Learning Outcomes
After reading this article, you will be able to explain the purpose and scope of an audit, recognise situations requiring professional judgement, and describe how materiality and risk influence audit decisions. You will understand how auditors apply their knowledge and experience to reach informed conclusions during an audit, particularly in areas involving estimates, sampling decisions, and evaluating the sufficiency of evidence.
ACCA Foundations in Audit (FAU) Syllabus
For ACCA Foundations in Audit (FAU), you are required to understand the essential skills of applying professional judgement within the audit process. In particular, you should focus your revision on:
- The purpose and scope of an external audit
- The role of professional judgement in audit planning and performance
- The application of materiality and audit risk
- Identifying situations where judgement is necessary, such as evaluating estimates and selecting samples
- How professional judgement affects the collection and evaluation of audit evidence
- Recognising the limits of professional judgement within the requirements of auditing standards
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What does the term "professional judgement" mean in the context of audit work?
- In which THREE audit areas is the exercise of professional judgement most critical?
- True or false? The concept of materiality is always an objective threshold defined by law.
- Why is it important for auditors to apply professional judgement when assessing audit evidence?
Introduction
Throughout the audit, auditors regularly face decisions that cannot be answered by simple rules or checklists. Real-world business situations are highly variable, making it necessary for auditors to apply not just knowledge of principles but also their own experience and critical thinking. Professional judgement is the skill of applying knowledge, training, and experience to determine the most appropriate way to proceed—whether in setting materiality, evaluating risks, deciding where to focus work, or assessing whether sufficient evidence has been gathered for a reliable audit opinion.
PURPOSE AND SCOPE OF AN AUDIT
The primary purpose of an external audit is to provide an independent opinion on whether the financial statements are free from material misstatements and fairly present the financial position and results of a company in accordance with the applicable reporting framework.
The scope of the audit covers all material aspects of the financial statements but does not amount to a guarantee of absolute accuracy. Auditors must use their discretion—balancing the risk of undetected errors with practical constraints such as time, resources, significance of potential misstatements, and compliance with International Standards on Auditing (ISAs).
Key Term: professional judgement
The application of relevant training, knowledge, and experience, within the context of auditing and ethical standards, in making informed decisions during an audit engagement.
THE ROLE OF PROFESSIONAL JUDGEMENT IN AUDITING
Many audit processes rely not on mechanical rules but on careful consideration of the facts and circumstances. Professional judgement is critical in areas such as:
- Determining materiality thresholds
- Assessing the risks of material misstatement
- Planning the nature, timing, and extent of audit procedures
- Evaluating whether audit evidence obtained is sufficient and appropriate
- Interpreting the requirements of auditing standards where precise guidance may not be prescribed
Key Term: materiality
An amount or omission is material if it could reasonably be expected to influence the economic decisions of users based on the financial statements.Key Term: audit risk
The risk that the auditor expresses an inappropriate audit opinion on financial statements that are materially misstated.
Professional Judgement in Practice
Audit teams use professional judgement from the beginning to the end of an assignment. For example, setting materiality is not a fixed calculation, but involves considering both quantitative (size) and qualitative (nature) factors. Similarly, determining if management's accounting estimates are reasonable requires assessing available evidence—sometimes under uncertainty.
ISA 200 requires auditors to exercise professional judgement throughout their planning and performance of the audit, especially when:
- Identifying and assessing risks of material misstatement
- Designing and carrying out audit procedures to respond to identified risks
- Determining whether sufficient appropriate evidence has been obtained
- Drawing appropriate conclusions for the audit opinion
Worked Example 1.1
You are planning the audit of a company with annual revenue of £2 million and profit before tax of £80,000. The team must determine an appropriate level of overall materiality for the audit and decide which benchmark to use.
Answer:
- The auditor uses professional judgement to select the most relevant benchmark. Common options include a percentage of revenue, profit before tax, or total assets.
- For a profit-oriented business, a typical range is 5-10% of profit before tax, but if profit is volatile or small relative to revenue, another benchmark (such as 1% of revenue) may be justified.
- Qualitative factors (such as regulatory requirements or stakeholder concerns) also influence the decision.
Worked Example 1.2
During the course of audit testing, you discover three adjustments, each £2,000, in different accounts. The pre-set materiality threshold is £10,000. Should you require adjustment in the statements?
Answer:
- Professional judgement involves considering the aggregate effect: £2,000 × 3 = £6,000, which is below £10,000.
- However, if the errors relate to the same area or indicate a pattern, all effects must be reviewed in total.
- The auditor should also consider if any item, regardless of size, is material by nature or required by law.
Worked Example 1.3
A client’s estimate for a provision is based on uncertain legal proceedings without clear evidence. How should the auditor proceed?
Answer:
- Professional judgement guides the auditor to review all available evidence, consult with management, perhaps seek legal advice, and compare management’s assumptions to historical outcomes.
- If uncertainty remains high, the auditor considers if adequate disclosure or a range of possible outcomes is appropriate.
Exam Warning
A frequent exam error is failing to recognise that professional judgement must be linked to the facts of the scenario and the specific objectives of the audit. Quoting “judgement is required” without exemplifying its use will rarely secure marks. Always support your answers with practical audit reasoning.
Professional Judgement and Auditor Responsibility
While exercising professional judgement is a central part of the auditor's role, it must always be applied within the framework of auditing standards, legal requirements, and the Code of Ethics. Judgement does not override the mandatory requirements of ISAs but operates within their boundaries.
Professional scepticism—an attitude of questioning and alertness to conditions that may indicate possible misstatement due to error or fraud—should always accompany professional judgement. Together, these skills ensure audit quality and protect public confidence in the audit process.
Key Term: professional scepticism
An attitude of critical assessment, vigilance, and alertness to possible misstatement due to error or fraud throughout the audit.
Summary
Auditors use professional judgement at every stage of the audit, from planning and risk assessment through to evaluating evidence and issuing the audit opinion. This skill ensures that audit procedures address the most important issues and that evidence collected is evaluated in context. While judgement is a core component of audit practice, it must always be balanced with professional scepticism and compliance with auditing standards.
Key Point Checklist
This article has covered the following key knowledge points:
- The purpose and scope of an external audit
- The importance of professional judgement in audit planning, execution, and opinion formation
- How auditors set and apply materiality using professional judgement
- The relationship between professional judgement, audit risk, and audit procedures
- Application of judgement in areas involving estimates, sampling, and sufficiency of evidence
- The need to accompany judgement with professional scepticism at all times
Key Terms and Concepts
- professional judgement
- materiality
- audit risk
- professional scepticism