Professional Scepticism in an Audit of a Financial Report

In August 2012, the Australian Auditing and Assurances Standards Board (AUASB) issued a Bulletin called Professional Scepticism in an Audit of a Financial Report. The AUASB took this opportunity to emphasize to both auditors and others, the important and fundamental role that professional skepticism has to play in the audits of financial reports. It also reminded audit firms of their role in education, mentoring and inspiring partners and staff to cultivate a skeptical mindset, recognizing that it is a vital ingredient in performing high quality audit engagements.

According to the Bulletin, the inspection programs of the Australian Securities and Investments Commission (ASIC) have raised concerns about whether professional skepticism is being applied properly in practice. The findings question whether auditors: respond appropriately to unreliable audit evidence; seek to corroborate evidence rather than challenge it; and adequately demonstrate in the audit working papers how professional skepticism has been applied.

The ASIC refers to key areas of audit judgment where the level of professional skepticism exercized or evidenced in the audit files needs to be improved, particularly: fair value measurement of assets; impairment calculations; and going concern assessments. Importantly, audit committees play a significant influencing role and commonly seek to foster appropriate professional skepticism in the external audit. Auditors, in turn, should demonstrate the value of their audit by seeking to convince audit committees that they have properly exercized professional skepticism in the conduct of the audit.

In light of these concerns, this 8-page Bulletin, which is presented in Question and Answer format, encourages auditors to bring “professional skepticism” to front-of-mind in the conduct of their audit engagements. The test for auditors, especially in an uncertain economic environment, is to remain alert, to improve audit documentation and to continually and critically re-assess the application of professional judgment.

Enhancing Audit Quality: Canadian Perspectives - Conclusions and Recommendations 2013

The Enhancing Audit Quality (EAQ) initiative, headed by the Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Public Accountability Board (CPAB), has been completed. This initiative arose following the audit symposium organized by CPAB in December 2011. Work commenced in February 2012 and the final report, Enhancing Audit Quality: Canadian Perspectives - Conclusions and Recommendations, was published in May 2013.

The conclusions in the report will be reviewed and appropriate action will be taken by the pertinent competent bodies in Canada. Reforms introduced in other jurisdictions, such as Europe and the United States, will have to be carefully monitored to ensure that Canadian reforms are not in direct conflict with those proposed elsewhere, frustrating attempts to harmonize the solutions ultimately implemented. Recommendations on how best to maintain auditor independence and support professional skepticism are among the key findings aimed at adding value to financial reporting.

The EAQ initiative gained stakeholder input on developments taking place in jurisdictions  hardest hit by the financial crisis, such as Europe and the United States, where  regulators have suggested a number of remedies such as subjecting  audit firms to term limits and calling for mandatory re-tendering of audits. The EAQ initiative concluded that the preferred approach is having audit committees perform a periodic review of their audit firm at least every five years, resulting in a recommendation to retain or replace the audit firm. A report summarizing the results of the comprehensive review should then be included in an entity’s public disclosures, which would strengthen transparency.

CPAB is Canada’s audit regulator, dedicated to protecting the investing public’s interests and to delivering value to its various stakeholders through world class audit regulation. It regulates the auditors of Canadian public companies through its national inspection program. CPAB delivers value by promoting high-quality, independent auditing. As a champion of audit quality, CPAB contributes to public confidence in the integrity of financial reporting, which supports Canada’s capital markets.

CPA Canada is the national organization representing the Chartered Professional Accountants (CPA) profession in Canada. The Canadian Institute of Chartered Accountants (CICA) and The Society of Management Accountants of Canada (CMA Canada) created the organization on January 1, 2013, to support unification of the Canadian accounting profession under the CPA banner.

Centre for Accounting Ethics: 2013 Symposium on “Tone at the Top”

The Centre for Accounting Ethics at the University of Waterloo was established in 1991 through a grant from the Auditing and Accounting Development Fund. In supporting projects designed to enhance the teaching of ethics to accounting students and the research of ethical issues in accounting, the Centre aims to help prepare future accountants and financial managers to exercise professional judgment within an ethical framework and to promote high ethical standards.

