1- INTRODUCTION
Audit inspectors from many countries question themselves whether auditors use their critical thinking skills appropriately in their professional activities. Are they right to worry?
Professional scepticism, also called critical thinking, is an attitude of a questioning mind the auditor should adopt in carrying out its mission. This attitude is to ask the right questions, to dig more in doubt, and not to accept the assertions of management without corroboration. The exercise of critical thinking is so fundamental to the work of the auditors that audit standards make it an essential requirement. Indeed, without professional scepticism, it is impossible to carry out a mission of great quality and an accomplished one. However, it may be difficult for the auditor to prove that he has demonstrated an appropriate critical thinking and had the sufficient amount of suspicion.
More than ever before, audit inspectors urge auditors to reveal their critical thinking and demonstrate what they have done. According to recent reports, some auditors:
• do not react properly when they get inconsistent or contradictory evidence ;
• seem to place unwarranted reliance on management representations and sayings;
• seem to seek only evidence validating the assertions of management rather than questioning them ;
• seem to accept as sufficient non- evidences
In response to growing concerns on professional scepticism, audit firms, standard setters and others concerned use three main strategies:
• Improve individual auditor training so they know when they need to: challenge the assertions of management, consider alternatives, look for more evidence and respond to inconsistencies or contradictions. This training also provides a good soil for...
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...mportance of the duty that audit committees have in both measuring and communicating to investors whether the auditors have completed a high quality, sceptical audit;
- Auditors inevitably have strong working relations with management and audit committees, which may lead them to develop trust that could result into a lack of, or reduced, scepticism;
- The audit firms’ business models promote a culture of developing strong relationships with clients/audited entities. This highlights the risk of the auditor bringing his interests ahead of those of shareholders and could lead the audit firm and the auditor to develop trust or self-interest motivations that may reduce either their objectivity or willingness to challenge management to the extent required.
4- RESULTS/CONCLUSIONS
The analysis here suggests that an appropriate professional scepticism in audit implies:
Auditors do not provide audit opinions for different levels of assurance. Therefore, auditors consider providing more or less assurance when modifying evidence for engagement risk to be unnecessary. However, auditors should be professionally responsible to accumulate additional evidence, assign more experienced personnel, and review the audit more thoroughly, particularly when a client poses a higher than normal degree of engagement risk. The auditor should also modify evidence for engagement risk when high legal exposure and other potential actions affecting the auditor
When it comes to the audit objectives, the public and the auditing profession maintain varying expectations. The public expects the prevention of fraud to be the auditor’s responsibility. However, the auditors believe that they are responsible for fraud detection, but not obliged to find all of it. In addition, the public views the fraud by the characteristics displayed by management and employees. For example, WoolEx Mills’ management wanted to exude a prevailing financial position and to uphold reputations. By committing financial statement fraud, it made the company look successful even though Sales and cash flows were decreasing. The public would view these particular characteristics as pressures to why the company committed fraud. Greed, recognition, and influences also impacted the public’s view of Wool Ex Mills’ fraud scheme. The CEO used authority to influence employees to take part in the fraud scheme. The public would see that the CEO utilized power to manipulate shareholders, which impacted their trust with WoolEx Mills (Cohen, Ding, Lesage, & Stolowy 2015) (Krishnan & Shah
According to PCAOB Ethics and Independence Rule 3520 a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Independence is required for all audit engagements. The auditor must be independent of an entity when performing an engagement according to General Accepted Auditing Standards (GAAS). Independence is very significant to the audit profession, because the primary purpose of an audit is to provide financial statement users with reasonable assurance an on whether the financial statements are presented fairly. The auditor’s report gives credibility to an entity financial statement and without an auditor’s report the financial statement would be consider worthless. Reliance on management for the fair presentation of a financial statement would often result with a bias and impressive financial statements that doesn’t reflect a true picture of the entity’s financial position. An auditor’s independence should not in anyway be influenced by any relationship between their client and
Rittenberg, Larry, Bradley Schwieger, and Karla Johnstone. Auditing. 6th ed. Mason: Thomas South-Western, 2005. 10-40.
The audit committee should follow certain criterion to choose internal auditors and external auditors, and also supervise their activities and interaction thus ensuring the function of audit both internal and external.
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
The first trait of professional skepticism is to have a questioning mind. This trait is important to have as an auditor because it is the attitude of an individual relating to curiosity and interest. In this case, the audit team at Betty’s firm questioned Toby regarding the large miscellaneous expense. However, Toby would give Betty a response that will explain the issue without further investigating. Betty did not question Toby further since having a large miscellaneous expense account should be an indicator to auditors to prepare for questions. Betty did not have a questioning mind after Toby provided an explanation. In this situation, the best approach to Betty is to question Toby’s explanation of the large miscellaneous account balance. Auditors should contentiously ask questions until they are certain that they the evidence contains no errors.
