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• Professional Skepticism is defined in • Professional skepticism is an attitude that includes being

the ISAs as An attitude that includes a alert to, for example:
questioning mind, being alert to
conditions which may indicate possible a) Evidence that is inconsistent with other evidence obtained;
misstatement due to error or fraud, and b) Information that calls into question the reliability of
a critical assessment of audit evidence documents and responses to inquiries to be used as evidence;
• In that model the auditor exercises c) Circumstances that suggest the need for procedures in
professional judgment and maintain
professional skepticism throughout the addition to those required by relevant Assurance Standards;
planning and performance of the audit and
and, among other things: d) Conditions that may indicate likely misstatement.
• Identify and assess risks of material
misstatement, whether due to fraud or error, • Maintaining professional skepticism throughout the
based on an understanding of the entity and its engagement is necessary to, for example, reduce the risk
environment, including the entity’s internal
control. of:
• Obtain sufficient appropriate audit evidence Overlooking unusual circumstances;
about whether material misstatements exist,
through designing and implementing appropriate Overgeneralizing when drawing conclusions from observations;
responses to the assessed risks.
• Assessing audit evidence whether it is
and
appropriate and sufficient. Using inappropriate assumptions in determining the nature,
• Form an opinion on the financial statements timing and extent of procedures and evaluating the results
based on conclusions drawn from the audit thereof.
evidence obtained.
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• Professional skepticism is necessary to the critical

assessment of evidence. This includes questioning
inconsistent evidence and the reliability of documents and
responses to inquiries. It also includes consideration of the
sufficiency and appropriateness of evidence obtained in
the light of the circumstances. The auditor shall plan and perform an audit with
• Unless the engagement involves assurance about whether professional skepticism recognizing that
documents are genuine, records and documents may be circumstances may exist that cause the financial
accepted as genuine unless the practitioner has reason to statements to be materially misstated. [ISA 200,
believe the contrary. Nevertheless, the practitioner Para. 15, Ref: Para. A18–A22]
considers the reliability of information to be used as
evidence.
• The practitioner cannot be expected to disregard past
experience of the honesty and integrity of those who
provide evidence. Nevertheless, a belief that those who
provide evidence are honest and have integrity does not
relieve the practitioner of the need to maintain
professional skepticism. 3 4

Professional skepticism is necessary to the critical Professional skepticism is applied in making

assessment of audit evidence and assists the professional judgments, which prompt actions (e.g., in
auditor in remaining alert for possible indications relation to risk assessment and response)
of management bias.
This includes questioning contradictory audit • Professional judgment – The application of relevant
evidence and the reliability of documents, training, knowledge and experience, within the
responses to inquiries and other information context provided by auditing, accounting and ethical
obtained from management and those charged with standards, in making informed decisions about the
governance. courses of action that are appropriate in the
It also includes being alert to conditions that may
circumstances of the audit engagement. [ISA 200
indicate possible misstatement due to error or
fraud and considering the sufficiency and Para. 13(k)]
appropriateness of audit evidence obtained in light • The auditor shall exercise professional judgment in
of the circumstances. [IAPN 1000, Para.71] planning and performing an audit of financial
statements. [ISA 200 Para. 16, Ref: Para. A23–A27]
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• Professional Judgment • The distinguishing feature of the professional judgment expected of

