## **Learning Outcomes**

After studying this article, you will be able to explain why professional scepticism is essential in an audit, describe the auditor’s required attitude, recognise examples where scepticism is critical, and outline how it is exercised in accordance with International Standards on Auditing (ISAs). You will learn how professional scepticism helps detect material misstatements due to error or fraud, and how it affects the audit approach and evidence-gathering.

## **ACCA Foundations in Audit (FAU) Syllabus**

For ACCA Foundations in Audit (FAU), you are required to understand the importance of professional scepticism in audits. In particular, you should be able to:

- Define the term professional scepticism and state its purpose.
- Explain how professional scepticism is applied throughout the audit.
- Recognise situations that require heightened scepticism, including potential fraud or conflicting audit evidence.
- Identify the relationship between scepticism, professional judgement, and audit evidence.
- Discuss the impact of failing to maintain professional scepticism.

## **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._

1. What is professional scepticism, and why is it required throughout an audit?
2. Which of the following best demonstrates professional scepticism?
   a) Accepting all client explanations without investigation  
   b) Questioning the consistency of management responses when evidence disagrees  
   c) Relying solely on prior year audit results  
   d) Documenting all findings without review
3. True or false? A lack of professional scepticism could result in missing material fraud during an audit.
4. Give two audit scenarios where enhanced professional scepticism is needed.

## **Introduction**

Auditors do not simply accept evidence at face value. Instead, they are required to approach every audit with a questioning mindset—continually alert for conditions that might indicate error or fraud. This attitude, known as professional scepticism, is fundamental in providing reliable assurance to users of financial statements. It protects against bias, pressure, and complacency, allowing the auditor to obtain sufficient appropriate evidence and reducing the risk of undetected misstatements.

> **Key Term: Professional scepticism**
> Professional scepticism is an attitude that includes a questioning mind, alertness to possible misstatement due to error or fraud, and critical assessment of audit evidence.

## **THE NEED FOR PROFESSIONAL SCEPTICISM**

Auditors are tasked with expressing an independent opinion on financial statements. Since management has incentives that may conflict with accurate reporting—such as earning bonuses or meeting loan covenants—the risk of intentional or unintentional misstatement always exists. ISAs require auditors to plan and perform audits with professional scepticism to counteract these threats.

Scepticism means not merely accepting audit evidence or management’s explanations without scrutiny. Instead, the auditor must remain vigilant for:

- Contradictory evidence,
- Unreliable documents or information,
- Signs of fraud or bias,
- Unusual transactions,
- Pressure to reach certain conclusions.

Professional scepticism is applied to all stages of the audit—planning, performing procedures, and evaluating evidence. It supports the collection of high-quality, persuasive evidence.

> **Key Term: Audit evidence**
> Audit evidence is the information obtained by the auditor in arriving at the conclusions upon which the auditor’s opinion is based.

## **APPLYING PROFESSIONAL SCEPTICISM IN PRACTICE**

### When is professional scepticism needed most?

Auditors must maintain scepticism constantly, but certain situations require heightened alertness:

- When information from different sources does not agree.
- When audit evidence seems contradictory or inconclusive.
- When documentation appears altered, incomplete, or unusually prepared.
- When management have a history of aggressive estimates or errors.
- In areas of high estimation uncertainty or judgement.

Auditors should always probe for additional evidence if they encounter any of these warning signs.

> **Key Term: Material misstatement**
> A material misstatement is an error or fraud in the financial statements that could reasonably influence the decisions of users.

## **THE ROLE OF PROFESSIONAL SCEPTICISM IN THE AUDIT PROCESS**

Professional scepticism underlies judgments such as:

- Assessing audit risk,
- Designing appropriate audit procedures,
- Evaluating the sufficiency and reliability of evidence,
- Deciding when to revise testing or consult experts.

It requires auditors to remain alert for indicators of management bias, override of controls, or attempts to conceal errors. Where explanations or evidence do not align, further investigation is essential before drawing conclusions.

> **Key Term: Professional judgement**
> Professional judgement is the application of relevant training, knowledge, and experience to make informed decisions throughout the audit engagement.
>
> **Key Term: Reasonable assurance**
> Reasonable assurance is a high (but not absolute) level of confidence that the financial statements are free of material misstatement, as achieved through sufficient appropriate audit evidence.

## **EXERCISING PROFESSIONAL SCEPTICISM: PRACTICAL STEPS**

- **Challenging contradictory evidence:** Do not rely solely on written representations if other information disagrees.
- **Reviewing source documentation:** Prefer original, third-party, and written evidence over oral or client-produced evidence.
- **Evaluating the reliability of information:** Be aware that poor-quality systems or previously identified issues increase risk.
- **Documenting actions taken:** Keep records of how scepticism influenced judgements or further procedures performed.

### **Worked Example 1.1**

You are auditing ABC Ltd and notice a large receivable overdue by many months. Management insists the debt will be paid soon, providing only verbal assurances.

**What should you do to apply professional scepticism in this situation?**

> **Answer:**
>
> - Seek alternative evidence of recoverability, such as recent correspondence or post year-end payments.
> - Consider the high risk of misstatement and challenge management explanations.
> - If evidence remains lacking, recommend an allowance for irrecoverable debt.

### **Worked Example 1.2**

During stocktake, you observe that counts were completed unusually quickly and several inventory sheets have identical handwriting. Management claims this is due to experienced staff.

**How does professional scepticism guide your response?**

> **Answer:**
>
> - Recognise these are red flags.
> - Examine count sheets closely for signs of fabrication.
> - Increase substantive inventory testing and consider possible fraud.

### **Exam Warning**

> Some students wrongly believe professional scepticism means auditors must distrust management or assume fraud always exists. In reality, auditors must remain unbiased, neither assuming honesty nor dishonesty, but always being alert for evidence of potential misstatement.

## **Summary**

Professional scepticism is the auditor’s questioning attitude essential to every audit. By remaining alert, probing explanations, and seeking corroborative evidence, auditors reduce the risk of material misstatement and provide reliable assurance to stakeholders.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define professional scepticism and its requirement in audits.
- Identify when and how scepticism must be applied.
- Recognise audit scenarios needing heightened scepticism.
- Explain the link between scepticism, professional judgement, and audit evidence.
- Know the consequences of lacking professional scepticism for audit quality.

## **Key Terms and Concepts**

- Professional scepticism
- Audit evidence
- Material misstatement
- Professional judgement
- Reasonable assurance

Purpose and scope of an audit - Professional scepticism in audits