Do You Have an Auditor's "Sixth Sense?"
You may be asking, “What exactly is a sixth sense?” Here is an example. A CPA firm partner was asked to prepare a proposal for an audit of a local non-profit organization. To learn more about the executive director and the organization, he arranged a meeting to discuss the organization’s needs. While the director was affable and congenial, the partner left the meeting with an uncomfortable feeling (his sixth sense!).
Shortly thereafter, the partner invited the director to join his foursome for a round of golf. During 18 holes, the partner watched with amazement as the director falsified his score on every hole! A year or so after declining the audit, a major embezzlement perpetrated by the director was discovered. The CPA’s sixth sense prevented association with a client that had low integrity and poor character!
SAS No. 99 calls this attribute “professional skepticism.” This auditing standard defines professional skepticism as “an attitude that includes a questioning mind and a critical assessment of audit evidence.” Actually, this attitude produces the ability to evaluate facts and circumstances in light of one’s experience and observations. Professional skepticism is somewhat like the skills demonstrated by the lead characters in a popular television series, Lie to Me!
Many of us were taught that our greatest audit “tools” were our eyes and ears. What we see and hear during client relationships will usually confirm our audit findings or alert us to the possibility of errors or fraud. What an auditor does with those “alerts” will either result in audit quality or audit failure!
Unfortunately, we can’t just read a book to improve our professional skepticism. As an auditor’s technical knowledge and experience grows, so must his/her ability to discern truth. Continually challenging verbal responses to client inquiries and, at the same time, considering non-verbal communication clues will improve our discernment.
Some guides to fraud detection from major publishers have contained lists of non-verbal clues to deception that may occur while interviewing client personnel. Clues such as redness in a person’s cheeks or neck, clinching of teeth, sweaty palms and the inability to make eye contact should stimulate an auditor’s sixth sense.
Professional skepticism is the key to performing effective and efficient risk-based audits and reviews. Beginning with the client acceptance and continuance evaluation and identifying risks early in an engagement, an auditor’s or accountant's professional skepticism becomes the platform upon which he/she builds a quality engagement.
In my Small Audit Series and my Basic Staff Training Series of webcasts and self-study courses, professional skepticism is the guide for applying professional judgment throughout an engagement. You can download a syllabus for over 30 of my live or on-demand, self-study webcasts on our website, www.cpafirmsupport.com.
by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs. He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms. Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations. He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.