The Centre has announced its first biennial Symposium to be held on April 18–20, 2013 in Toronto, Canada. The theme is Accounting Ethics and Tone at the Top. Papers are invited from academe and practice addressing this theme. Possible questions include the role of boards of directors in shaping ethics policy, the audit committee’s oversight role in setting the ethical environment of an organization, the intersection of risk management, control systems and ethical practices and its impact on tone at the top. The papers from this Symposium will be considered for a Special Issue of the Journal of Business Ethics. Submission deadline is January 15, 2013. For more information, see the Call for papers and register online.

Additional resources are available at the Centre, including Members of the Centre, Ethics Teaching Cases, Published Articles,  Ethics Links and an Ethics Bibliography which can be searched by 59 subjects, such as “Ethical/Professional Values,” “Integrity” and “Professional Judgment.”

Enhancing Audit Quality: Canadian Perspectives

Since the 2008 global financial crisis, policy makers, regulators, standard setters and others around the world have been considering changes to the financial system to promote greater financial stability and to reduce systematic risk. Audit quality is among the factors being discussed, with major audit reform initiatives well underway by the European Commission; the United States’ Public Company Accounting Oversight Board; the United Kingdom’s Financial Reporting Council; and the International Auditing and Assurance Standards Board, which has launched a project on enhancing auditor reporting

Enhancing Audit Quality: Canadian Perspectives is a consultation process being led by the Canadian Public Accountability Board (CPAB) and the Canadian Institute of Chartered Accountants (CICA) to gain stakeholder input on key issues emerging with respect to enhancing audit quality globally, and the impact on Canada. To provide effective coordination and direction to this work, an enhancing audit quality steering group (chaired by David Brown, a leading securities lawyer and former chair of the Ontario Securities Commission) has been established, along with three working groups, with experts from audit committees, auditing and assurance standard setters, auditors, investors, prudential and securities regulators, financial-statement preparers, CPAB and the CICA.

The working groups will focus on three aspects of audit quality and reform being discussed internationally. The working group on the role of the audit committee will focus on the reporting relationships between audit committees and their key stakeholders, along with enhancing and promoting professional skepticism by the audit committee and the auditor. The working group on auditor reporting will target enhancing the information value of the auditor’s report and expanding auditor association with management disclosures outside of the financial statements. The working group on auditor independence will focus its efforts on the options relating to the appointment and rotation of, and non-audit services provided by, auditors that will improve independence, objectivity, professional skepticism and audit quality at firms.

Professional scepticism and other key audit issues

There is an ongoing debate about whether professional accountants are sufficiently sceptical in applying professional judgment. For example, the concerns of regulators and others have been highlighted in the media and form part of the discussions on the future of the accounting profession. In this regard, the Institute of Chartered Accountants in England and Wales (ICAEW) (Audit and Assurance Faculty) is exploring the possibility of conveying key messages on the issues and has discussed this possibility with the UK Professional Oversight Board (POB).

The result is a new set of videos Professional scepticism and other key audit issues now available on the ICAEW website. The purpose of the videos is to highlight some of the concerns of the POB (and other regulators around the world) and to be constructive about how audit firms respond to the issues. In total, there are ten videos with one compilation video (about 40 minutes long). It is hoped that, in addition to individual auditors watching them, some firms will play the videos as part of training activities and team meetings.

The longest video (about 17 minutes) highlights the fundamental importance of professional scepticism. The video provides key messages on the issues that will be of interest to firms at the current time. Martyn Jones (ICAEW Vice-President) speaks about how auditors should be dealing with the challenges and the need to understand that scepticism is a behavioural issue for the entire audit team. John Kellas (POB Chairman) talks about what the Audit Inspection Unit (AIU) has been looking at in the current climate and describes the ways a lack of scepticism can be apparent. Myles Thompson (Chairman of the faculty’s Technical and Practical Auditing Committee) outlines the personality traits that auditors need to have and gives tips on how to produce documentation that demonstrates scepticism.

The messages are relevant to auditors from firms of all sizes and the personal qualities that are spoken about are needed for all types and sizes of audit. The key points also apply internationally, not just in the UK. Other subjects covered in the videos are group audits, quality control, audit committee reporting, audit documentation, ethical matters and concluding remarks.