Professional skepticism and professional judgment in practice

• Define professional skepticism and professional judgment using AU-C 200.14.
• Identify conditions that should heighten skepticism during fieldwork.
• Document a significant judgment so an experienced auditor can follow it.

Two requirements, stated plainly

AU-C 200.17 requires you to plan and perform an audit with professional skepticism, recognizing that circumstances may exist that cause the financial statements to be materially misstated. AU-C 200.18 requires you to exercise professional judgment in planning and performing the audit.

AU-C 200.14 defines both:

• Professional skepticism is "an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence."
• Professional judgment is the application of relevant training, knowledge and experience, within the context of auditing, accounting and ethical standards, in making informed decisions about the courses of action appropriate in the circumstances.

Skepticism is the attitude. Judgment is the decision. You need both: skepticism makes you ask whether the evidence really supports the assertion, and judgment decides what to do about the answer.

What skepticism looks like on the job

AU-C 200.A22 lists conditions to stay alert to:

• Audit evidence that contradicts other evidence.
• Information that calls into question the reliability of documents or responses to inquiries.
• Conditions that may indicate possible fraud.
• Circumstances that suggest the need for procedures beyond those GAAS require.

AU-C 200.A23 explains why: skepticism reduces the risk of overlooking unusual circumstances, overgeneralizing from limited observations, and using inappropriate assumptions when designing procedures and evaluating results.

Skepticism is not distrust of management. AU-C 240.13 lets you accept records and documents as genuine unless you have reason to believe otherwise. The point is that a long relationship with an honest client does not replace evidence. AU-C 240.12 states this directly for fraud: maintain skepticism notwithstanding past experience of the honesty and integrity of management.

Behaviors that show skepticism in a file:

• Corroborating inquiry with inspection or other evidence instead of stopping at "per CFO."
• Following up an inconsistent answer (AU-C 240.14 requires further investigation of vague or implausible responses).
• Considering contrary evidence when reaching a conclusion, as AU-C 330.28 requires.
• Checking the source and completeness of a client-prepared report before using it.

Documenting judgment

AU-C 230.08 requires documentation sufficient for an experienced auditor with no previous connection to the audit to understand significant findings or issues, the conclusions reached, and the significant professional judgments made in reaching them. A judgment that is not written down cannot be reviewed, and peer reviewers treat it as not made.

A useful structure for a judgment memo:

1. The issue and why it is significant.
2. The relevant standard or framework requirement.
3. The facts and evidence, including evidence that points the other way.
4. Alternatives considered.
5. The conclusion and the reason it is appropriate.

AU-C 230.12 adds a specific requirement: if you identify information inconsistent with your final conclusion on a significant matter, document how you addressed the inconsistency. Our guide to documenting procedures and memo template follow this structure.

Patterns that signal a skepticism problem

• Conclusions copied from the prior year with no evidence of current-year procedures.
• Explanations for fluctuations that restate the change ("revenue increased because sales increased").
• Management's estimate accepted because it is "within the range" without testing the assumptions.
• Exceptions closed with "client corrected" and no consideration of what caused them.
• Judgment memos that list only supporting evidence.

Each of these shows the team reached a conclusion first and gathered paper second.

A fluctuation explanation that does not hold up