What Is Professional Skepticism, Results of the ASIC Audit Inspection - Assignment Example

AUDITING Name Institution Tutor Date What Is Professional Scepticism Professional scepticism is a condition in which the mind is prepared to find out errors or question various financial events while performing assurance engagements (Bagshaw, 2013). Professional scepticism is basically a skill which enables the auditor to be alert in a given situation. The auditors are always alert for any reaction that might occur in the financial activities of the organization. These are relevant questions that ensure the information and reports are true. It is essentially an attitude which encompasses a questioning mind. With this attitude, the auditor asks several questions which can be helpful in realizing future consequences. The auditors measure all the side effects of the information they acquire by their questioning mind or attitude. In addition, they ask questions which can help in making critical assessment of various financial activities with strong proof (Bagshaw, 2013). In essence, ISA 200 demands the use of professional scepticism as a way of enhancing the ability of the auditor to realize risks of misstatements and take action to the identified risks. Professional scepticism is strongly related to the fundamental moral considerations of the auditor’s independence and objectivity. Additionally, professional Scepticism involves professional judgement by the auditor. An audit without the professional scepticism attitude is likely to be of low quality. Application of professional scepticism should ensure the auditor does not neglect odd circumstances, adopt incorrect assumptions when formulating the audit response needed and address recognized risks or oversimplify results from various audit procedures. This are all important in improving the audit quality (ISA 200, 2009). An auditor should perform and plan an audit with professional scepticism and realize that circumstances may occur that cause various financial statements to be misstated. The auditor needs to be alert to: Audit given evidence that contradict audit evidence acquired. Information that questions the trustworthiness of various documents and responses to questions to be utilized as audit evidence. Any condition that might designate possible fraud. Various circumstances that recommend the need for audit measures in addition to the ones needed by ISAs (ISA 200, 2009). 2. Explain how professional scepticism relates to obtaining reasonable assurance about a client Professional scepticism can be used in accessing the client engagement acceptance. At this level, the auditor considers whether the management of projected audit client operates with integrity and if there is any factor that may affect the auditors and hinder them from acting with professional scepticism on accepting the engagement (ISA 200, 2009). Professional scepticism also relates to obtaining reasonable assurance about the client when performing various risk assessment procedures. The auditors should use professional scepticism when performing risk assessment measures for the client at their planning phase of the audit. For instance, when access results of investigative procedures with the management, they should not admit explanations by the management at face value; they should attain corroboratory proof for the explanations presented. Through this, they are capable of obtaining reasonable assurance from the client that their audit is accurate (ISA 200, 2009). Additionally, the auditors can also use professional scepticism in obtaining audit evidence. In order to obtain reasonable assurance, the auditor needs to be ready to challenge the administration, more specifically on subjective and complex matters and on matters that need high level of judgement to be exercised. The sufficiency and reliability of evidence should be given more consideration, specifically where there are fraud and risks. There might be some issues that may arise at some point during the audit that can affect professional scepticism, for instance, the administration may decline the auditor from gaining information from a third party. When this occurs, the auditor will have to put into consideration the quality of evidence received from the administration. ISA 200 records that a conviction that administration and those in governing positions are honest and trustworthy does not ease the auditor of the desire to uphold professional scepticism or permit the auditor to be contented with audit evidence which is less persuasive when obtaining reasonable assurance (ISA 200, 2009). Reasonable assurance can also be obtained when evaluating evidence. An auditor with professional scepticism should critically and analytically analyze the audit evidence and pay more attention for contradictory evidence that might destabilize the efficiency, appropriateness and sufficiency of evidence obtained. In addition, the auditor should use professional scepticism in examining the opinions of other auditors about a client by considering the general sufficiency of proof to support the audit judgement and by evaluating if the financial statements depict the appearance of the underlying events and transactions. Eventually, utilization of professional scepticism should limit detection of risk since it enhances the efficiency of practical audit procedures and lowers the possibility that the auditor will arrive at an unsuitable conclusion when evaluating various results of the audit procedures (Basu, 2009). 3. Are the results of the ASIC audit inspection report consistent with the application of professional scepticism by auditors?  Justify your answer with reference to the ASIC report. The reports in the ASIC audit inspection are inconsistent with the application of professional scepticism by auditors (ASIC, 2015). The report provides information concerning how the auditors failed to provide an accurate audit of the financial reports and errors made in their auditing procedures. According to ISA200, when obtaining reasonable assurance, the professional editor should be accountable for maintaining professional scepticism all through the audit, considering the possibility of management override of controls and realizing the fact that audit processes which are efficient in realizing the error might not be efficient in detecting a fraud. The results found that the auditors did not provide the exact position of the firm. ASIC reviews indicated that there was insufficient professional scepticism in the whole process. Specifically for impairing testing, fair value measurements, revenue recognition, tax balances, outcomes of inner control testing and financial report disclosures. Practising professional scepticism is a significant part of conducting professional audits (ASIC, 2015). The auditor needs to practise professional scepticism, with a questioning mind, of the legitimacy