Professional scepticism is defined as an "attitude" by Gunn and Jules (2012). This way of thinking in an auditing context involves constantly asking questions and checking for red flags that might point to inconsistencies in the evidence being examined. The mindset also encompasses a questioning strategy used to address several situations, including the potential for misrepresentation, inaccuracy, or fraud. Professional scepticism in auditing is the awareness of these possibilities of fraudulent or incorrect financial statements. Planning auditing data and implementing changes to audit processes are also included in the conception. Based on information offered by the International Standards in Auditing (ISA 200), it acknowledges the range of applications of professional scepticism concerning audit evidence that conflicts with other audit evidence and situations that may suggest the probability of fraud. The audit evidence contains the papers and answers to audit questions and any information that doubts their legitimacy (McKenna, 2013).
This research aims to demonstrate how professional scepticism may be used to improve an auditor's capacity to spot and deal with serious misstatements (statements that could significantly impact financial choices). The research also shows the extent to which auditor responsibilities must be met to comply with SEC regulations (SEC). The research demonstrates the actual application of various examples of the application of professional scepticism in auditing evidence, and the discussion demonstrates the auditor's responsibilities indicated in Section 10A.
This has been done by analysing the occurrences reported in business settings. In addition, the debate demonstrates the incorporation of academic research in this setting, which is relevant to the study undertaken by several academic researchers (http://www.accaglobal.com, 2016).
Auditors use professional scepticism to boost audit quality across the board, from client acceptance to results of specific procedures. Questions of what constitutes an acceptable assigned engagement, how such an acceptance is assessed, where such evidence may be found, and how it is evaluated are all discussed concerning this idea (Auasb.gov.au. 2016).
At the engagement acceptance stage, the auditor should consider whether the client's management is accountable enough to make ethical decisions. The auditors need to keep a close eye on this to see whether there are any issues with the use of professional scepticism. The auditors should also check that the firm has no responsibilities that may compromise their impartiality (Brown-Liburd et al., 2013).
As part of the audit planning process, auditors must maintain a healthy degree of scepticism while they carry out the various risk assessment methods. If the auditor is meeting with corporate management to discuss the outcomes of analytical techniques, for instance, he should avoid concluding management's explanation during that meeting. The auditor needs to look into the supporting evidence for the various evidence presented (Sec.gov. 2016).
In gathering audit evidence, the auditor should be quick to question the management team about ambiguous items or need a high level of judgment to improve the quality of the audited data.
The auditor needs to consider the dependability criteria if there is any suspicion of fraud in the audit evidence. For instance, if the company's management opposes the auditor's request to acquire evidence from a third party, the auditor will have to consider who among the management can be trusted to gather evidence. The auditor may request a statement from upper management in such a case. Even if management has demonstrated the appropriate level of concern for upholding integrity, the auditor is permitted by "ISA 200" standards to maintain professional scepticism concerning any action that will provide the auditor with sufficient cause for satisfaction and sufficient grounds for obtaining reasonable assurance (Glover & Prawitt, 2014).
The auditor is responsible for conducting a thorough analysis of all available audit evidence and examining any discrepancies that might doubt the quality and usefulness of the collected data (Carpenter & Reimers, 2013).
Professional scepticism is a general idea with concrete uses in fraud investigations. According to "ISA 240" standards related to "The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements," when an auditor is obtaining assurance, the auditor is responsible for assuring professional scepticism throughout the entire audit procedure and also needs to consider the potential for management to avoid the controls. Effective fraud detection is a method that must be recognised in the audit procedure (ISA 240.8).
The International Standards on Auditing (ISA) 240 specifies the need for auditors to be sceptical throughout an audit, not just when it comes to potential fraud but also when it comes to the honesty and integrity of management and those in charge of governance (ISA 240.12).
The ISA 240 sections that matter most stress the need for trustworthy audit evidence. The clause under ISA 240 indicates that management's reactions to enquiries frequently contribute to the continuation of fraud and the identification of fraud ("ISA 240. A17"). When management presents the required audit evidence, it may be documents, a written representation, or replies to questions. All of these must be carefully reviewed to assess the reliability of the evidence presented per ISA 240 standards (Ifac.org. 2016).
