Questioning Mindset

Introduction

►An inappropriate mindset, due to actual or perceived risk of misstatement being

low, has been identified as a causal factor leading to inconsistent evaluation or
execution of audit procedures.
►This mindset resulted in teams:
►Not performing a sufficient walkthrough and identifying all the relevant “what can go
wrongs” (WCGWs), challenging existing WCGWs and the related controls to address the
risks
►Not challenging whether the design of review controls was responsive to the identified risks
►Not identifying controls that addressed the risks associated with the identified IPE
►Over relying on the prior year testing strategy without critically evaluating the
appropriateness for the current year
►Not performing sufficient audit procedures to identify contrary evidence (i.e., only
evaluating information provided by management rather than challenging whether additional
procedures were needed to aggregate appropriate sufficient evidence)
►Most quality occurrences (QOs) where mindset was the identified issue related to
recurring inspection findings (e.g., MRCs, Estimation SCOTS).
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Learning objectives

► Discuss observations and expectations related to a

questioning mindset
► Discuss why teams may at times lack a questioning
mindset
► Discuss behaviors that demonstrate a questioning
mindset

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Activity overview

Activity Time
False Assurance video – part 1 and debrief 15 minutes

False Assurance video – part 2 and debrief/ QO case study 35 minutes

False Assurance video – part 3 and debrief/ QO case study 35 minutes

False Assurance video – part 4 and conclusion 10 minutes

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Case study background

► False Assurance video

► Hypothetical multi-year audit of a high tech company
► Classroom discussion on certain aspects of the video that highlight
issues facing our audit teams today
► Valuation of technology asset and impairment
► Related party transactions
► Mindset decisions
► Discussion of integrated audit scenarios
► Supplemental case study in part 2 and part 3
► Review fact pattern based on actual QOs
► Classroom discussion on results of these decisions and behaviors that
could have resulted in more positive outcomes

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False Assurance video – part 1 and debrief
False Assurance video – part 1 discussion

► Do you think the impairment test should be conducted on the original

acquired technology asset in isolation or should it be tested instead as part
of a wider reporting unit to include the other development assets?
► Have the auditors done enough to verify whether there is a sufficient link
between the later versions and the original technology? If not, what more
should they have done?
► How would our control testing procedures be impacted if budgeted sales
information is the basis for developing the projected financial information
(PFI) in the technology valuation that is used within management’s review
control over the impairment analysis?
► Do you believe that sufficient procedures were performed regarding the
CEO’s sister's former connection to Premintel? If not, what should the
auditors have done?

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False Assurance video – part 2 and QO case
study
False Assurance video – part 2 discussion

► If the valuation is used in a review control over the

impairment analysis, how would the independent expert’s
conclusion affect our ICFR procedures?
► How would you have handled the issue related to
Premintel? If this were an integrated audit, would that
change your considerations?
► Do you feel the extent and quality of the review carried out
by Dan regarding the Premintel reports was sufficient?
Should Joe have further challenged the review?
► What fraud risks should have been identified during the
audit team’s meeting?

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Fraud risk assessment reminders

► PCAOB Auditing Standard 2110, paragraphs 52-53 requires a

discussion among the key engagement team members (including the
Partner) about the potential for material misstatement due fraud, to
occur with an attitude that includes a questioning mindset.
► Teams need to assess risks as to how material fraud in financial
reporting could be perpetrated or concealed in order to appropriately
tailor the controls and substantive testing to the risks.
► Be specific on what types of accounts, transactions, or assertions may
give rise to the risk
► Evaluate matters that could be particularly susceptible to management
bias (e.g., estimates)
► Firm tools and enablers have been designed to be responsive in
accordance with our professional standard related to fraud.

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Case study 1: Quality occurrence

► Objective: Identify causal factors for QOs associated with

a lack of a questioning mindset and discuss behaviors
that demonstrate a questioning mindset
► Time: 10 minutes
► Instructions:
► Review the fact pattern within HO 2
► At your table, discuss the ways in which the audit team failed to
exercise a questioning mindset
► Discuss what steps could have been taken by the audit team to
prevent the QO

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Case study 1: Quality occurrence debrief

► In what ways did the audit team fail to exercise a

questioning mindset?
► What could the audit team have done differently?

