In these videos, we walk through 5 AUD practice questions in each to teach about applying professional skepticism and judgment. These questions are from AUD content area 1 on the AICPA CPA exam blueprints: Ethics, Professional Responsibilities, and General Principles.
The best way to use each video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
Also be sure to watch one of our free webinars on the 6 “key ingredients” to an extremely effective & efficient CPA study process here…
Applying Professional Skepticism and Judgment
Professional skepticism is a critical mindset that requires auditors to question and verify information rather than simply accepting it at face value. However, various unconscious biases, external incentives, and judgment-making shortcuts can impede an auditor’s ability to maintain this skeptical outlook. Recognizing these impediments is the first step toward mitigating their effects and ensuring a high-quality audit.
1. Unconscious Biases
Overconfidence Bias
- Definition: Auditors may overestimate their abilities to detect errors or fraud, believing they are less susceptible to mistakes than they actually are.
- Impact: This can lead to inadequate testing and a failure to gather sufficient evidence, ultimately increasing the risk of undetected misstatements.
Confirmation Bias
- Definition: The tendency to seek or interpret evidence in a way that confirms preconceptions.
- Impact: Auditors might focus on documents or data that support management’s claims while ignoring contradictory information. For instance, an auditor might accept a client’s explanation for a variance without further inquiry if it aligns with their initial expectation.
Anchoring Bias
- Definition: Overreliance on the first piece of information encountered (the “anchor”).
- Impact: An auditor reviewing a previous year’s estimate might be reluctant to adjust that figure significantly, even when current-year evidence suggests a different result.
2. External Pressures and Incentives
Time and Budget Constraints
- Definition: Tight deadlines or limited budgets incentivize auditors to seek “quick fixes” rather than the most reliable evidence.
- Impact: Under these pressures, an auditor may choose to rely on client-provided data or avoid additional audit procedures, compromising thoroughness.
Client Relationship Pressures
- Definition: Desire to maintain a positive rapport with the client or cross-sell other services.
- Impact: Auditors may subconsciously avoid challenging management’s assertions to preserve a good working relationship, thereby undercutting professional skepticism.
Performance Incentives
- Definition: Bonus structures or promotions tied to perceived efficiency or client satisfaction.
- Impact: Auditors might reduce testing or disregard red flags if they believe it will reflect favorably on them in the short term, even if it risks long-term audit quality.
3. Judgment-Making Shortcuts
Satisficing
- Definition: Settling for evidence that is “good enough” rather than seeking the best possible evidence.
- Impact: In practice, this could mean relying on readily available documentation rather than verifying with external sources, increasing the risk of missing material misstatements.
Groupthink
- Definition: A collective pattern where team members strive for consensus without critically evaluating alternative viewpoints.
- Impact: If senior team members or dominant personalities favor a particular conclusion, other auditors may avoid raising concerns, even if there is contradictory evidence.
Familiarity Threat
- Definition: Long-standing relationships with management or repeat audit engagements can make auditors overly trusting.
- Impact: Auditors may skip certain tests or place too much reliance on management representations if they believe they already “know” the client well.
4. Examples of Impediments in Action
- Time Pressure Scenario
- Situation: An audit firm gives a strict deadline to complete testing for revenue recognition.
- Risk: Auditors might rely on the client’s schedule of sales without verifying underlying documentation.
- Outcome: Potential fraud or error in revenue figures remains undiscovered due to incomplete testing.
- Client Intimidation Scenario
- Situation: Management signals dissatisfaction with probing questions about internal controls.
- Risk: The auditor’s inclination to please the client could outweigh the need to thoroughly investigate red flags.
- Outcome: The auditor fails to follow through on additional procedures, compromising skepticism.
5. Mitigating Strategies
- Awareness and Training: Regularly discuss common biases and pressures, making staff aware of how easily these can creep into their work.
- Strong Quality Controls: Implement peer reviews, second partner reviews, and rotation of audit team members to provide fresh perspectives.
- Structured Professional Judgment Framework: Use checklists or decision matrices that guide auditors to evaluate evidence systematically and consider alternative viewpoints.
- Tone at the Top: Establish firm-wide policies emphasizing objectivity, independence, and thoroughness over quick completion or client appeasement.
Conclusion
Unconscious biases, external pressures, and judgment shortcuts pose substantial threats to professional skepticism. By understanding these impediments and employing robust mitigation strategies, auditors can maintain the necessary balance between efficiency and diligent verification. Ultimately, embracing a culture that prioritizes skepticism and sound professional judgment strengthens the integrity and reliability of the audit process.