There are several contexts in which conceptualizing professional scepticism might be useful. Several types of staff questions and responses have been proposed by the "International Auditing and Assurance Standards Board (IAASB)," which together outline the significance of professional scepticism concerning accounting estimates, ongoing concerns, considerations made for the law and regulation, and the disclosure made by related parties (Messier, 2016).
Significant assumptions made by management, especially in developing accounting estimates and reviewing the judgmental decisions made by management, can be accounted for through accounting estimates, including the fair value consideration of the various accounting estimates.
The auditors should also check the management's evaluation of the going concern and determine if the strategies the management offers are sufficient for the continuing concern.
Disclosures for connected parties can be hard, and the management assignment help can only know the information. In this case, auditors may have to rely on management to identify the connected party members. Auditors in such a situation should use professional scepticism (Apps.americanbar.org. 2016).
The "Securities and Exchange Commission" has fined or otherwise punished 80 out of 81 auditors in 27 separate cases and 26 times in total. Section 10A of the audit requirement demonstrates how different forms of professional scepticism are implemented (Retheauditors.com. 2016).
Due to their inherent professional scepticism, auditors should never rest easy until they have verified that management's confident assertions are supported by reliable evidence. Suppose an auditor becomes aware of any unlawful activity that might have a "material" effect on a company's financial statements. In that case, they must notify the SEC under Section 10A of the "Securities and Exchange Commission" (SEC) regulations. Failure to obtain adequate competent audit evidence and failing to carry out the required professional care are two of the top areas cited by the SEC, demonstrating the incompetence of the various auditors. The SEC highlights inadequate professional scepticism, inability to gather necessary information relating to management representations, and inability to provide a reasonable conclusion on audited data. In conducting audits, several businesses found discrepancies, most notably concerning violations of the code of conduct concerning the FCPA, tax evasion, and the Anti-Money Laundering Act.
Companies like Wal-Mart, News Corp., and the Las Vegas Sands have all been caught engaging in questionable business practices. Financial institutions like Deutsche Bank and UBS have gained notoriety for their roles in tax fraud. As a result of these varied observations, it is crucial to include professional scepticism in current business operations (Quadackers & Wright, 2014).
Professional scepticism is crucial in several contexts, including accepting and continuing fraud in financial statements, risk assessment, designing an audit strategy, complying with the law and regulations, and major and unusual transactions.
While thinking about managerial honesty, evaluating the acceptance and continuation criteria is crucial. Questions and answers to different kinds of inquiries form the basis of the risk assessment. The outcomes highlighted concerning the substantial misstatements or conflicting facts are also considered. Incorporating uncertainty into the audit plan and expanding the use of external confirmations to acquire third-party information needed to formulate an audit plan. An adequate amount of processes must be planned to assess the validity of the data that will be utilised in the audit. Due to the prevalence of noncompliance throughout the auditing process, auditors need to be well-versed in a wide range of rules and regulations to maintain heightened vigilance. The auditors need to think about the reason for the transaction and verify the management's answers for the purpose of further proof, such as analysing the contracts, so that they may exercise professional scepticism regarding the major and odd entries.
IAASB chairman Arnold Schilder, in his prologue to this collection of questions and answers from IAASB personnel, emphasises the rising necessity for the auditor to exercise professional scepticism. The most significant cause of doubt among experts is the implementation of the "International Financial Reporting Standards" (IFRS). This is reflected in the need for financial statement preparers (those responsible for putting together tax returns) to use a high degree of discretion in determining which accounting procedures to use.
The 2008-2009 worldwide financial crisis provided fresh evidence for maintaining a healthy dose of professional scepticism. Auditors in several jurisdictions have earned a bad reputation due to their failure to exercise sufficient professional scepticism during auditing fair values, going concern evaluations, and transactions involving related parties. The IAASB issued the staff questions and explanations to emphasise the significance of financial statement auditing (Hurtt et al., 2013).
Conclusion
According to the IAASB's statement, auditors should not emphasise the need for professional scepticism. However, every auditor should recognise that adopting a suspicious stance is their personal and professional obligation. The auditors must be ready to confront the management on several areas important to compiling the financial statements in light of the complexities and subjective elements in the IFRS requirement. National agencies like the Financial Reporting Council (FRC) and the International Auditing and Assurance Standards Board (IAASB) are always eager to help auditors use professional scepticism to enhance the overall audit quality of financial reports. These organizations are charged with protecting the auditing profession's independence and ensuring the auditing opinion's reliability.
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