- 6 Marks
Question
You are the Audit Manager of Golden Beach Hotels Ltd (GBHL), which has been making losses in its operations due to various factors such as competition, renovation of non-current assets, and non-compliance with laws and regulations in the hospitality industry. These factors are not obvious in the draft financial statements submitted for auditing.
Required:
Explain what is meant by professional skepticism, and why this is necessary to understand the financial performance and position of GBHL.
Answer
Professional skepticism is an attitude that includes having a questioning mind, being alert to conditions that may indicate possible misstatements due to error or fraud, and subjecting audit evidence to a critical assessment rather than just accepting it at face value.
It is essential that professional skepticism is maintained throughout the audit to minimize the risk of overlooking unusual transactions, over-generalizing when drawing conclusions, or using inappropriate assumptions in determining the nature, timing, and extent of audit procedures and evaluating their results.
Professional skepticism is necessary to critically assess audit evidence, question contradictory evidence, and evaluate the reliability of management’s explanations and documents. This is especially important in understanding GBHL’s financial performance, which may be affected by undisclosed issues or misstatements.
- Tags: Audit Procedures, Financial Performance, Professional Skepticism
- Level: Level 2
- Topic: Professional and Ethical Considerations
- Series: MAR 2023
- Uploader: Theophilus