Learning about Professional Skepticism – Part 3 of 3

What does it mean to be sceptical? What does it mean to cast doubt on something you feel is not right, despite popular consensus? Scepticism may be generally defined as a personal disposition toward doubt or incredulity of facts, persons, or institutions.

For a general overview of sketicism, watch the YouTube video "What is Skepticism? A primer for understanding reality."

For an indepth analysis, refer to the research paper "A Model and Literature Review of Professional Skepticism in Auditing" by Mark W. Nelson, Auditing: A Journal of Practice & Theory, Vol. 28, No. 2, November 2009, pp. 1–34. This paper reviews research that examines professional skepticism in auditing. Consistent with much research and with recent regulatory concerns, the paper defines professional skepticism as "indicated by auditor judgments and decisions that reflect a heightened assessment of the risk that an assertion is incorrect, conditional on the information available to the auditor."

In many circumstances the assertion in question will be a client’s assertion that the financial statements are free of material misstatement, but the definition could apply to other assertions as well (e.g., attesting to the effectiveness of a client’s internal controls). This definition reflects more of a "presumptive doubt" than a "neutral" view of professional skepticism, implying that auditors who exhibit high professional skepticism are auditors who need relatively more persuasive evidence (in terms of quality and/or quantity) to be convinced that an assertion is correct. Depending on how an auditor's decisions are evaluated, it is possible under this definition for an auditor to exhibit too much professional skepticism, in that they could design overly inefficient and expensive audits.

The paper provides a model that describes how audit evidence combines with auditor knowledge, traits, and incentives to produce judgments that reflect professional skepticism. The model also describes how, given a judgment that reflects some level of professional skepticism, the judgment combines with auditor knowledge, traits and incentives to produce actions that reflect relatively more or less professional skepticism. The model highlights that auditors’ pre-existing knowledge, traits and incentives all combine (and potentially trade off or interact) to affect the amount of professional skepticism in audit judgment and audit actions. This perspective also facilitates understanding how audit firms can influence professional skepticism in practice via hiring, training, performance appraisal, review, decision aids, incentives and changes in tasks and institutions.