Embedding Professional Skepticism

One of the key public interest issues identified during the of the proposed revisions to ISA 240 (Revised)  was the need to reinforce the appropriate exercise of professional skepticism, including reminding auditors of the importance of remaining alert to conditions that may indicate possible fraud and maintaining professional skepticism throughout the audit.

The proposed revisiosn we open for public consultation during the first half of 2024. These revisions included enhancements to reinforce the importance of exercising professional skepticism when applying the standard. Specifically:

• Highlighting the importance of professional skepticism in the introductory paragraphs.
• New and enhanced requirements and application material regarding:
  • Maintaining professional skepticism throughout the audit.
  • The authenticity of records and documents.
  • Remaining alert for information that is indicative of fraud or suspected fraud.

Status: The IAASB anticipates voting to approve the revisions to ISA 240 at its March 2025 meeting.

A key public interest issue identified during the development of the proposed revisions to the IAASB’s standard on going concern was reinforcing professional skepticism related to auditors considerations about the appropriateness of management’s use of the going concern basis of accounting, management’s assessment of going concern, and maintaining professional skepticism when gathering audit evidence, questioning judgments made and assumptions used, and developing conclusions.

To emphasize the robust exercise of professional skepticism, the proposed revisions included:

• A new requirement emphasizing the importance of professional skepticism when evaluating management’s assessment in a manner that is not biased toward obtaining audit evidence that may be corroborative or excluding audit evidence that may be contradictory.
• A new requirement to evaluate whether the judgments and decisions made by management in making its assessment of going concern, even if they are individually reasonable, are indicators of possible management bias.
• Enhanced connections to the requirement in ISA 315 (Revised 2019) for the auditor to design and perform risk assessment procedures in a manner that is not biased toward obtaining audit evidence that may be corroborative or toward excluding audit evidence that may be contradictory.
• New application material emphasizing the relevance of identifying indicators of possible management’s bias and the impact to the audit.

Status: The IAASB anticipates voting to approve the revisions to ISA 570 (Revised) at its December 2024 meeting.

During the revision process for the proposed changes to ISA 500, fostering the maintenance of the auditor’s professional skepticism when making judgments about, information to be used as audit evidence, and sufficient appropriate audit evidence, was identified as a key public interest issue. To achieve this, the proposed changes included emphasizing the importance of professional skepticism, including when:

• Designing and performing audit procedures in a manner that is not biased.
• Evaluating the relevance and reliability of information intended to be used as audit evidence.
• Considering all audit evidence obtained as a basis for concluding whether sufficient appropriate audit evidence has been obtained.

Status: After March 2024, work on proposed ISA 500 (Revised) was paused temporarily while work is undertaken to identify, understand and scope the risk response elements of the new Audit Evidence and Risk Response project. This new project builds on the work already done on proposed ISA 500 (Revised) and will be informed by the IAASB’s Technology Position.

While the ISA for LCE was under development, attention was given to helping auditors of smaller and less complex entities undertake consistent, effective and high-quality audits through appropriately exercising professional judgment and professional skepticism. As the underlying concepts of professional judgment and professional skepticism apply in the same way as in an audit using the full suite of ISAs, some changes made to recent ISA revision projects to enhance the auditor’s exercise of professional skepticism, were incorporated in the ISA for LCE. For example, around corroborative or contradictory audit evidence.

Status: The ISA for LCE was issued in December 2023 and will be effective for audits beginning on or after December 15, 2025 for jurisdictions that adopt or permit its use. Visit the dedicated web page, iaasb.org/ISAforLCE, for the standard and related materials.

The revised standard addresses special considerations that apply to audits of group financial statements (group audits). Group audits are often more complex and challenging than single-entity audits because a group may have many entities or business units across multiple jurisdictions, and component auditors may be involved.

As the standard on group audits was revised, the importance of professional skepticism, and maintaining professional skepticism throughout an audit, was emphasized. This includes as part of the group auditor’s:

• Direction, supervision and review of engagement team members’ work, including component auditors, which may inform the group auditor about whether the engagement team has appropriately exercised professional skepticism.
• Evaluating whether sufficient appropriate audit evidence has been obtained (including by component auditors) to provide a basis for forming an opinion on the group financial statements.

Status: ISA 600 (Revised) was issued in April 2022 and is effective for audits of group financial statements for periods beginning on or after December 15, 2023.

When the IAASB developed the new and revised quality management standards, it considered how to foster an appropriately independent, challenging, and skeptical auditor's mindset. It also considered how the standards can articulate the requirements for auditors, especially engagement partners, to appropriately demonstrate the application of professional skepticism in carrying out the audit, and how the standards can address firms’ contributions to fostering the appropriate environment for the effective application of professional skepticism.

