Auditors' Judgment in a Financial Statement Audit and Professional Skepticism in Auditing

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An increasing number of arguments have been made on a national and an international level, both academically and practically, for more "professional skepticism in auditing." The internal and external environments surrounding independent auditors have resulted in an eroding of professional skepticism and have threatened to weaken society's trust in auditors. This erosion was observed in the early 1990s and strongly acknowledged by the accounting profession itself. Professional standards have long emphasized an appropriate degree of skepticism throughout the evidence process, which is composed of planning audit programs, performing the procedures, and evaluating the evidence. Auditors are expected to understand that the essence of skepticism is "raising a question" and "exhibiting a questioning mind," yet doing so does not seem to be enough to prevent audit failures resulting from insufficient skepticism.One of the basic issues facing the accounting profession in the US, Europe, and even … More in Japan at the moment is the quality of professional skepticism in auditing. This issue is fundamentally a matter of audit evidence and is concerned with the degree and extent to which auditors should doubt the financial statements. To put it another way, professional skepticism contains the following two facets of the auditor's cognition : the scope and depth. The scope facet of professional skepticism is concerned with the auditor's assertion-framing, which includes determining the basic nature (affirmative and negative) and selection of assertions to be scrutinized and how and to what extent. It is basically related to an auditor's way of knowing and symbolically deals with what approach (positive and/or negative) the auditor should (can) adopt initially prior to beginning the evidence gathering process, and reactively during the evidence gathering process. Thus, professional skepticism in auditing is epistemic in its nature. In general, the number assertions, positive and/or negative, the auditors recognize reflects the scope of their skepticism. The depth facet of professional skepticism is concerned with the evidence, making an evaluative judgment concerning its competence : the relevance, quality (reliability), and quantity to be collected for scrutinizing a particular assertion. This facet is related to the auditor's disposition to raise questions in making such an evidential judgment in a particular audit setting and fundamentally deals with measuring the depth of the auditor's questioning mind. In this sense, professional skepticism in auditing is psychological in nature. In other words, professional skepticism in auditing is dual in nature, applicable at both epistemic and psychological facets of audit cognition. Whether the auditors can successfully accomplish their assurance role under a financial statement audit depends on their success in recognizing and exercising the dual nature of professional skepticism. Auditors therefore need to develop skills in both disciplines. Research on professional skepticism has been in progress for some time, yet almost all prior (empirical) research on the subject has focused on the second facet, particularly on the effects of auditors' psychological traits on professional skepticism. Why? Many studies seem to have been based on a preconception that only an affirmative approach ("substantiating the assertions" : confirmation) can be accepted as the way of knowing under a financial statement audit.It should be noted, however, that another way of knowing is recognized in the philosophy of science, that is, a negative approach ("proactively looking for negative indications of material misstatements : falsification). Under a negative approach, auditors put more focus on uncovering negative instances or signs related to the negative assertions so that they can form a reasonable basis for corroborating their belief in the fair presentation of financial statements.The main objective of this research is to present a conceptual framework for professional skepticism which gives due consideration to its dual nature as well as different views recognized in the audit literature of the auditor's mindset related to skepticism. This conceptual framework can show, in terms of professional skepticism, not only where the current audit practice is considered to rest, but also in which direction the practice may be moving. Less