In 2015, Pearson Canada published the textbook Auditing: The Art and Science of Assurance
Engagements,Thirteenth Canadian Edition
by Professor Alvin A. Arens (Michigan State University), Randal J. Elder
(Syracuse University), Mark S. Beasley (North Carolina State University) and
Joanne C. Jones (York University). Chapter 4 (on
pages 63-91) covers Professional Judgment and Ethics. The Chapter presents A
Framework for Professional Judgment, discusses the Auditor’s Mindset and
Judgment Tendencies, presents A Framework for Ethical Reasoning, and offers Professional
Guidance on Ethical Conduct.
The authors note (see page
65) that “In its research report, Professional Judgment and the Auditor, the Canadian Institute of Chartered Accountants (now
CPA Canada) said: Professional judgment in auditing is the application of relevant
knowledge and experience, within the context provided by auditing and
accounting standards and Rules of Professional Conduct, in reaching decisions
where a choice must be made between alternative possible courses of action.”
The report further explained
that professional judgment is analytical and systematic, objective, prudent,
and carried out with integrity and recognition of responsibility to those
affected by its consequences. This means that auditors must be able to justify
a decision on the basis that it:
• Is well thought out;
• Is objective;
• Meets the underlying
principles of GAAP and GAAS;
• Has evidence to support the
decision;
• Maximizes the likelihood of
“good” consequences;
• Is carried out with truthfulness
and forthrightness; and
• Considers the impact on the
financial statement users.
Accordingly, this type of
decision making can be both complex and difficult. To assist auditors and
firms, several professional associations such as CPA Canada, the Institute of
Chartered Accountants of Australia, and the Institute of Chartered Accountants
of Scotland, as well as the American Center for Audit Quality, have issued
professional judgment and professional skepticism frameworks that provide
auditors with a methodical approach.
The approach depicted in
Figure 4-1 above (see page 66) is based on those various frameworks. Although the
framework may seem to be simple, such frameworks are considered effective tools
in guiding thinking and encouraging auditors to be aware of their own judgment
biases and traps and what can go wrong. Judgment biases and traps are
considered in more detail as part of the auditor mindset component of the
framework (see page 67).
