Professional scepticism in auditing means having a questioning mind. It is critically assessing evidence in auditing. It ensures that auditors do not take information at face value. This also means that auditors must evaluate evidence intently before coming to conclusions. It, in turn, prevents fraudulent activity, errors, and misstatements in numbers.
Professional scepticism in auditing means a spirit of doubt when reviewing financial statements. All auditors must have the habit of verifying information and not assume anything is correct. Financial statements can sometimes be prepared and presented misleadingly. Sometimes exhibiting inconsistencies and evidence of fraud. It also includes having a dignified distance from unfair or fraudulent practices in the auditing process. In short, it makes one’s financial reports fairer and more accurate.
What is Professional Scepticism in Auditing?
Professional scepticism in auditing comprises an auditor’s questioning. It is a critical evaluation of financial statements. An auditor should not have blind faith in the management or assume that financial information is accurate. It is essential for auditors not only to verify the facts. But also to ensure that financial reporting is free from material misstatements.
Professional scepticism in auditing relates to the attitude of an auditor viewing all financial statements. It is about the principle of “infallibility of numbers”. Through fact, deduction, questioning, and proving or disproving any fact or assumption. An auditor’s actions include examining financial transactions for professional scepticism.
Features of Professional Scepticism in Auditing
Auditors will check for inconsistencies and/or errors or misappropriated activities, as they are currently involved in detecting misstatements in financial records. An auditor must collect sufficient evidence before making an opinion and account for any possible bias or misrepresentation in the data collected.
- Questioning Mind: Always ask and take challenges to certain assumptions.
- Critical Assessment of Evidence: It must evaluate on reliability and relevance of information.
- Independence: Must not be biased by management and outside pressures.
- Alertness towards Fraud Risks: They should always keep themselves alert. To the possibility of fraud or manipulation.
- Adequate Evidence Collection: Sufficient proof by auditors before arriving at a decision.
Importance of Professional Scepticism in Auditing
Professional scepticism plays a significant role in auditing. Because it helps the auditor detect fraud and errors, the absence of this trait may lead an auditor to ignore certain information that has a bearing on the financial statements. Scepticism is the ingredient that ensures due care and diligence in performing the auditing job.
The exercise of professional scepticism by auditors. It raises the quality of financial reporting. It guarantees that companies do not present misleading or even fraudulent financial records. This helps to bolster public confidence in financial reports. Upon which investors and stakeholders base their decisions.
Importance of the Concept of Professional Scepticism
Auditors will check for inconsistencies and/or errors or misappropriated activities. They are currently involved in detecting misstatements in financial records. An auditor must collect sufficient evidence before making an opinion. It accounts for any possible bias or misrepresentation in the data collected.
- Improves the Audit: Sceptical auditors know the difference between an accurate report and a half-truth.
- Protects investors and other stakeholders: Ensure companies provide honest financial statements.
- Strengthens Regulatory Compliance: It pushes organisations to comply with requirements for financial reporting.
- Enhances The Credibility Of The Auditor: Auditors that demonstrate scepticism over time develop a reputation of being reliable and accurate.
Examples of Professional Scepticism in Auditing
Examples of professional scepticism in auditing show how auditors apply a questioning mindset. Auditors do not accept financial data at face value. They verify information, challenge assumptions, and collect sufficient evidence.
Unusual Revenue Recognition
A company reports unusually high revenue at the end of the year. The auditor noted it and questioned the transactions. Upon investigation, the auditor discovered that the company recorded sales in anticipation of fulfilment or before a credible inventory. The company had done this to portray a good view of its financial position. Using professional scepticism, the auditor identified the misstatement in the financial statements.
Checking Inventory Valuation
A company claims to have much inventory on its financial statement, so the auditor goes to the warehouse to check it. Upon inspection, the auditor found that some of the inventory was damaged and would not be usable. The value of the company’s inventory was overstated. Professional scepticism then helped the auditor find the truth.
