Once upon a time, it was easy to achieve audit quality. Purchasing a set of practice aids from a major publisher, completing all the requirements of the forms, checklists and programs, and preparing working papers for every trial balance account was the way it was done. This approach took a lot of time but it made the cheeks of “warm-glow” auditors turn pink! This “don’t worry, be happy” strategy enabled some of us to sleep at night!
Then along came the “expectation gap” standards of the mid-1980s. These standards injected a concept called “professional judgment” into our audit approaches. Basing audit approaches on worst-case risk scenarios, we learned, didn’t always qualify as professional judgment. Can you believe we actually had to begin identifying risks during planning and tailoring audit programs based on those risks?
This made many auditors uncomfortable. Not understanding which procedures to add or delete in applying professional judgment based on assessed levels of risk, we continued to default to high risk and perform all procedures on all purchased practice aids.
Twenty years passed and new risk assessment standards became effective. Audit strategies now must be designed based on assessed levels of risk of material misstatement at the assertion (account classification) level. Even more professional judgment is required! High risk should result in more audit work; low risk requires less audit work.
We get the high risk part but doing less work when risk is low causes us to grab the edge of our desks and squeeze until our knuckles turn white! We still fear missing an error or fraud so we continue doing everything! This is not professional judgment!
So what’s an auditor to do? An old playwright, G.K. Chesterton I believe, once said, “The best way out is through.” So it is for today’s auditor. Going “through” to professional judgment on audits includes these steps:
1. Know the requirements of the professional standards. We must know what the requirements are so we can do the minimum!
2. Plan unique audit strategies on each engagement for each client. Use professional risk-based judgments to determine the minimum substantive evidence necessary to evaluate financial statement assertions.
3. Decide upon the most cost-beneficial evidence collection methods and audit documentation possible in each engagement’s circumstances.
These steps will result in compliance with the requirements of current and new redrafted risk assessment standards. The auditor’s professional judgment will ensure both quality and profitability on every engagement!
Two live or on-demand webcasts in my Small Audit Series, “Using Only Key Forms” and “Just Enough Working Papers” cover these subjects in greater detail. You can download syllabuses and register by clicking the applicable box on my home page, www.cpafirmsupport.com.