Strategies for efficient, effective audit documentation

An AICPA study found that the most common audit issue is a lack of adequate documentation. Although some auditors may think that documenting the nature, timing, extent and results of audit procedures will break the audit budget, many practitioners have found that this is not the case.

In fact, strong documentation will facilitate compliance with auditing standards and it usually leads to a more efficient engagement. The time spent documenting in accordance with the standards is an investment that will pay dividends later. Complying with the requirements while implementing the best practices will help auditors and audit firms perform high-quality work while increasing overall efficiency. In other words, take a smart approach to planning, embrace standardization, document now and save time later, and be prepared for what's ahead.

For more information, read the November 2017 article “4 strategies for efficient, effective audit documentation” in the Journal of Accountancy online. As well, review the additional AICPA guidance and resources at the end of that article. Further guidance on audit documentation in the context of exercising professional judgment is also available in previous posts on this blog.

Addressing Unconscious Bias in Decision Making

According to a recent article in the American Institute of Certified Public Accountants (AICPA) Journal of Accountancy, many professionals, without realizing it, make “unconscious” choices regarding those who are different in terms of race, gender, geographic origin, college education and other factors. This “unconscious bias” is a hidden bias that can significantly undermine good decision making and impacts both personal and business decisions.

How much do you know about unconscious bias? Try a short, 10-question, online quiz to help test your knowledge on the subject. To learn more, watch the following AICPA Unconscious Bias webcast series of three information videos:

• “Help Me in the Heart - Understanding Unconscious Bias”: This session will help participants understand the full scope of what unconscious bias entails, where it comes from, and the areas of business it impacts. 
• “Look Me in the Brain – Identifying Unconscious Bias”: This session will help participants identify personal biases which might be holding us back from true inclusiveness.
• “Fix Me in the Act – Managing Unconscious Bias”: This session will help participants manage biases in a constructive manner to obtain the highest level of inclusiveness and performance. 

In addition, review previous blog postings on “bias” and how it affects the exercise of professional judgment.

Research and Guidance Resources by the Center for Audit Quality (CAQ)

Devoted to enhancing investor confidence and public trust in the global capital markets, the Center for Audit Quality (CAQ) is an autonomous, nonpartisan, and nonprofit public policy organization based in Washington, DC. Supported by a membership of U.S. accounting firms registered with the Public Company Accounting Oversight Board (PCAOB), the CAQ is led by a Governing Board made up of CEOs from leading public company auditing firms and the AICPA, as well as three members from outside the public company auditing profession. CAQ resources include guides, case studies, technical alerts, research reports, comment letters, amicus briefs, and videos. They are all publicly available and free of charge.

On August 7, 2016, top practitioners from the public company auditing profession gathered with leading academics at the CAQ’s Eighth Annual Symposium in New York, Research in Auditing – Insights from Academics and Practitioners. The event is a key part of the CAQ’s ongoing dialogue with the academic community on how research can help inform audit practice. As in past years, the 2016 Symposium included panel discussions on critical issues.

This Symposium panel focused on the advantages that can be gained when academics team up with members of the profession to inform their research. Behavioral and archival researchers working with the CAQ Research Advisory Board have benefited from conferring with auditors to better understand the challenges faced in practice, how those are addressed, and how changes in approach or audit methodology could impact the research question.

The Center for Audit Quality has also developed two video vignettes for use in the classroom (each approximately five minutes in length) that provide insights into the types of conversations that occur when auditors are assessing the internal controls used by management. In these scenarios, the focus is on a management review control over goodwill impairment estimates. The discussions captured in the videos can also be used in other teaching situations as they highlight communications and interviewing techniques, professional skepticism, and how to navigate conversations on difficult and sensitive issues. To learn more, refer to video Vignette 1: A Meeting between the Audit Manager and the Company Controller and video Vignette 2: A Meeting between the Audit Manager and the Engagement Partner.

Enhancing Public Trust in the Accounting Profession Using Professional Judgment

A 2004 dissertation empirically examined the impact of ethics instruction and ability on student propensity to use professional judgment in resolving accounting ethics dilemmas. The literature has supported the need for increased ethics instruction in accounting programs as a vehicle to improve ethical decision making in the accounting profession. The significance of the American Institute of Certified Public Accountants (AICPA; 2004) Code of Professional Conduct as the profession’s source of authority relative to ethical decision making was documented.

The Code emphasizes three trust characteristics (ability, benevolence, and integrity) identified in the literature that are important relative to enhancing public trust in the accounting profession. Ability is important to ethics instruction as it determines the extent to which students acquire a working knowledge of the provisions of the AICPA Code of Professional Conduct. The ethical norms contained in the Code’s provisions are derived from the underlying ethical decision-making characteristics inherent in the accounting profession’s organizational culture. These characteristics relate to an individual’s ethics system, ethics application perspective, moral reasoning perspective and level of moral reasoning.

The literature has supported a deontological ethics system, holistic ethics application perspective, orthodox moral reasoning perspective, and conventional level of moral reasoning as appropriate for ethical decision making in the accounting profession. All of these characteristics point to the use of professional judgment rather than personal judgment in the resolution of accounting ethics dilemmas.