Accounts Receivable Verification
A company reports a high amount of accounts receivable. The auditor questions why the company is not receiving any cash. Upon checking, the auditor found out several receivables carry amounts from long ago, and some customers were doubtful about paying. The auditor would insist that the company restate its financial records.
Inquiry into Irregular Expenses
A company announces an unusual increase in expenses. Seeing that the auditor examines the receipts and invoices and finds some expenses unrelated to business pursuits. There were missing invoices, and some payments were made to unknown vendors. The auditor reported the findings and suggested further actions.
Relevance to the ACCA Syllabus
Professional scepticism is essential for ACCA students as it applies to auditing, financial reporting, and assurance. The ACCA syllabus emphasises that auditors should question. The integrity of financial statements and identify risks of material misstatements due to fraud or error. The syllabus includes papers such as Audit & Assurance (AA) and Advanced Audit & Assurance (AAA). It is an important subject within the ethical and professional judgment framework.
Professional Scepticism ACCA Questions
Q1: Why is professional scepticism essential in an audit?
A) To accept all management representations as truthful
B) To ensure auditors maintain an attitude of doubt and inquiry
C) To increase efficiency by reducing audit procedures
D) To comply with financial reporting standards
Ans: B) To ensure auditors maintain an attitude of doubt and inquiry
Q2: Which of the following best describes an example of professional scepticism?
A) Accepting all financial statements at face value
B) Reviewing and questioning management’s assumptions in financial reporting
C) Assuming all financial statements are fraudulent
D) Trusting internal audit findings without further verification
Ans: B) Reviewing and questioning management’s assumptions in financial reporting
Q3: In the context of auditing, professional scepticism requires an auditor to:
A) Assume that management is always honest
B) Design audit procedures to detect fraud and material misstatements
C) Rely solely on previous year’s audit findings
D) Ignore conflicting audit evidence
Ans: B) Design audit procedures to detect fraud and material misstatements
Q4: According to ISA 200, professional scepticism should be applied when:
A) Planning and performing an audit
B) Only when fraud is suspected
C) When preparing financial statements
D) When management requests it
Ans: A) Planning and performing an audit
Q5: An auditor exercising professional scepticism would most likely:
A) Accept all documentation provided by management without question
B) Investigate inconsistencies and obtain sufficient audit evidence
C) Assume that all transactions are fraudulent
D) Limit the audit procedures to reduce costs
Ans: B) Investigate inconsistencies and obtain sufficient audit evidence
Relevance to US CMA Syllabus
Professional scepticism applies to internal controls, risk management, and financial statement analysis in the CMA context. Hence, it ensures management accountants can assess financial information critically, discover errors, and discourage fraudulent reporting. This is especially stressed in Internal Controls and Risk Management in Part 1 of the CMA exam.
Professional Scepticism US CMA Questions
Q6: How does professional scepticism benefit management accountants?
A) It helps them accept financial reports without question
B) It enables them to assess financial data and detect irregularities critically
C) It reduces the need for internal controls
D) It eliminates all risk of fraud
Ans: B) It enables them to assess financial data and detect irregularities critically
Q7: When analyzing variances in financial statements, professional scepticism involves:
A) Accepting variances as a regular business occurrence
B) Investigating unexpected variances for potential errors or fraud
C) Ignoring small discrepancies to save time
D) Only relying on management’s explanation
Ans: B) Investigating unexpected variances for potential errors or fraud
Q8: A management accountant demonstrating professional scepticism should:
A) Ignore information from external sources
B) Validate financial information before making decisions
C) Assume all reported figures are accurate
D) Eliminate all subjective judgment in financial reporting
Ans: B) Validate financial information before making decisions
Q9: In risk management, professional scepticism helps CMAs to:
A) Accept risks without further evaluation
B) Critically assess the likelihood and impact of financial risks
C) Assume all financial risks are low
D) Rely solely on past trends for risk assessment
Ans: B) Critically assess the likelihood and impact of financial risks
Q10: Which of the following is an example of applying professional scepticism in cost accounting?
