Auditors tend to get a lot of eye rolls from client personnel. After all, no one likes to have their work questioned or their errors pointed out to their bosses. Yet that questioning is foundational to the audit practice.
If auditors are not appropriately skeptical – seeking only to corroborate management’s assertions, perhaps, or rationalize evidence that doesn’t make sense – then their opinion loses its value to investors.
The Public Company Accounting Oversight Board (PCAOB) says auditors should assess “what could go wrong” with their clients’ financial statements and obtain “sufficient appropriate evidence,” which is not necessarily the most easily attainable evidence. Professional skepticism, “an attitude that includes a questioning mind,” must be applied throughout all phases of the audit and by all team members.
Subjectivity and judgment are more prevalent than ever, given the migration toward more principles-based accounting standards and the increased use of fair values in financial reporting. Professional skepticism is especially important in areas where judgment has been applied because there are more opportunities for management biases to creep in and misstatements to occur.
It also is critical in an auditor’s consideration of fraud because those who would intentionally misstate a company’s financials likely would also try to conceal their tactics.
Challenges to Professional Skepticism
Using their critical-thinking skills to apply context and perspective to clients’ financial statements is how CPAs add value to the audit process. But when busy season hits, most auditors find it challenging to shut the door and put their thinking caps on. Even if they did have the time, more thinking could lead to more questioning (read: more work).