Status: The suite of quality management standards were issued in December 2020 and are effective for audits beginning on or after December 15, 2022.

ISQM 1 on Quality Management at Firm Level

In ISQM 1, the IAASB addressed professional skepticism by:

• Including essential explanatory material explaining how a system of quality management enables the consistent performance of quality engagements. In particular, it explains how quality engagements are achieved, and clarifies that doing so involves exercising professional judgment and, when applicable to the type of engagement, exercising professional skepticism.
• Adding a quality objective stating that, “engagement teams exercise appropriate professional judgment and, when applicable to the type of engagement, professional skepticism.”
• Developing application material explaining how ISA 220 (Revised) addresses impediments to exercising professional skepticism at the engagement level, unconscious auditor biases that may impede professional skepticism, and possible actions that the engagement team may take to mitigate such impediments.

ISQM 2 on Engagement Quality Reviews

While the IAASB acknowledges that the engagement quality reviewer does not exercise professional skepticism because that term is generally described in the context of obtaining and evaluating audit evidence, ISQM 2 requires the engagement quality reviewer to evaluate, based on the review of selected engagement documentation, the basis for the engagement team’s significant judgments, including, when applicable to the type of engagement, the engagement team’s exercise of professional skepticism. This requirement acknowledges that an important part of the engagement quality reviewer’s role is evaluating the engagement team’s exercise of professional skepticism in making significant judgments and reaching conclusions thereon.

ISA 220 (Revised) on Quality Management at Engagement Level

In ISA 220 (Revised), the IAASB addressed professional skepticism by:

• Including new introductory and application material on the importance of the use of professional skepticism and professional judgment in performing audit engagements. Guidance is also included on impediments to exercising professional skepticism and unconscious biases that may affect judgments. The IAASB also expanded the list of unconscious biases to align with the biases referenced in the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards).
• Including a stand-back provision that requires the engagement partner to determine whether they have taken overall responsibility for managing and achieving quality on the audit engagement.

For ISA 315 (Revised 2019), the IAASB focused on enhancing the application of professional skepticism in audits. Given that professional skepticism is a fundamental concept to audit quality, in the years preceding the revision, audit regulatory bodies highlighted significant concerns about how some auditors are performing risk assessment procedures without appropriately applying professional skepticism. In addition, feedback during the public consultation highlighted that it is more difficult for auditors to apply appropriate professional skepticism if they do not have a sufficient understanding of the entity and its environment.

To respond to these issues, the IAASB:

• Introduced a requirement to design and perform risk assessment procedures in a manner that is not biased toward obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory.
• Introduced a requirement to ‘stand-back’ once the risk assessment procedures have been performed, by taking into account all audit evidence obtained from risk assessment procedures, whether corroborative or contradictory to assertions made by management to evaluate whether the audit evidence obtained from the risk assessment procedures provides an appropriate basis for the identification and assessment of the risks of material misstatement.
• Used more explicit language and enhanced application material to reinforce the importance of exercising professional skepticism when performing risk assessment procedures.

Status: ISA 315 (Revised 2019) was issued in December 2019 and is effective for audits of financial statements for periods beginning on or after December 15, 2021. Visit the dedicated web page for the standard and related materials.

Prior to the revision project, inspection findings raised significant concerns about audit quality for accounting estimates, and the need to address this by fostering a more independent and challenging skeptical mindset in auditors. As ISA 540 (Revised) was developed, improving the auditor’s exercise of professional skepticism was a key public interest focus.

This was addressed by:

• Including a requirement to design and perform further audit procedures in a manner that is not biased toward obtaining audit evidence that may be corroborative or toward excluding audit evidence that may be contradictory.
• Enhancing the requirements to ‘stand-back’ and evaluate the audit evidence obtained regarding the accounting estimates, including both corroborative and contradictory audit evidence.
• Using stronger language to reinforce the importance of exercising professional skepticism. To respond to calls for stronger language, particularly from regulators and investors, to reinforce the importance of exercising professional skepticism in auditing accounting estimates, the IAASB included terms such as “challenge,” “question” and “reconsider” within application material relating to:
  • Retrospective review;
  • Changes in methods, significant assumptions and data from prior periods;
  • Indicators of management bias; and
  • Overall evaluation based on audit procedures performed.

Status: ISA 540 (Revised) was issued in October 2018 and is effective for audits of financial statements for periods beginning on or after December 15, 2019. Visit the dedicated web page for the standard and related materials.