Applying professional scepticism

The objective of this article is to explain the importance of professional scepticism as an essential part of the assurance practioner’s mindset, and to consider the reasons why approaching a sustainability assurance engagement with an attitude of professional scepticism is increasingly important.

What is professional scepticism?

The glossary of terms contained in the IAASB’s Handbook of International Quality Control, Assuranceing, Review, Other Assurance, and Related Services Pronouncements contains the following definition of the term ‘professional scepticism’:

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.

Professional scepticism includes being alert to, for example:

• Assurance evidence that contradicts other evidence obtained.
• Information that brings into question the reliability of documents and responses to inquiries to be used as assurance evidence.
• Conditions that may indicate possible fraud.
• Circumstances that suggest the need for additional assurance procedures

Professional scepticism is closely related to fundamental ethical considerations of objectivity and independence. Professional scepticism is also linked to the application of professional judgment by the assurance practioner. An assurance engagement performed without an attitude of professional scepticism is not likely to be of high quality. At its core the application of professional scepticism should help to ensure that the assurance practioner does not neglect unusual circumstances, oversimplify the results from assurance procedures or adopt inappropriate assumptions when determining the assurance response required to address identified risks, all of which should improve assurance quality.

How does the sustainability assurance practioner apply professional scepticism?

The assurance practioner is likely to apply professional scepticism at various stages from client acceptance and at various points during the assurance process, and some typical examples are given below:

• When assessing engagement acceptance – at this stage the assurance practioner should consider whether the management of the intended assurance client acts with integrity and whether there are any matters that may impact on the assurance practioner being able to act with professional scepticism if they accept the engagement, such as ethical threats to objectivity.
  
  
• When performing risk assessment procedures – an assurance practioner should be sceptical when performing risk assessment procedures at the planning stage of the assurance engagement. For example, when discussing the results of analytical procedures with management, the assurance practioner should not accept management’s explanations at face value, and should obtain corroboratory evidence for the explanations offered.
  
  
• When obtaining assurance evidence – the assurance practioner should be ready to challenge management, especially on complex and subjective matters and matters that have required a degree of judgement to be exercised by management. The reliability and sufficiency of evidence should be considered, especially where there are risks of fraud. There may also be specific issues arising during a sustainability assurance engagement which impacts on professional scepticism – for example, if management refuses the assurance practioner’s request to obtain evidence from a third party. The assurance practioner will have to consider how much trust can be placed on evidence obtained from management – for example, evidence in the form of enquiry with management or written representations obtained from management.

• When evaluating evidence – the assurance practioner should critically assess assurance evidence and be alert for contradictory evidence that may undermine the sufficiency and appropriateness of evidence obtained.

Ultimately, the application of professional scepticism should reduce detection risk because it enhances the effectiveness of applied assurance procedures and reduces the possibility that the assurance practioner will reach an inappropriate conclusion when evaluating the results of assurance procedures.

Other areas where professional scepticism may be important
The IAASB has issued a Staff Questions and Answers document entitled Professional Scepticism in an Assurance of Financial Statements, which outlines some of the areas of the assurance where the use of professional scepticism may be important. These are outlined below and largely relate to areas of the assurance that are complex, subjective or highly judgmental.

• Accounting estimates – this can include fair value accounting estimates, the use of significant assumptions by management in developing accounting estimates, and reviewing the judgements and decisions used by management for management bias in developing accounting estimates.  The practioner should be alert to the possibility of greenwashing in any sustainability reporting.
  
  
• Related party relationships and disclosures – it can be difficult to obtain information on related parties, as knowledge may be confined to management meaning that the assurance practioner may have to rely on management to identify all related parties The assurance practioner should also be sceptical when assessing the business rationale behind related party transactions.
  
  
• Consideration of laws and regulations – the assurance practioner should be alert throughout the assurance engagement for indications that there may have been a suspected non-compliance with laws and regulations.

The IAASB Staff Questions and Answers document contains a foreword by Arnold Schilder, IAASB chairman, which emphasises the increasing need for assurance practioners to apply professional scepticism. One reason for this is the increased use of judgment and subjectivity in management’s financial reporting decisions. This is due to the application of International Financial Reporting Standards (IFRS), which are largely principle-based, and often require the preparers of financial statements to exercise significant judgment when making decisions on accounting treatments.

Conclusion

Given the increasingly complex and subjective nature of IFRS requirements, assurance practioners must be confident to challenge management on a range of matters relevant to the preparation of sustainability information.

Adapted from an article written by a member of one of ACCA’s examining teams