Professional Skepticism and Audit Quality

In the hit TV series "House, M.D.," Dr. Gregory House famously quipped, "Everybody lies." While his methods were often extreme, his skeptical mindset allowed him to uncover the truth when others missed it. In the world of internal auditing, channelling Dr. House's skepticism is crucial. Just as he approached each case with a questioning mind, internal auditors must cultivate professional skepticism to uncover hidden truths and ensure integrity of their work.

Professional skepticism in auditing isn't about distrust; it's about questioning, verifying, and ensuring that conclusions are based on solid evidence. This article explores the challenges to maintaining skepticism and provides actionable strategies to sharpen this vital skill.

Professional Skepticism

It is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement and a critical assessment of evidence. The six characteristics of skepticism cited in a Center for Audit Quality’s report are as follows:

1.????? a questioning mind;

2.????? suspension of judgment until appropriate evidence is obtained;

3.????? a desire to search for knowledge and corroborate information;

4.????? understanding that people’s motivation/perception may lead them to provide biased or misleading information;

5.????? autonomy or independence of mind

6.????? sufficient self-esteem to challenge assumptions and resist pressure

Obstacles to Professional Skepticism: Navigating the Auditing Minefield

1. Cognitive Biases: Our minds are wired with various biases that can cloud judgment. These include relying too much on past experiences (overconfidence bias), relying on data that only confirms their initial beliefs instead of questioning conflicting data (confirmation bias), relying on recent/significant incidents instead of thoroughly reviewing all data (availability bias), and not revisiting initial findings in light of additional inputs / data (anchoring). These are not the only ones. Recognizing all these biases is the first step in mitigating their impact on professional skepticism.
2. Individual Traits: Personal characteristics, such as being naturally trusting or conflict-averse, can influence an auditor's ability to maintain professional skepticism (in face of management pressure, client demands or team pressure)
3. Inadequate Supervision: Poor oversight or a focus on efficiency over critical thinking can stifle skepticism across the audit team, as can groupthink. Teams may conform to dominant opinions without properly evaluating alternatives, undermining independent critical thinking.
4. Time Constraints: Tight deadlines and client demands can push auditors into a "check-the-box" mentality, sacrificing thorough analysis for speed.
5. Knowledge Limitations: Lack of subject matter expertise or advanced analytical tools can hinder an auditor's ability to challenge complex information effectively.
6. Familiarity Risks: Long-standing client relationships may breed complacency, leading auditors to overlook risks or rely too heavily on past experiences.

Other areas that could erode professional skepticism include poor audit tone from the Audit leaders, focus on customer satisfaction at the cost of performing a thorough, high quality audit, lack of experience or confidence reflecting as gaps in competence or due professional care among others.

Sharpening the Skeptic's Toolkit: Strategies for Enhancement

1. Fortify the Frontline managers: Engagement managers, Chief Audit Executives (CAEs), and Audit Committees must provide robust supervision, encouraging probing questions and critical thinking at every stage.
2. Bulletproof Methodology and Robust Planning: Adopt a rigorous audit approach that includes regular consultations with the CAE, promoting consistent skepticism and ensuring findings are thoroughly challenged. Effective planning and scoping help auditors focus on key areas, allowing time for in-depth questioning rather than superficial reviews.
3. Invest in Intellectual Armor: Ongoing training in fraud detection, bias recognition, technical expertise, and human psychology equips auditors to ask tough questions and recognize red flags. Engage auditors with deep industry knowledge or subject matter expertise to critically assess complex information.
4. Rotate for Fresh Perspectives: Regularly rotating auditors between clients or departments helps avoid over-familiarity and introduces new viewpoints that can reveal previously overlooked risks.
5. Cultivate Independent Thinking: Create an environment where team members feel empowered to voice concerns and question assumptions. Consider designating a "devil's advocate" in key discussions to challenge the majority view.
6. Set the Tone from the Top: Leadership must promote a culture of inquiry, transparency, and critical thinking, empowering auditors to maintain skepticism throughout the audit process. This not only covers Audit leadership but also that of organization and audit committees.

The Internal Audit Manager's Role in Fostering Skepticism

1. Lead by Example: Demonstrate professional skepticism in your own work and interactions with the team / clients.
2. Leverage Data Analytics: Utilize advanced data analytics tools to identify anomalies, patterns, and trends that might not be apparent through traditional auditing methods.
3. Conduct "Assumption-Busting" Sessions: Hold team meetings where auditors are encouraged to challenge long-standing assumptions about clients or processes.
4. Promote "Healthy Disagreement": Reward team members who constructively challenge findings or methodologies, fostering a culture where skepticism is valued.
5. Implement "Blind" Reviews: Have team members review work papers without knowing the preparer, reducing the influence of reputation or seniority on the review process.

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The Chief Audit Executive’s Strategies for Enhancing Skepticism

1. Drive the Skepticism Agenda: Clearly communicate the importance of professional skepticism to all levels of the audit function and the organization – in words, actions and behaviour, especially the audit manager and supervisors. Additionally, protect the audit function from undue influence and advocate for its ability to challenge management assertions without fear of reprisal.
2. Advocate for Resources: Ensure the internal audit function has access to necessary tools, technology, and expertise (business understanding, technical knowhow, behavioural competencies)
3. Invest in Training and Outside Perspectives: Provide ongoing education in critical thinking, fraud detection, and industry-specific risks to equip auditors with the knowledge to be effectively skeptical. Bring in guest speakers from law enforcement, fraud investigation, or other relevant fields to share their approaches on skepticism and how they foster the same.
4. Implement a Robust Quality Assurance Program: Regularly assess the effectiveness of professional skepticism within the audit function and make improvements as needed.
5. Promote Automation: Champion the adoption of automated processes that can free up auditors' time for more critical thinking and skeptical analysis.

Conclusion: Embracing the Skeptic's Journey

Professional skepticism is not about distrust; it's about ensuring the integrity of audits through thoughtful inquiry, analysis, and verification. By addressing challenges and implementing strategies to enhance skepticism, internal audit teams can provide more reliable assessments and add greater value to their organizations.

As internal auditors, we must approach each engagement with a keen eye and a skeptical mindset. In doing so, we not only fulfil our professional responsibilities but also elevate the entire field of internal auditing.