Proverbs 10:9 states: “People with integrity walk safely, but those who follow crooked paths will slip and fall” (New Living Translation).” This Scripture suggests that individuals who do not walk in integrity follow “crooked paths.” They walk in ways that are not morally sound, pure, and honest—but in ways that are corrupt. Clients want accountants with integrity. Thus, integrity is critical to the public trust. As a matter of fact, one of the general definitions of integrity provided by the AICPA Code is that it is a quality from which the public trust derives. Also, it is an element of character fundamental to professional recognition, and it requires members to be (among other things) honest and candid within the constraints of confidentiality (Duska, Duska & Ragatz, 2011). Integrity in the accounting profession involves adhering to the rules and principles of the profession. This includes remaining free of conflicts of interest and maintaining client relationships in which the accountant can remain objective in discharging his or her responsibilities. This requires independence in fact and in appearance as mandated under section 1.200.001.01, Independence Rule the AICPA Code. In other words, no one should be able to view the accountant as being biased with respect to a client’s financial reporting due to an improper client relationship. Lack of integrity in accounting practices has been, and continues to be, a key element in the downfall of many institutions which has hurt the public trust in the accounting
Since the early 1970s, the auditing profession has been under increased pressure and scrutiny by government and users of audit reports. The phrase ‘ Audit Expectations Gap’ was first coined when the AICPA put the Cohen Commission together in 1974 to investigate whether the ‘expectations gap’ existed. However, the history of the expectation gap goes right back to the start of company auditing in the nineteenth century (Humphrey and Turley 1992). Since then, events ranging from the collapse of Arthur Anderson to the ongoing savings and loan problems seemed to have made the gap become more and more apparent.
An auditor needs to follow, abide and comply with the standards, rules and regulations of their profession, as these will help the auditor to recognize when independence and objectivity are compromised. Works Cited Gray, Iain and Stuart Manson. The Audit Process: Principles, Practice and Cases. London: Thomson Learning, 2008. Print.
Personal behavioural traits such as an auditor’s attitude and ethical values, and his level of competence which is his knowledge do affect his professional scepticism. This means that education, training and experience will influence professional scepticism. Therefore, audit firms are responsible to develop and polish their auditors to have a sceptical mind by planning and enforce policies that stress on the importance of professional scepticism in performing audit works.
The fundamental duty of an external financial auditor is to form and express an opinion on whether the reporting entity’s financial statements are prepared in accordance with the relevant financial reporting framework. In discharging this duty, the auditor must exercise “reasonable skill, care and caution” (Lopes, J. in Kingston Cotton Mill Co 1896) as reflected in current legal and professional requirements.
The evolution of auditing is a complicated history that has always been changing through historical events. Auditing always changed to meet the needs of the business environment of that day. Auditing has been around since the beginning of human civilization, focusing mainly, at first, on finding efraud. As the United States grew, the business world grew, and auditing began to play more important roles. In the late 1800’s and early 1900’s, people began to invest money into large corporations. The Stock Market crash of 1929 and various scandals made auditors realize that their roles in society were very important. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. The auditors’ job became more difficult as the accounting principles changed, and became easier with the use of internal controls. These controls introduced the need for testing; not an in-depth detailed audit. Auditing jobs would have to change to meet the changing business world. The invention of computers impacted the auditors’ world by making their job at times easier and at times making their job more difficult. Finally, the auditors’ job of certifying and testing companies’ financial statements is the backbone of the business world.
“Critical thinking is the disciplined art of ensuring that you use the best thinking you are capable of in any set of circumstances” (Paul & Elder, 2006, p. xviii). Critical thinking involves the capability to think rationally and fair-minded. One must have the ability to employ his thinking reflectively and independently. Critical thinking is more than just thinking "naturally." It involves analyzing oneself and self improvement. One needs to do more than gather information when making a good decision to think critically. Even if someone has a good memory and knows a large amount of facts is does not necessarily mean that he thinks critically. As a critical thinker one needs the ability to determine the consequences from what one knows, to know how to make use of information to solve problems, and seek reliable sources of information to inform oneself ("Module: About Critical Thinking", 2011). Critical thinking in business in important because it helps one recognize the prejudices, false beliefs, and habits that may lead to flawed decisions.
Audit is a process to evaluate and review the accounts and financial statement objectively. We can divide it into internal auditors and external auditors. Internal auditors have a inner knowledge of business process. Auditor has access to the much confidential information and all levels of management. But they may lose their judgement and they are not acceptable by the shareholder. “The overall objective of the external auditors is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements in acco...