by the ISAs.
Why maintaining professional skepticism is necessary? (ISA 200 – para A19)

Maintaining professional skepticism throughout the audit is necessary if the auditor is, for
example, to reduce the risks of:

 Overlooking unusual circumstances.

 Over generalizing when drawing conclusions from audit observations.
  Using inappropriate assumptions in determining the nature, timing and extent of
the audit procedures and evaluating the results thereof.

Professional Judgment

Auditor is required to decide about many things while conducting assurance engagement. To
decide appropriately audit is required to apply his professional judgment to the matter under
consideration. Professional judgment is a skill that auditor acquires overtime and only after
acquiring such skill he can apply professional judgment. Auditor acquires this skill by
obtaining relevant:

 training
 skill; and
 experience
That is why application of professional judgment also means application of the training, skill
and experience of the auditor. And only such auditor is expected to have acquired
professional judgment whose training, knowledge and experience has enabled him to gain
such competency level that allows him to achieve reasonable judgments in a given
circumstances. In short professional judgment is circumstantial based and not every
auditor is expected to be competent for every assignment.

Application of professional judgment is essential in interpretation of relevant laws and

standards as well under particular circumstances. Professional judgment is necessary in
particular regarding decisions about:

 Materiality and audit risk.

 The nature, timing and extent of audit procedures in accordance with auditing
standards.
 Evaluating whether sufficient appropriate audit evidence has been obtained, or
further procedures are required to meet the audit objectives and the requirements
of standards.
 The evaluation of management’s judgments in applying the entity’s applicable
financial reporting framework.
 The drawing of conclusions based on the audit evidence obtained.
However, professional judgment does not mean that auditor can reach or form
conclusions on his own. Auditor always makes conclusions based on facts which are known
to the auditor. Thus it also means that professional judgment does not mean that auditor is
capable of discovering such events and misstatements in respect of which he was unable to
obtain information after applying reasonable audit procedures. Professional judgment does
not mean that auditor possess the knowledge of unknown.