If the numbers don’t seem to add up, or the receipts aren’t where they are supposed to be, many clients will have a logical explanation ready. But how much should they be taken at their word? And how should auditors handle situations where client representatives insist that a particular inconsistency is nothing to worry about?
These and similar situations can be tricky on both an emotional and practical level, but there are clear guidelines within the auditing community on how to handle them. By exercising the recommended level of professional scepticism, auditors can get the information they need for a thorough and complete audit, without much inconvenience to the client.
Proper auditing requires meticulousness and diligence, but it is also a kind of balancing act. Auditors should develop a good working relationship with their clients to maintain the ethics of investigation. Explanations for discrepancies should be followed up on but not immediately believed or disbelieved. Digging down into the sources for company data is important – however, if every little detail is doubted, the audit will go on long past its due date. Therefore, “smart selection of data” is a good rule of thumb in every audit.
A healthy sense of scepticism is an essential asset for every responsible auditor, allowing them to shield their work against all sorts of corporate maneuvering. This approach indeed preserves much of the value of an independent audit. Responsible auditors maintain an appropriate level of trust with their clients, however, at the same time they are also cautious to avoid instances of misrepresentations, mistakes or malfeasance that may otherwise be allowed to slip through due to undue trust on client’s credibility. Too much or too little trust: in either case, the damage done is same – an incomplete, incompetent and unethical audit with quality undelivered!
Finding the middle ground
The IAASB’s Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements defines ‘professional scepticism’ as:
“An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.”
ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, elaborates on this general concept using specific guidelines, as in the following passage.
“Professional scepticism includes being alert to, for example:
- Audit evidence that contradicts other audit evidence obtained.
- Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.
- Conditions that may indicate possible fraud.
- Circumstances that suggest the need for audit procedures in addition to those required by the ISAs.”
Resolving these issues requires the right approach from the auditors themselves, as well as support from their managers and colleagues.
Balance comes from a place of knowledge
The key to successful auditing is maintaining the right balance, on both personal and professional levels. When auditors have too much confidence in their own abilities, they may neglect their responsibility to double-check their own work.
To exhibit strong auditing skills, an auditor needs to have shrewd business acumen. To ask the right questions, they need to first learn about the nature of business, the industry and the company they are auditing. In this way, they can become more familiar with their own assumptions and subconscious biases, as well as the likely biases of the people they interact with. Otherwise, they may apply too much scepticism to some areas, and not enough in others.
As auditing is logic- and rule-based, some practitioners may become victims of misdirection through the use of false information that can be deceiving. Auditors’ questions may be met with apparently reasonable answers, but these should nevertheless be checked independently just to be sure that they are indeed accurate.
A fear of appearing foolish can cause auditors to hold their tongues when they feel they are missing something obvious. But a failure to ask may indeed lead them to overlook a discrepancy that actually is obvious. In these and other cases, experience, knowledge and confidence are needed to help professional auditors navigate successfully through new situations, so that the result of their audit genuinely reflects competent and responsible reporting.
Audit strategies for promoting independent analysis
Auditors should always be part of a well-trained team that has support and direction from experienced leaders. A system of accountability should be in place, where accurate results and critical thinking are rewarded and any oversights are reviewed thoroughly to ensure they are not repeated.
By having a well-rounded team in place, auditors can be occasionally rotated among clients, so as to avoid becoming too familiar with the subject of an audit. An independent review is the goal of every audit, and it is often best delivered by a fresh pair of eyes.
Experienced members can bring their teams together and share their knowledge of common red flags that appear during audits. These are often invaluable to directing lines of research and inquiry, particularly when the audits are complex.
Above all, audit team leaders should create an atmosphere where juniors are encouraged to ask questions in order to get to the bottom of any issue that may arise. As general guidelines are concerned, audit teams should be taught to embrace the adage: “Trust, but verify.” Through such measures, auditors will have the mindset, resources, incentives and support to approach each audit with a methodical, curious, and appropriately sceptical mentality.
The value of reputation
ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, notes that “Management is often in the best position to perpetrate fraud. Accordingly, when evaluating management’s responses to inquiries with an attitude of professional scepticism, the auditor may judge it necessary to corroborate responses to inquiries with other information.”
Indeed, in some cases, incentives may be available to management that are contingent on meeting accounting goals. Mistakes in these areas may simply be the result of convenience; people are less likely to double-check results that they are happy with. Whatever the reason, when inaccurate information makes it past the auditor’s eye, the outcome can affect the reputations of both the client and the auditing firm. Executives and investors may also receive misleading information which will ultimately affect the planning of their next moves on the basis of false data.
For these and other related reasons, the IAASB has stressed that “the need for professional scepticism cannot be overemphasised”. Auditing firms live or die based on their reputation. Also, management must have robust internal controls which generate accurate internal information in order to function responsibly and transparently. By keeping both the public and private sector honest, sceptical auditors carry the torch forward for society as a whole.