Does skepticism by the auditor would enhance audit quality

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

PCAOB describes professional skepticism as a general duty of care that needs to be applied by the auditor throughout the duration of the audit engagement. Professional skepticism involves the auditor having a clear and questioning mind regarding the assertions that are presented by management or other client personnel. The auditor is instructed to not take the words or data presented by management as sufficient and appropriate audit evidence but rather the auditor needs to thoroughly audit the evidence with a questioning mind to achieve reasonable assurance about the persuasiveness of the evidence. Skepticism is composed of three elements; auditor attributes, mindset and actions. The PCAOB

* How can such apparently reliable evidence lead an auditor to an improper conclusion? (6 points)

Summary: The objective of this article is to clarify the significance of professional skepticism as an essential part of the auditor’s mindset, and to consider the reasons why approaching an audit with an attitude of professional skepticism is becoming increasingly important. The following are three case studies that will concentrate your consideration on what it takes to be a skeptical auditor when performing journal entry testing.

“Audit committee members or their agents may proactively examine areas, functions, and personnel where collusive fraud risk is reasonably likely to be perpetrated,” (Zmags). The search for fraud, even if performed in the same location multiple times, may continue until the audit committee feels confident that they have ruled out the probability that fraud is prevalent. One of the biggest risks of fraud is management override of controls, requiring the extensive search for risk in, “journal entries and other adjustments and reviewing accounting estimates for possible biases that could result in material misstatements,” (Nysscpa).

Professional skepticism practices as neutral but discipline approach to detection and investigation. Per SAS No. 1 it suggests that an auditor neither assumers that management is dishonest or assumes unquestionable honesty. Professional skepticism requires fraud examiners to “pull on thread” in which means Red flags are warning signal or something that demands attention or provokes an irate reaction. Red Flag symptoms of fraud may be divided into at least six categories: unexplained accounting anomalies, exploited internal control weaknesses, identified analytical anomalies where non

The company should hire it’s own internal auditor’s to ensure that the staff understand the company’s accounting procedures. This also helps the external auditor as it give the external auditor another viewpoint when assessing fraud risks. The internal auditors are apart of those charged with governance and that helps take the pressure off of the external auditor if a fraud should be discovered.

An attitude that includes a questioning mind and a critical assessment of audit evidence. The auditor should not assume whether they relate to academics, safety or business practices – help people identify acceptable levels of quality, and standards are used in nearly all aspects of our lives. Without standards, it’d be harder to tell whether a student is making adequate educational progress. While it sounds as if there are numerous standards valuation professionals may need to consider, industry experts have noted that the key is to adhere to standards of those organizations to which you belongs. Skeptic mind enables auditor to recognize that circumstances may exist that because the financial statements to be material misstated so he should be alert and remain cautious about such information and events that indicate the existence of material misstatement in the financial statements. Auditor is required to decide about many things while conducting assurance engagement. To decide appropriately audit is required to apply his professional judgment to the matter under consideration. Professional judgment is a skill that auditor acquires overtime and only after acquiring such skill he can apply professional judgment. Auditor acquires this skill by obtaining relevant:

Professional skepticism in auditing financial statement involves the auditor having the necessary skill set and attitude that includes a questioning mind, making a critical assessment of the audit evidence, careful observation and looking beyond the obvious, being diligent, alert, persistent and courageous paying close attention to situations which may involve misstatement due to fraud. Professional skepticism is critical in an audit because it facilitates professional judgment and it also provides the evidence that the audit was planned and performed in accordance with generally accepted auditing standards (Mintz & Morris, 2014).

Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become

Throughout the years, banks, shareholders, possible investors and creditors always relied on the financial statements produced by a company. Since the management of a company is producing these documents it has been assumed that the managers may act dishonestly so that their performance looks better. To monitor the company’s performance better the directors along with the shareholders employ external auditors to check all these financial statements for both intentional and unintentional errors. Therefore, external auditors have no motivation to produce dishonest reports, hence they are regarded as being truly independent. But can they actually be independent when their

The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.

An auditor’s duty is to presume a risk of material misstatement exists, and thus engage in professional skepticism in reviewing the financial documents published by an organization. Evidence does not exist that PwC practiced such skepticism when presented with financial statements depicting an organization’s continued improvement

To put it succinctly, if auditors take at face value everything they see or hear, they are not doing their jobs. A final reason auditors don’t uncover fraud is because they frequently don’t use the analytical tools that are available to them.

Internal auditor, should be the eyes and ears of the company to combat fraud. As fraud becomes a growing problem to every company nowadays no matter what size the organization is, the risk of fraud is like a storm that could wipe the company out dry at any given time. Most companies have strategically strengthen its internal control and corporate governance to effectively mitigate fraud as it is becoming a necessity to protect the company from the perpetrators through an internal audit function. This is consistent to Flostoiu (2012) research conclusion that the excellent way to prevent fraud is by internal control and evaluate consistently to ensure internal controls remain effective, as organization with successful implementation of internal audit programs is more audit-ready and more equipped to detect fraud, as internal audit function is becoming extremely significant towards identification of fraud indicators (p.27). Nicolaescu (2013) determined the organization’s internal audit is a corporate governance structure’s important part and the internal auditor’s abilities to conduct “fraud work” (p.110). In response to the growing concern of fraud, the Auditing Standard Boards issued Statement on Auditing Standards (SAS, 2002) No. 82: Considerations of Fraud in a Financial Statement Audit, which requires auditor to strategically accomplish the audit and identify the risk of material misstatement due to fraud or error