A) Relying solely on historical cost data
B) Investigating significant deviations in cost allocations
C) Accepting budget assumptions without review
D) Avoiding detailed variance analysis
Ans: B) Investigating significant deviations in cost allocations
Relevance to the US CPA Syllabus
The US CPA syllabus provides a comprehensive study of professional scepticism, for instance, in the Auditing and Attestation (AUD) section. It requires independence in CPAs and a critical evaluation of financial information for fraud, error, or misstatement detection. In this respect, corporate governance and the code of ethics are also important.
Professional Scepticism US CPA Questions
Q11: Professional scepticism in audit engagements is required because:
A) Auditors must assume management is always truthful
B) It helps auditors detect fraud and material misstatements
C) It reduces the need for audit documentation
D) It allows auditors to complete the audit faster
Ans: B) It helps auditors detect fraud and material misstatements
Q12: According to the AICPA Code of Conduct, professional scepticism is necessary to:
A) Ensure strict adherence to GAAP
B) Maintain an independent mindset in auditing
C) Minimize workload during audits
D) Eliminate all financial risks
Ans: B) Maintain an independent mindset in auditing
Q13: When reviewing audit evidence, a CPA exercising professional scepticism should:
A) Ignore contradictory evidence
B) Seek additional supporting evidence when findings are inconsistent
C) Accept management representations without verification
D) Reduce audit testing based on prior year results
Ans: B) Seek additional supporting evidence when findings are inconsistent
Q14: Which of the following statements about professional scepticism is correct?
A) It requires auditors to assume all clients are committing fraud
B) It involves a questioning mindset and critical assessment of evidence
C) It eliminates the need for external confirmations
D) It allows auditors to rely completely on internal controls
Ans: B) It involves a questioning mindset and critical assessment of evidence
Q15: A CPA exercising professional scepticism in a financial audit will:
A) Reduce the extent of substantive procedures
B) Investigate inconsistencies in financial records
C) Rely only on the client’s explanations
D) Accept assumptions without verification
Ans: B) Investigate inconsistencies in financial records
Relevance to the CFA Syllabus
Professional scepticism is an essential skill for CFA candidates, especially concerning financial analysis, forensic accounting, and investment management. Its objective is to allow analysts to examine financial statements objectively, detect earnings manipulation, and exercise sound judgments in investment decisions. Scepticism is emphasized in the CFA Ethics and Professional Standards section as a prerequisite for maintaining integrity and investor confidence.
Professional Scepticism CFA Questions
Q16: Why is professional scepticism important in financial analysis?
A) It ensures all financial data is accepted as reliable
B) It helps analysts detect earnings manipulation and financial misstatements
C) It reduces the need for in-depth research
D) It allows analysts to depend solely on company reports
Ans: B) It helps analysts detect earnings manipulation and financial misstatements
Q17: In investment analysis, professional scepticism helps:
A) Blindly trusting financial statements
B) Critically evaluating reported earnings and cash flows
C) Ignoring risk disclosures in reports
D) Making decisions based only on market trends
Ans: B) Critically evaluating reported earnings and cash flows
Q18: How can a CFA use professional scepticism in asset valuation?
A) By accepting the stated value without analysis
B) By independently verifying key assumptions and estimates
C) By assuming all companies report honestly
D) By avoiding analysis of financial notes
Ans: B) By independently verifying key assumptions and estimates
Q19: Which of the following best represents professional scepticism in financial statement analysis?
A) Automatically assuming financial statements are fraudulent
B) Challenging unusual financial ratios and unexplained trends
C) Ignoring accounting policy changes
D) Relying on unaudited financial data
Ans: B) Challenging unusual financial ratios and unexplained trends
Q20: Professional scepticism helps prevent:
A) Market fluctuations
B) Fraudulent financial reporting and misrepresentation
C) Changes in accounting standards
D) Interest rate volatility
Ans: B) Fraudulent financial reporting and misrepresentation
