• 15 Marks

AAA – Nov 2018 – L3 – Q5 – Ethical Issues in Auditing

Examining professional skepticism, its necessity across audit stages, and its application in audits.

As a result of recent global financial crises, audit inspection reports in various jurisdictions have noted areas requiring professional judgment. Such areas include fair value, related party transactions, and going concern assessments, where regulators and oversight bodies believe that auditors should clearly demonstrate professional scepticism.

Required:

a. Explain the term “Professional Scepticism.” (3 Marks)

b. Identify the stages in the audit process where professional scepticism is necessary. (3 Marks)

c. Discuss three ways in which the application of professional scepticism can be demonstrated by the auditor. (9 Marks)

  • a. Definition of Professional Scepticism:
    • Professional scepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. It involves being alert to circumstances that may indicate possible misstatements due to error or fraud and thoroughly evaluating audit evidence rather than accepting it at face value.
  • b. Stages in the Audit Process Requiring Professional Scepticism:
    1. Risk Assessment: During the planning phase, professional scepticism is essential in identifying areas that may be susceptible to material misstatement, whether due to error or fraud.
    2. Evidence Gathering: Throughout the audit, scepticism ensures that auditors critically evaluate the reliability of the evidence obtained, especially in areas involving estimates and judgments.
    3. Evaluation of Conclusions: At the final stage, professional scepticism is applied when forming conclusions, particularly regarding issues like going concern assumptions and related party transactions.
  • c. Demonstrating Application of Professional Scepticism:
    1. Challenging Management’s Assumptions: Auditors should critically assess the reasonableness of management’s assumptions, especially in areas involving judgment, such as fair value measurements.
    2. Seeking Corroborative Evidence: When dealing with related party transactions or other sensitive areas, auditors should look for additional evidence to verify the information provided by management.
    3. Evaluating Inconsistencies: If auditors find any inconsistencies in the audit evidence, they should investigate further and not disregard information that contradicts their initial expectations or findings.
Back to all questions

Pick a Form

Professional Tutor Application Form
Academic Tutor Application Form
Student Tutor Application Form