What Is Professional Skeptism

Aleicia Copeland

ACC 625 Summer 2016

June 15th, 2016

Mid-Term Essay

INTRODUCTION

An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate.  This basic function of accounting is so important that there is an entire field of experts, known as auditors, dedicated to assuring its proper performance.   Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties.  This issue has been the catalyst for many discussions regarding the proper procedures an auditor should follow when analyzing a firm’s financial statements.   A byproduct of the years of lengthy debate has been an increased focus on the level of professional skepticism an auditor should demonstrate when carryout audit procedures.  In this text there will be a discussion on what professional skepticism (PS) is, the different perspectives of PS, how professional skepticism relates to professional judgement, and its overall effect on the auditing field.

WHAT IS SKEPTICISM?

Defined as “an attitude that includes a questioning mind and a critical assessment of audit evidence” (AU 230), professional skepticism is a something that should be exercised in all aspects of an audit.  Three of the major governing bodies over external audits are the AICPA, the PCAOB, and the SEC.   The American Institute of Certified Public Accountants (AICPA) states that in order to exercise due professional care, which is a requirement under generally accepted auditing standards (GAAS), an auditor must use professional skepticism.  Similarly, the public company accounting oversight board (PCAOB) emphasizes professional skepticism, stating that the level of PS used by an accountant has a direct impact on the overall quality of the audit.  

WHAT ARE THE TWO PERSPECTIVES OF PS?

Throughout the various discussions between accountants and major governing bodies, there have been two perspectives of professional skepticism (PS) that have risen to be dominant.  The neutrality perspective and the presumptive doubt perspective can been seen throughout much of the authoritative literature on professional skepticism. Neutrality refers to the accountant being free from management bias, while presumptive doubt represents the assumption that the auditor has some level of responsibility in management’s dishonesty and that bias exist.  Seeing as presumptive doubt involves a more skeptical view of the auditor’s mindset, it is easy for one to believe that this perspective is the more realistic of the two, making it more important.  Not only does this perspective provide a more conservative approach to the auditing, but it also leaves room for the natural human biases that tend to exist.  While an auditor is expected to be a professional, it is not realistic to expect them to be devoid of natural human tendencies and emotions, thus it is important to focus on the biases that may exist in order to limit the overall audit risk.