a practitioner is that it is exercised by a practitioner whose training,
• Professional judgment is essential to the proper conduct of an assurance knowledge and experience have assisted in developing the necessary
engagement. This is because interpretation of relevant ethical competencies to achieve reasonable judgments.
requirements and relevant Assurance Standards and the informed decisions
required throughout the engagement cannot be made without the • The exercise of professional judgment in any particular case is based
application of relevant training, knowledge and experience to the facts and on the facts and circumstances that are known by the practitioner.
circumstances. Professional judgment is necessary in particular regarding Consultation on difficult or contentious matters during the course of
decisions about: the engagement, both within the engagement team and between
• Materiality and engagement risk. the engagement team and others at the appropriate level within or
outside the firm assist the practitioner in making informed and
• The nature, timing and extent of procedures used to meet the reasonable judgments.
requirements of relevant Assurance Standards and obtain evidence.
• Evaluating whether sufficient appropriate evidence has been obtained, and
• Professional judgment can be evaluated based on whether the
whether more needs to be done to achieve the objectives of relevant judgment reached reflects a competent application of assurance and
Assurance Standards. measurement or evaluation principles and is appropriate in the light
of, and consistent with, the facts and circumstances that were known
• In particular, in the case of a limited assurance engagement, professional to the practitioner up to the date of the practitioner’s assurance
judgment is required in evaluating whether a meaningful level of assurance report.
has been obtained.
• In the case of a direct engagement, applying the criteria to the underlying • Professional judgment needs to be exercised throughout the
subject matter, and if the practitioner selects or develops the criteria, engagement. Professional judgment is not to be used as the
selecting or developing them. justification for decisions that are not otherwise supported by the
facts and circumstances of the engagement or sufficient appropriate
• In the case of an attestation engagement, evaluating such judgments made evidence.
by others.
• The appropriate conclusions to draw based on the evidence obtained. 7 8

Understanding of biases and other

relevant psychological factors
• There are a range of biases that can hinder logical and objective
reasoning. These can subconsciously affect the judgement processes of
everyone, including highly skilled and experienced auditors.
• Such biases may include:
1. Availability bias: a tendency to place more weight on events or
experiences that immediately come to mind or are readily available
than on those that are not.
2. Confirmation bias: a tendency to place more weight on information
that corroborates/verify an existing belief than information that
contradicts or casts doubt on that belief.
3. Groupthink: a tendency to think or make decisions as a group that
discourages creativity or individual responsibility.
4. Overconfidence: a tendency to overestimate one’s own ability to make
accurate assessments of risk or other judgements or decisions.
5. Anchoring bias: a tendency to use an initial piece of information as an
anchor against which subsequent information is inadequately assessed.
6. Automation bias: a tendency to favor output generated from
automated systems, even when human reasoning or contradictory
information raises questions as to whether such output is reliable or fit
for purpose.
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• Other relevant psychological factors may impact on

judgement too.
• For example, certain personality traits may be detrimental to
the exercise of good judgement, such as an undue fear of
2.2. Audit Evidence
conflict, unwillingness to challenge figures of authority
where appropriate, impatience or stubbornness. Conversely,
some are likely to support an effective judgement process,
such as perceptiveness and a willingness to consult and
listen. Nature of Evidence
• Furthermore, an auditor’s feelings and beliefs will play an
important role in how they go about making a judgement,  The use of evidence is not unique to auditors
affecting matters such as where they look to gather
information and how susceptible they are to judgement traps
such as motivated reasoning, which involves one’s  Evidence is also used by scientists, lawyers,
motivations unduly influencing how one evaluates and historians
information or makes decisions.
• For example, an auditor may have made decisions in the past
that have become politically “associated” with them, and
consequently could be motivated to make decisions now that
are consistent with those prior decisions or do not cast them
in a bad light, which could lead to inappropriate judgements.
• Understanding the factors discussed here assists the auditor
in developing strategies to mitigate or cultivate such factors
as appropriate. 11
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Critical Assessment of Audit Evidence Critical Assessment of Audit Evidence

• Audit evidence – Information used by the auditor in • The auditor shall design and perform audit procedures that are
arriving at the conclusions on which the auditor’s opinion is appropriate in the circumstances for the purpose of obtaining
sufficient appropriate audit evidence. [ISA 500 Para. 6, Ref: Para.
based. Audit evidence includes both information contained A1–A25]
in the accounting records underlying the financial • ISA 330 requires the auditor to conclude whether sufficient
statements and other information. [ISA 500 Para. 5(c)] appropriate audit evidence has been obtained.
• Appropriateness (of audit evidence) – The measure of the • Whether sufficient appropriate audit evidence has been
quality of audit evidence; that is, its relevance and its obtained to reduce audit risk to an acceptably low level, and
thereby enable the auditor to draw reasonable conclusions on
reliability in providing support for the conclusions on which which to base the auditor’s opinion, is a matter of professional
the auditor’s opinion is based. [ISA 500 Para. 5(b)] judgment.
• Sufficiency (of audit evidence) – The measure of the • ISA 200 contains discussion of such matters as the nature of
quantity of audit evidence. The quantity of the audit audit procedures, the timeliness of financial reporting, and the
evidence needed is affected by the auditor’s assessment of balance between benefit and cost, which are relevant factors
when the auditor exercises professional judgment regarding
the risks of material misstatement and also by the quality of whether sufficient appropriate audit evidence has been
such audit evidence. [ISA 500 Para. 5(e)] 13 obtained. [ISA 200 Para. A6] 14