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False Assurance video – part 3 and QO case
study
False Assurance video – part 3 discussion

► How would the S1D cancellations affect the year end audit
plan and, in particular, the value of technology?

► Do you think the audit team exercised the appropriate

mindset when receiving the explanation from the entity
regarding the external contractor doing the work on the IT
project?
► Should the Premintel non-issue have made Joe and Sam think
twice about raising another potential issue?
► If you were Sam, what would you have done?

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Fraud risk execution considerations

► PCAOB Auditing Standard 2301, paragraph 7 requires the auditor to

apply professional skepticism in gathering and evaluating audit
evidence, particularly in response to a fraud risk. For example:
► Modifying the nature, timing and/or extent of planned audit procedures to
obtain sufficient appropriate evidence regarding relevant assertions
► Obtaining sufficient appropriate evidence to corroborate management's
explanations or representations concerning important matters
► Our response to fraud risk includes a specific response to both
substantive testing and control testing.
► We must identify and test controls that are specifically responsive to the
fraud risk.

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Fraud risk execution considerations (cont.)

► Considerations for identification of controls that are specifically responsive to a

fraud risk:
► We need to understand and evaluate the controls responsive to the fraud risk.
► As the risk of material misstatement increases, the controls should be more
sensitive and precise.
► What are some examples of controls management could have implemented in
order to prevent or detect a risk of fraudulent payments, as illustrated in the
video?
► Reminders in performing procedures to test the effectiveness of controls
responsive to a fraud risk:
► Testing the accuracy and completeness of IPE used in the performance of the
control
► Evidence obtained from management review controls needs to be specifically
responsive to the risk
► A greater mix of testing procedures may be necessary

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Case study 2: Quality occurrence

► Objective: Identify causal factors for QOs associated with

a lack of a questioning mindset and discuss behaviors
that demonstrate a questioning mindset
► Time: 10 minutes
► Instructions:
► Review the fact pattern within HO 3
► At your table, discuss the ways in which the audit team failed to
exercise a questioning mindset
► Further, discuss what steps could have been taken by the audit
team to prevent the QO

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Case study 2: Quality occurrence debrief

► In what ways did the audit team fail to exercise a

questioning mindset?
► What could the audit team have done differently?

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False Assurance video – part 4 and
conclusion
Americas Assurance: Who we are - debrief

We are objective and inquisitive and have a skeptical mindset

throughout the audit.
► We ask probing questions and don’t stop inquiring until we’re satisfied.
► We make decisions based only on facts.

Maintaining a questioning mindset is an active effort which takes place

throughout the audit; we must continue to ask probing questions until we
understand and are satisfied with the solution.
► Rather than trusting client assertions, we must make decisions based on
facts. Inquiry is not enough, and we need to supplement our questions of
management with inspection, observation and/or reperformance
procedures to validate management assertions.

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Americas Assurance: who we are - debrief
(cont.)

We know our client’s business and relevant risks.

Obtaining a thorough understanding of the client’s business allows us to

better identify unexpected changes in an account, identify the potential
for management bias, better plan audit procedures and provide better
client service by having more effective conversations about activity in an
account.
► Without specific knowledge of the company’s strategies, policies and
processes, we leave ourselves at risk of performing insufficient testing of
significant accounts or key controls, not questioning contrary audit
evidence, not investigating reconciling items or inappropriately waiving on
differences.

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Key takeaways

► Establish the expectation that all team members exercise a

questioning mindset and critical assessment of evidence throughout
the entire audit
► Challenge the prior year work plan and ensure the plan is
appropriately detailed for each respective account/SCOT and
responsive to changes in the business and/or audit environment
► Prioritize the importance of ICFR procedures and complete control
work early enough in the audit cycle to be responsive to any issues
identified
► Our procedures and documentation need to meet professional
standards in all audit areas irrespective of risk
► Adjust supervision and review based on changes in circumstances
► Assume personal responsibility for the execution of the audit with high
quality
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Summary

► Discuss observations and expectations related to a

questioning mindset
► Discuss why teams may at times lack a questioning
mindset
► Discuss behaviors that demonstrate a questioning
mindset

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