of the audit proof obtained and administration‘s judgement on various accounting treatments and estimates. Specifically, the report found out that the auditors appeared to have relied greatly on readily accepted information and explanations of the management without challenging matters such as major underlying assumptions. They also obtained evidence to corroborate various estimates and treatment rather than challenge them ISA 200(2009) emphasizes the significance of assessing the reliability of information that should be used as audit support and the controls over its maintenance and preparation. Isa also claims that, management can also perpetrate fraud. The management may fail to provide reliable evidence for the audit process. This is important since it reminds the auditor that when the administration or management provides audit evidence, either through answers, written presentation or through other forms, the auditor should carefully consider the reliability and validity of such information and whether they need to acquire more evidence from other sources. The report found out that the auditors in many jurisdictions did not pay attention to professional scepticism at the time of auditing. It criticised the auditors specifically in relation to the audit fair values, related transactions and various assessment. The report has greatly emphasised the need for professional scepticism specifically when auditing financial statements where there are high chances of material misstatement as a result of financial distress (ASIC, 2015). According to Financial Reporting Council in UK (2012), professional scepticism is the foundation of quality audit. The auditor should acutely search for risk of misstatements; this is the only way of obtaining high quality audit. The report by the ASIC states that, the auditors failed to acquire adequate evidences to demonstrate their considerations of the suitability of the going concern assumption. The auditor needs to review the administration’s assessment of growing concern and determine whether the plans are reasonable this is vital where there is great doubt over the ability of the organization to proceed as a going concern. Thus, the report records that the audit conducted was inconsistent with the application of professional scepticism in the auditing process (ASIC, 2015). IAASB Work Plan for enhancing quality audit issued in 2014 prioritizes various issue that impact quality of audit including quality control, group audit and professional scepticism. It is evident that, professional scepticism is to keep on the agenda of various regulatory authorities for a given time, since it is intrinsically correlated with other audit issues such as ethics, audit quality and ultimately the belief that the general public have on auditing profession. 4. The ASIC report identifies a number of skills that will support the application of professional scepticism.  What are these skills?  How does your study at University help you to develop the appropriate skills? The first skill identified in the ASIC report is obtaining appropriate audit evidence to help in supporting risk and planning assessments. Obtaining appropriate understanding of the entity’s environment including its financial information system and internal control is vital in providing quality audit. Without proper assessment of the organization, the auditor may provide quality audit. The auditors should not rely on the information provided by the managers since the evidence may be incorrect and may not lead to proper auditing process. The managers can provide misleading evidence which compromise the quality of the auditing process (ASIC, 2015). Another skill is that the auditor should possess a sceptic mind that can make the auditor alert for every situation and help the auditor avoid material misstatement (ASIC, 2015). The auditor needs to be cautious of errors that may occur during the auditing process. Professional scepticism skills can help in making financial statement transparent as a result, guarding the material statement from various misstatements. Moreover, professional scepticism skills can be obtained through unremitting experience and training. Sceptic skill is relevant and vital in producing quality auditing and can make the auditor professional in the auditing skills. There is need for the auditor to possess professional judgment skills and obey all the standards of auditing. They need to consider the size of the business when determining the general materiality levels. Bagshaw (2013) suggest that, the auditor should be professional at all cost and obey all set auditing standard without violating any standard. Through this, the auditor can provide quality audit and be professional in their auditing process. Consequently, developing a proper understanding of the business of the entity and the environment is also important in producing quality auditing. The auditor should be able to identify the business of the entity and the environment where it operates. My study in the university is significant in developing professional skills that can make me a good auditor. Through my classes, I am able to be sceptic in my thinking and be keen to detail in class. I always believe that professional scepticism is a mind-set matter. It needs possessing self-confidence and good character to retain an inquisitive mind reject the temptations of accepting the easy answers especially when presented by the management. Through my study in class, I am able to develop this skill and realize the importance of professional scepticism in auditing. One technique that has worked for me in class is always to imagining the worst and operate form there in exploring possible options. ‘Black hat’ by Edward de Bono thinking hats leads to high-quality auditors. As a result, we have been trained in class to have an attitude of thinking the worst and proving the best. REFERENCES ASIC.(2015). Audit inspection program report for 2014–15. Retrieved at http://d ownload.asic.gov.au/media/3491241/rep-461-published-15-december-2015.pdf Bagshaw, K. (2013). Audit and assurance essentials for professional accountancy exams. Basu, S. K. (2009). Fundamentals of auditing. Delhi: Pearson. Financial Reporting Council. (2012). Establishing a common and reaffirming its central role in delivering audit quality. Retrieved at. https://frc.org.uk/Our- Work/Publications/APB/Briefing-Paper-Professional-Scepticism.pdf IAASB. (2014).Work Plan for 2015–2016: Enhancing Audit Quality and Preparing for the Future. Retrieved at. https://www.ifac.org/system/files/publications/files/IAASB- Work-Plan-2015-2016.pdf INTERNATIONAL STANDARD ON AUDITING 200. (2009). Overall Objectives Of The Independent Auditor And The Conduct Of An Audit In Accordance With International Standards On Auditing . retrieved from. http://www.ifac.org/system/files/downloads/a008-2010-iaasb-handbook-isa-200.pdf Read More