Auditor independence under the spotlight
“Professional skepticism is about auditing the time, mindset, attitude and related questions about how management has scouted the transactions and applied judgments and assessments within disclosures in the financial statements as well,” says Ken Siong, technical director of the International Ethics Standards Board for Accountants (IESBA). “It’s very critical [to have professional skepticism] to enable auditors to get to the bottom of issues to make sure they can be confident and evaluate critical issues, and whether those issues have been accounted for and presented in financial statements.”
Siong's words come as the Independent Regulatory Board for Auditors (IRBA) welcomes the release of the publication Toward enhanced professional skepticism by the combined Professional Scepticism Working Group of the International Auditing and Assurance Standards Board (IAASB), the IESBA, and the International Accounting Education Standards Board (IAESB).
The report highlights the importance of professional skepticism to the public interest, which it says is underscored by the increasing complexity of business and financial reporting and the fundamental reliance the public places on credible reporting.
Pictured left: Ken Siong
The South African audit regulator has for some time been concerned about the independence and scepticism of auditors, and undertook a two-year project to research independence measures, which led to the announcement of the Mandatory Audit Firm Rotation (MAFR) rule earlier this year.
Bernard Agulhas (main picture), CEO of the IRBA, said:
"In South Africa, during our work on independence, we have been conscious of the links between weakened professional scepticism and loss of independence. Independence of auditors is absolutely key to audit quality. So, if we wish to improve the audit quality, then we must work on professional scepticism in order to strengthen independence. The observations and recommendations of the report are largely aligned to the conclusions we reached in our independence research as it related to weakened professional scepticism and loss of independence."
In particular, the recommendations urge auditors to be more sceptical of management estimates, as the group believes that the growing use of management's estimates in recent years has led to deficiencies in reports.
Auditors need to be wary of their own biases and judgments, says the group. It further suggests that audit committees use the new recommendations to measure the effectiveness of their audit teams, and to practice more scepticism themselves in their management oversight roles.
"A sceptical attitude also includes asking the right questions when accepting and continuing a client relationship, and exercising healthy professional scepticism when being presented with information from clients. Auditors should also consider that there could be information that is not presented to them and should develop appropriate procedures which will make them aware thereof."