According to the author, there are several avenues for future research efforts relative to increasing the use of professional judgment in present and future accounting leaders and ultimately enhancing public trust in the accounting profession. They are (a) replicating the study’s repeated measures experiment to other sample frames within the sample population, (b) extending the repeated measures experiment to other sample populations, (c) conducting a longitudinal study involving student use of professional judgment, (d) preparing and conducting repeated measures experiments that evaluate the impact of the other important trust characteristics of benevolence and integrity on student use of professional judgment, and (e) developing and testing a comprehensive model of professional judgment that incorporates all three of the important characteristics that enhance public trust.

This 100-page dissertation is available online. For more information, read, Enhancing Public Trust in the Accounting Profession Using Professional Judgment Rather Than Personal Judgment in Resolving Accounting Ethics Dilemmas, by Gene R. Sullivan submitted in April 2004 to Regent University School of Leadership Studies in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Organizational Leadership.

Professionalism is Primary

In December 2003, Douglas R. Carmichael, Director of Professional Standards at the Public Company Accounting Oversight Board (PCAOB) was invited to speak about professionalism at the AICPA Annual National Conference in Washington, DC. In his presentation, he noted that: “Most organized professions have duties to clients and to the public. A lawyer has responsibilities to the court and the law as well as to individual clients. A doctor has responsibilities for public health as well as to individual patients. Poor management of duties to the public versus to individual clients can cause a lack of respect for a profession.”

Furthermore, “Some would say that is what happened to independent auditors. Intense pressure on the management of public companies to meet the earnings expectations of analysts led to intense pressure on auditors to help clients meet those expectations. There were economic incentives to preserve the relationship with the client. Building the client relationship had become the service ideal. Accommodation on questionable accounting practices was one result. There was a widespread erosion of professionalism and the profession lost the confidence of investors. This decline in professionalism did not happen overnight. Some would say it started decades ago.”

In concluding his presentation, he suggested:“One step that could be taken is to amend the ten basic auditing standards to add a new general standard that might be worded as follows: The auditor shall, in all matters related to the audit, act in a manner that places primary emphasis on protection of investors and the furtherance of the public interest in the issuance of informative, fair, and independent audit reports. This would make dedication to professionalism an overriding and mandatory obligation for the auditor of a public company.”

Learn more about professionalism by reviewing the presentation on Professionalism is Primary. Also, refer to previous postings about professionalism as part of this blog on Professional Judgment Matters.

Promoting high ethical standards in the profession

As the first state society established in the United States, the New York State Society of Certified Public Accountants (“NYSSCPA” or “Society”) continues to play a leading role in the development and promotion of high ethical standards within the profession. The Society’s bylaws state that the membership shall be bound by the Society’s Code; however, it is advisable for Society members who are also members of the American Institute of Certified Public Accountants (“AICPA”) to apprise themselves of the applicable laws and related regulations of governmental agencies that regulate certified public accountants in the United States.

One of the cornerstones of the profession of public accountancy is the high ethical standards of its members. Such standards are set forth in the AICPA Code of Professional Conduct (the “Code”). While high ethical standards are essential in achieving public trust and confidence, such trust can be maintained only if the public is confident that the profession can regulate itself and discipline those members who violate or ignore the Code.

The AICPA adopted a revised Code that became effective December 15, 2014. The Conceptual Framework for Members in Business and the Conceptual Framework for Members in Public Practice became effective December 15, 2015. For updates to the Code, see the Table of Contents, Appendix C - Revision History Table.

Professional Judgment Resources for Auditors and Audit Firms

The 1995 research report Professional Judgment and the Auditor was prepared by staff of the Canadian Institute of Chartered Accountants (CICA), Research Studies Department (J. Paul-Emile Roy, CA) under the direction of an 8-member Study Group of professionals.  That Report identified many sources of information regarding the issues surrounding professional judgment. It developed a framework for professional judgment and discussed key factors that influence the judgment process. Furthermore, it provided valuable guidance to practitioners regarding their professional obligations when exercising professional judgment.

As noted in the previous post “A Process for Professional Judgment,” the US Center for Audit Quality (CAQ) has also recently published a Professional Judgment Resource. This Professional Judgment Resource is designed to provide auditors with an example of a decision-making process to facilitate important auditing and accounting judgments in a professionally skeptical manner. This CAQ Resource is aimed at both auditors and audit firms to enhance their system of quality control. According to the Overview (on page 2): “...the exercise of professional judgment should be: (1) Based on the relevant facts and circumstances known and available at the time the judgment is made; (2) Made after the consideration of reasonable alternatives; (3) Sensitive to the degree of uncertainty that may be inherent in the judgment; and (4) In compliance with the applicable professional standards.

 Effective auditor decision making also requires the application of professional skepticism. Indeed, the appropriate exercise of professional skepticism throughout the judgment process is at the heart of effective auditor decision making. Accordingly, the CAQ Resource outlines a decision-making process grounded in five essential actions that include identifying and defining the issue, reviewing and completing the documentation, and explaining the rationale for the conclusion. In addition, the Resource identifies several of the more common judgment tendencies and traps that can potentially lead to bias and weaken professional skepticism. It also provides illustrative examples of these tendencies and strategies that can be used to avoid them.