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    A Model and Literature Review of Professional Skepticism in...
    research summary posted April 23, 2012 by The Auditing Section, last edited May 25, 2012, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
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    Title:
    A Model and Literature Review of Professional Skepticism in Auditing
    Practical Implications:

    Professional skepticism is an integral component of auditing and audit quality, as evidenced by standards such as SAS 1 and SAS 109.  Regulators often refer to professional skepticism as something that was missing when audit failures occur.  Thus, understanding what factors influence auditors’ levels of professional skepticism is important.  The author contends that this study facilitates an understanding of how audit firms can influence professional skepticism in practice via changes in such practices as hiring, training, performance appraisal, review, decision aids, incentives, and changes in tasks and institutions. 

    Citation:

    Nelson, M. W. 2009. A Model and Literature Review of Professional Skepticism in Auditing.  Auditing: A Journal of Practice & Theory 28 (2): 1-34.

    Keywords:
    Auditing, Professional skepticism
    Purpose of the Study:

    The purpose of this study is to review research that examines professional skepticism in auditing.  Consistent with other research and recent regulatory concerns, the author defines professional skepticism as “indicated by auditor judgments and decisions that reflect a heightened assessment of the risk that an assertion is incorrect, conditional on the information available to the auditor.” Unlike the professional standards, this definition reflects more of a “presumptive doubt” view rather than a “neutral” view of professional skepticism, implying that auditors who exhibit higher levels of professional skepticism are auditors who need relatively more persuasive evidence (in terms of quality and/or quantity) to be convinced that an assertion is correct.  In other words, such auditors are more likely to doubt evidence that an assertion is true than they are to doubt evidence than an assertion is false.  

    Drawing from prior studies, the author describes how audit evidence combines auditor knowledge, traits, and incentives to affect the level of professional skepticism exercised in auditor judgments.  Further, the author describes how, given a judgment with some level of professional skepticism, the judgment combines with auditor knowledge, traits, and incentives to affect auditor actions that reflect relatively more or less degrees of professional skepticism.

    Design/Method/ Approach:

    The study reviews research that examines professional skepticism in auditing.  The author discusses the various definitions of professional skepticism both in professional standards and academic research.  The author draws on prior relevant research to explain how auditor knowledge, traits, and incentives combine to affect the level of professional skepticism in auditor judgments and auditor actions. 

    Findings:
    • Knowledge: The author finds that audit experience and specialization can have both positive and negative effects on the level of professional skepticism exercised.  Auditors with more knowledge are better able to identify high-frequency errors and complex patterns of evidence that indicate error, but are also more likely to assume that non-error explanations are correct and that missing evidence is consistent with non-error explanations.  Auditors’ knowledge about complex professional standards provides auditors with an advantage when interacting with clients about contentious accounting issues.
    • Traits: The author finds that auditor problem-solving abilities, ethical predispositions, and traits such as self-confidence and the tendency to doubt are all related to the level of professional skepticism exercised in auditor judgments and actions.  
    • Incentives: The author finds that auditors’ incentives differ in the extent to which they affect the levels of professional skepticism exercised in auditor judgments and actions.  Auditors’ incentives can affect an auditor directly or indirectly, be immediate versus probabilistic, be financial versus social in nature, and affect an auditor in conscious and unconscious ways.  
    • Judgments: The author describes how audit evidence and pre-existing auditor knowledge, traits, and incentives all affect the level of professional skepticism in auditor judgments.  An example of a critical auditor judgment that is influenced by the level of applied professional skepticism is the overall audit risk assessment.  The author finds that much of the prior research draws upon work in psychology to identify how auditors’ cognitive limitations affect their levels of professional skepticism. Auditors’ cognitive limitations affect their levels of professional skepticism in predictable ways; therefore, practical changes can be made to increase the levels of professional skepticism applied in auditor judgments when these cognitive limitations are present.
    • Actions: The author describes how the level of professional skepticism applied in auditor judgments is a primary driver of the level of professional skepticism applied in auditor actions.  Some studies provide evidence that, given the level of professional skepticism of a particular auditor judgment, auditors’ traits and incentives influence whether or not an auditor takes an action that exhibits that level of professional skepticism.  The main auditor actions studied in prior research include auditors’ actions to modify the nature and extent of planned audit tests and auditors’ willingness to waive adjustments of identified misstatements.  
    • The author describes in detail how auditing firms can enhance levels of applied professional skepticism via changes in such areas as hiring, training, performance evaluation and promotion, review and consultation, decision aids, incentives, and tasks and institutions.
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
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