professional skepticism

Question 1

What is professional scepticism?

Answer 1

An attitude that includes:
-Questioning Mind: Always asking questions.
-Alertness: Being aware of potential errors or fraud.
-Critical Assessment: Evaluating audit evidence critically.

Question 2

stages where professional scepticism should be applied during an audit.

Answer 2

-Client Acceptance: Assess integrity of management and potential ethical threats.
-Risk Assessment Procedures: Challenge management’s explanations and obtain corroboratory evidence.
-Obtaining Audit Evidence: Challenge management on complex matters and evaluate the reliability and sufficiency of evidence.
-Evaluating Evidence: Critically assess audit evidence and look for contradictory evidence.
-Forming an Opinion: Ensure the sufficiency of evidence supports the audit opinion and evaluate the fair presentation of financial statements.

Question 3

What should auditors do if management refuses to provide evidence from a third party?

Answer 3

Consider the trustworthiness of evidence from management and potentially seek additional corroboration.

Question 4

Why is professional scepticism increasingly important in audits?

Answer 4

Due to increased judgment and subjectivity in financial reporting and lessons learned from past financial crises.

Question 5

What specific requirement does ISA 240 place on auditors regarding fraud?

Answer 5

-Maintain Scepticism Throughout: Continually apply scepticism, considering that material misstatements due to fraud could exist, even if management is generally honest (ISA 240.12).
-Assess Management’s Integrity: Be alert to the potential for management override of controls (ISA 240.8).
-Evaluate Evidence Carefully: Scrutinize the reliability of evidence provided by management and consider corroborating responses with other information (ISA 240.A17).

Question 6

What should auditors evaluate when assessing related party relationships and transactions?

Answer 6

Identify Related Parties: Ensure all related parties are identified, as management may have limited disclosure.
Evaluate Business Rationale: Assess the business rationale behind related party transactions to ensure they are legitimate.

Question 7

How does professional scepticism relate to audit quality?

Answer 7

It enhances audit quality by ensuring that auditors do not overlook unusual circumstances or adopt inappropriate assumptions.

Question 8

What does ISA 200 say about professional scepticism and management’s honesty?

Answer 8

Belief in management’s honesty does not relieve auditors from maintaining professional scepticism or obtaining sufficient audit evidence.

Question 9

What is one recommendation for audit firms to enhance professional scepticism?

Answer 9

Audit firms may need to change their culture to encourage a sceptical mindset.

Question 10

What role does professional scepticism play in the context of IFRS?

Answer 10

It is crucial due to the complex and subjective nature of IFRS requirements.

Question 11

How should auditors apply professional scepticism to accounting estimates?

Answer 11

Review Significant Assumptions: Examine the assumptions management uses in developing accounting estimates.
Check for Management Bias: Assess the judgements and decisions for potential bias.
Evaluate Fair Value Estimates: Scrutinize fair value estimates and the methods used to determine them.

Question 12

How should auditors apply professional scepticism when evaluating going concern assessments?

Answer 12

Review Management’s Assessment: Critically evaluate the assumptions and plans regarding the entity’s ability to continue as a going concern.
Assess Feasibility: Determine whether management’s plans to address going concern issues are realistic and achievable.

Question 13

How should auditors apply professional scepticism regarding compliance with laws and regulations?

Answer 13

Monitor for Non-Compliance: Be vigilant throughout the audit for indications of suspected non-compliance with laws and regulations.
Investigate Findings: Investigate any signs of potential non-compliance thoroughly and consider their impact on the financial statements.

Question 14

What does the Code say about objectivity and professional behaviour?

Answer 14

Objectivity: Requires professional judgment free from bias, conflicts of interest, or undue influence.
Professional Behaviour: Accountants must act in the public interest and adhere to ethical standards.

Question 15

What does integrity involve according to the Code?

Answer 15

Determination: Acting appropriately even under pressure.
Challenging: Standing firm and challenging others when necessary, despite potential personal or organizational consequences.

Question 16

What characteristics define an enquiring mind in the Code?

Answer 16

-Understanding Information: Ability to obtain and understand relevant information.
-Challenging Views: Capability to challenge others’ views.
Sensitivity to Integrity: -Awareness of the information’s integrity and presentation.
-Withholding Judgment: Delaying judgment until all information is considered.

Question 17

What types of bias should professional accountants be aware of?

Answer 17

-Anchoring Bias: Relying too much on initial information.
-Automation Bias: Overtrusting automated systems.
-Availability Bias: Favoring information that’s readily available.
-Confirmation Bias: Preferring information that confirms existing beliefs.
-Groupthink: Conforming to group opinions at the expense of creativity.
-Overconfidence Bias: Overestimating one’s own judgment abilities.
-Representation Bias: Relying on patterns or stereotypes.
-Selective Perception: Seeing what aligns with expectations.

Question 18

How does the Code highlight the importance of organisational culture?

Answer 18

-Leadership Accountability: Leaders must model and enforce ethical values.
-Education and Training: Proper programs and evaluations to support ethical culture.
-Adherence to Values: Ethical values should be maintained in all dealings.

Question 19

How does the Code relate to quality management?

Answer 19

Collaboration with ISQM 1: Works alongside the International Standard on Quality Management 1 to ensure effective quality management systems in audit firms.

Question 20

What is the key conclusion about the role of professional accountants according to the Code?

Answer 20

Public Interest: Professional accountants must act in the public interest and adhere to ethical standards to fulfill their responsibilities.