Audit Evidence Decisions Audit Program

1. Which audit procedures to use It includes a list of the audit procedures
the auditor considers necessary.
2. What sample size to select for a given procedure
 Sample sizes
3. Which items to select from the population  Items to select
 Timing of the tests
4. When to perform the procedures (timing)
Most auditors use computers to facilitate
the preparation of audit programs.

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Six Characteristics of Reliable

Relationships Among Audit
Evidence
Evidence and Qualities
Persuasiveness
[Link] of provider
1. Affecting Persuasiveness
Audit Evidence Decisions of Evidence

[Link] of client’s Audit procedures and timing Appropriateness

Relevance
internal controls Reliability
Independence of provider
[Link]’s direct knowledge Effectiveness of internal controls
Auditor's direct knowledge
Qualifications of provider
[Link] of individuals Objectivity of evidence
Timeliness
providing the information When procedures are performed
Portion of period being audited
[Link] of objectivity Sample size and items to select Sufficiency
Adequate sample size
6.
[Link] Selection of proper population items
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Persuasiveness and Cost Types of Audit Evidence

In making decisions about evidence 1. Physical examination
for a given audit, both persuasiveness 2. Confirmation
and cost must be considered.
3. Documentation
4. Analytical procedures
The auditor’s goal is to obtain a
sufficient amount of appropriate 5. Inquiries of the client
evidence at the lowest total cost. 6. Recalculation
7. Reperformance
8. Observation
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Relationships Broad guidelines

concerning auditor
Auditing
standards
qualifications and
conduct, evidence
accumulation,
Physical Examination
Qualifications
and conduct and reporting It is the inspection or count by the
Evidence
accumulation
auditor of a tangible asset.
Physical examination
Confirmation Reporting
Documentation
Analytical procedures
Inquiries of the client
Types of
Broad categories of
This type of evidence is most often
evidence
Recalculation evidence available associated with inventory and cash.
Reperformance for the auditor’s
Observation accumulation
Audit
procedures Specific instructions
FOUR for the accumulation
AUDIT of types of evidence
EVIDENCE Sample size
DECISIONS and items
to select Timing
of tests
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Confirmation Confirmation
Information Source Information Source

Assets Liabilities
Cash in bank Bank Accounts payable Creditor
Marketable securities Customer Notes payable Lender
Accounts receivable Maker Advances from customers Customer
Notes receivable Consignee Mortgages payable Mortgagor
Owned inventory out on consignment Public warehouse Bonds payable Bondholder
Inventory held in public warehouses Insurance company
Cash surrender value of life insurance Investment custodian

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Confirmation Documentation
Information Source It is the auditor’s inspection of the
Owners’ Equity client’s documents and records.
Shares outstanding Registrar and
transfer agent

Other Information
Internal External
Insurance coverage Insurance company documents documents
Contingent liabilities Bank, lender, and
client’s legal counsel
Bond indenture agreements Bond holder
Collateral held by creditors Creditor

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Analytical Procedures Inquiries of the Client

 Understand the client’s industry and business It is the obtaining of written or oral
information from the client in response
 Assess the entity’s ability to continue as a
to questions from the auditor.
going concern

 Indicate the presence of possible misstatements

in the financial statements Recalculation
 Reduce detailed audit tests
It involves rechecking a sample of calculations
made by the client.
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Appropriateness of Types of
Reperformance Evidence
It is the auditor’s independent tests of client  Type of evidence
accounting procedures or controls that  Independence of provider
were originally done.
 Effectiveness of client’s internal controls

