International standard-setters outline ways to enhance auditor’s professional skepticism

Three international standard-setters on Aug. 14, 2017, published a report that outlines potential ways to promote professional skepticism in auditing.

Toward Enhanced Professional Skepticism, which was produced by a joint working group formed in 2015 by the International Auditing and Assurance Standards Board (IAASB), International Ethics Standards Board for Accountants (IESBA), and the International Accounting Education Standards Board (IAESB), describes the group’s observations about the current environment and sets out actions the global boards will take. This is the first time that the three boards jointly commissioned a report.

The importance of professional skepticism is underscored by the increasing complexity of business and financial reporting, including the greater use of estimates and management judgment, business model changes resulting from technological developments, and the reliance of the public on dependable financial reporting. “It lies at the heart of a quality audit,” the boards said.

“When this initiative began, the boards were looking for input on whether and how each of their standards could contribute to strengthening the understanding and application of professional skepticism as it applies to an audit,” Annette Köhler, chair of the joint working group, said in a statement. “We have shared our observations and recommendations with the boards, and professional skepticism now features prominently in each of the boards’ strategic considerations.”

The 12-page report provides seven key observations.

In today’s complex and rapidly changing business environment, the working group said auditors must have a sufficient knowledge of their client’s business model and a strong understanding of relevant standards, laws, and regulations.

External factors such as financial reporting deadlines, resource constraints, a firm’s tone at the top, incentives, local culture, and groupthink can impede professional skepticism. Heightened awareness of those factors is the first step to lessen the effect, the report said.

Auditors must be aware of their personal traits and biases in exercising professional skepticism. Personal traits include confidence and responses to stress and time pressures. Confirmation bias and groupthink can also impede proper exercise of professional skepticism. The working group said standards might be improved by including more guidance about how an awareness and understanding of personal traits and biases can enhance professional skepticism.

Building in professional skepticism from the outset is key, according to the group.

“Education and training can raise awareness and develop the needed attitude,” the report said. “At both the firm and engagement level, it is critical to reinforce and monitor the application of professional skepticism, including through setting the right tone at the top.”

The working group observed that aspects of the concepts underlying professional skepticism may be relevant to all accountants, not just auditors.

The three standard-setters can do more to enhance skepticism, but standard-setting alone will not be enough, the working group said. “All stakeholders with an interest in professional skepticism have a role to play to help cultivate a skeptical mindset.”

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