Professional Skepticism: Not just an average critics

“Will you place upon it one who causes mischief therein and sheds blood, inquired the angels (2.30, Surah Al-Baqarah)” is the first-ever known evidence of skepticism. The literal meaning of skepticism is doubt as to the truth of something. Doubts as to the certainty of anything including the knowledge itself has existed ever since the birth of the first human. Skepticism is the reason behind every exploration that we have achieved so far, whether related to this world or beyond the skies and beneath the seas.

In a business perspective, it is skepticism that has given the existence to accountants and auditors. Entrepreneurs are concerned with building wealth which only becomes possible by engaging the factors of productions in a sophisticated synchronization to make the whole system working. Running such a brilliant system in the form of corporations and entities requires dealing with abundance of data which, if not, transformed into meaningful information, would only mislead its management in deciding the direction of that system.

Because of the need for timely and meaningful?information in making best informed decisions, the profession of accounting was born and there forth the accountants. Yes, even though the word professional skepticism is commonly referred to for the auditors but the truth is that the concept is equally important for the accountants as well, as the responsibility for the presentation of meaningful information to the board of directors and to the auditors rests with the accountants. The need for auditors became inevitable because of this very skeptic attitude from those who owned or regulated the corporations against those who managed it for the reason that the information being presented might have been misstated due to management’s ill-intention. Consider, if there were no skepticism expected from the auditors auditing the financial information of the corporations and entities; what objective would they achieve on behalf of their appointees? Had all evidences provided by the management in support of their assertions been accepted by the auditors without cross verification and critical assessment as to their reliability and relevance to the auditor’s assertions, it would have not been called an audit but merely the compilation of management claims.

The International Standard on Auditing (ISA) gives a crucial significance to professional skepticism in achieving the overall objective of the audit which is to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. The ISA connects professional skepticism with professional judgments which it expects from the auditor to apply throughout the planning and performance of the audit. It can be viewed logically that the exercise of professional judgments could not be possible without the application of professional skepticism at the very first place. How can one make the best professional judgments without critically evaluating the relevant assertions?

Furthermore, if judgments are reached at while not maintaining a professional attitude, it will only compromise the quality of the overall audit objective. Knowledge is power! For auditors, professional skepticism is a tool that enables them to equip themselves with valuable engagement information on which to base the audit opinion. There are two main principles of professional skepticism explained by the ISA; which are, having a questioning?mindset and a critical assessment of audit evidences. Having a questioning mindset however, does not refer to having doubts on management integrity in the absence of any persuasive evidences. It also does not mean to not account for any evidences or claims provided by the management. It refers to being cognizant of the fact that people’s motivations and perceptions can lead them to provide biased or misleading information; to not lose trust but to corroborate the information provided; to being alert to contradictory evidences or statements; to avoid reaching out to judgments without proper assessments and evaluations.

One must not, however, confuse the application of professional skepticism as continuous interrogation and seeking multiple evidences to justify a single assertion. It would only lead to wastage of time and efforts that could otherwise be used on other important areas of the audit and hence, compromising the quality of the audit. Therefore, not only being skeptic is important, being skilled at how and when to exercise skepticism is also significant. We must know that one of the auditor’s objectives is also to achieve the efficiency of the audit which means to complete the audit in due time, utilizing all the available resources including time at the optimum levels. Although, sometimes it becomes very difficult for the auditor to balance between maintaining the quality of the audit and its efficiency; the IFAC does not, in any case, support the notion of compromising the quality of the audit because of the limitation of resources. Nevertheless, the ISA requires that the auditor may regard the evidences as genuine unless evidence to the contrary has been discovered. The ISA also does not want the auditor to disregard the previous experience with management integrity and honesty. However, professional skepticism is required exclusively to be maintained in respect of being alert to conditions and circumstances that may have changed resulting in altered management integrity.

Auditors require persuasive evidences to conclude an assurance engagement. Auditors have recently been subject to severe criticism for not being able to identify and report misstatements to the stakeholders. Lax application of appropriate professional skepticism could be the most affecting reason. Auditing practices are being closely monitored and standardized globally by the International Federation of Accountants (IFAC) and also being regulated by local governing bodies, placing more and more focus on professional skepticism. As professional accountants, we must realize the great responsibility on our shoulders because of the trust that is placed on us. Chartered Accountants are one of the prime pillars of the economic and business structure globally and we must demonstrate accordingly in appearance and in mind. We must truly endorse that with great power comes great responsibility.

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