ACCA AAA ^INT Syllabus G. Current Issues - Current Developments In Auditing Standards - Part 2 - Notes ^{2 / 4}

Safeguards

Key enhancements proposed in phase 1 included:

1. More robust requirements relating to the application of the Conceptual Framework

2. More robust description of the concept of safeguards

3. New guidance on the concept of a 'reasonable and informed third party' that is essential to properly applying the conceptual framework

Phase 2 proposals look at safeguards-related provisions in the independence sections of the Code of Ethics (ie in relation to assurance services provided to audit client).

Observations on how PS can be enhanced

The key observations are:

1. Attention to business acumen is vital for professional scepticism

   More than just knowledge of standards. laws and regulations - a knowledge of the client's business model

2. Environmental factors can impede PS by:

   Resource constraints

   A firm's tone at the top

   Incentive systems

   Local culture and groupthink

3. Personal traits and biases affect PS eg

   An inquisitive nature
   Response to stress. time pressures. or conflict
   Knowledge and experience
   Cultural background

   So, become aware of these traits in order to then improve professional skepticism.

4. Instil PS at the beginning of your career. so education and training are key.

5. PS is relevant even beyond audit

   Understanding PS can benefit all professional accountants. This requires further study and research.

6. Standard setting alone will not be enough

   All stakeholders with an interest in professional skepticism have a role to play to help cultivate a skeptical mindset.

What is professional scepticism?

It is hard to define. but is fundamentally a mindset, which is linked to the ethical principles of objectivity and independence. It means 'being alert‘ to evidence that contradicts evidence already obtained, or which casts doubt on the reliability of documents or explanations provided, or which may indicate fraud.

Why is professional scepticism important in audits?

It is part of the auditor's ‘skill set“, and is part of professional judgment. It affects decisions about:

the procedures to be performed; 
the sufficiency and appropriateness of evidence obtained; 
the validity of management's financial reporting judgments; and the conclusions drawn based on audit evidence.

What can firms do to enhance awareness of professional scepticism ‘s importance?

It is a matter of education. training and experience, as well as the culture of the firm. 
At a firm-wide level, this means establishing policies and procedures. promoting a quality-oriented culture. and establishing training and continuing professional development schemes.

At an engagement level, this means that the partner must communicate the importance of quality, and that the audit team is able 'to raise concerns without fear of reprisals‘.

At what stage of the audit is professional scepticism necessary?

Throughout the audit! Eg.at engagement acceptance when considering the integrity of management and owners.

How does this relate to fraud?

The fact that fraud involves deception and concealment makes professional scepticism particularly important in relation to it. ISA 240 emphasises professional scepticism. particularly in the form of 'an ongoing questioning' of whether there has been a fraud.

There are also areas where there is a required presumption that there is a risk of fraud: revenue recognition, risks of management override of controls as a result of fraud and accounting estimates.

Where else is professional scepticism important, other than fraud?

Significant or judgmental areas. such as:

Accounting estimates (eg are assumptions reasonable?)
Going concern (eg are management's plans really feasible?)
Related party relationships and transactions (eg transactions outside the normal course of business - misappropriation of assets?)
Laws and regulations (eg where non-compliance may call into question going concern)

How can this be evidenced?

Audit documentation should enable an experienced auditor to understand significant decisions made during the audit and any conclusions drawn.

As the auditor should be professionally sceptical when making these decisions. the documentation would provide evidence of this. eg it should document the discussions the auditors have about possible non-compliance with laws and regulations. or possible management bias in relation to accounting estimates.