Observation  Auditor’s direct knowledge

 Qualifications of provider
It is the use of the senses to assess client activities.
 Objectivity of evidence

The auditor may tour the plant to obtain a general

impression of the client’s facilities.
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Types of Evidence and Four Evidence

Decisions for a Balance-Related Audit
Objective for Inventory*
Evidence
Terms and Types of Evidence
Items to
Type of Decisions Terms Type of Evidence
Evidence Audit Procedure Sample Size Select Timing
Observation Observes client’s All count Not Balance Examine Documentation
personnel counting teams applicable
inventory to determine
sheet date Scan Analytical procedures
whether they are Read Documentation
properly following
instructions
Compute Analytical procedures
40 items
Count a sample of with large Recompute Recalculation
Physical inventory and
examination compare quantity 120 dollar Balance Foot Recalculation
value, plus sheet
and description to items
80 date Trace Documentation/Reperformance
client’s counts randomly Compare Documentation
selected Count Physical examination
Compare quantity on 30 items with Balance
client’s perpetual 70 large dollar sheet
Observe Observation
Documentation records to quantity items value, plus 40 date Inquire Inquiries of client
on client’s counts randomly
selected
Vouch Documentation

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Audit Documentation Audit Documentation

• [ISA 230 Para. A7] Audit documentation provides evidence that the audit • Engagement documentation provides a record of the basis for
complies with the ISAs. However, it is neither necessary nor practicable for the the assurance report when it is prepared on a timely basis and
auditor to document every matter considered, or professional judgment is sufficient and appropriate to enable an experienced
made, in an audit. Further, it is unnecessary for the auditor to document practitioner, having no previous connection with the
separately (as in a checklist, for example) compliance with matters for which
engagement, to understand:
compliance is demonstrated by documents included within the audit file. For a) The nature, timing and extent of the procedures performed
example... to comply with relevant Assurance Standards and applicable
• In relation to requirements that apply generally throughout the audit, there legal and regulatory requirements;
may be a number of ways in which compliance with them may be b) The results of the procedures performed, and the evidence
demonstrated within the audit file: obtained; and
• While there may be no single way in which the auditor’s professional
skepticism is documented, the audit documentation may nevertheless provide
c) Significant matters arising during the engagement, the
evidence of the auditor’s exercise of professional skepticism in accordance
conclusions reached thereon, and significant professional
judgments made in reaching those conclusions.
with the ISAs. Such evidence may include specific procedures performed to
corroborate management’s responses to the auditor’s inquiries. • Engagement documentation includes how the practitioner
• Additionally, the audit documentation may be a memo that describes how addressed any inconsistency between information identified by
professional skepticism, working in combination with professional judgment the
critically analyzed an estimate and lead to further audit procedures being • practitioner and the practitioner’s final conclusion regarding a
performed. significant matter.
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Audit Documentation Audit Documentation

• [ISA 230 Para. A9] An important factor in determining the • [ISA 230 Para. A10] Some examples of circumstances in which, in
accordance with Paragraph 8, it is appropriate to prepare audit
form, content and extent of audit documentation of documentation relating to the use of professional judgment
significant matters is the extent of professional judgment include, where the matters and judgments are significant:
exercised in performing the work and evaluating the results.  The rationale for the auditor’s conclusion when a requirement
provides that the auditor “shall consider” certain information or
• Documentation of the professional judgments made, where factors, and that consideration is significant in the context of
significant, serves to explain the auditor’s conclusions and to the particular engagement.
reinforce the quality of the judgment.  The basis for the auditor’s conclusion on the reasonableness of
areas of subjective judgments (for example, the reasonableness
• Such matters are of particular interest to those responsible of significant accounting estimates).
for reviewing audit documentation, including those carrying  The basis for the auditor’s conclusions about the authenticity of
out subsequent audits when reviewing matters of continuing a document when further investigation (such as making
appropriate use of an expert or of confirmation procedures) is
significance (for example, when performing a retrospective undertaken in response to conditions identified during the audit
review of accounting estimates). that caused the auditor to believe that the document may not
be authentic.
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