COPYRIGHT NOTICE — This document is intended for internal use. It cannot be distributed to or reproduced by third parties without prior written permission from the Copyright Coordinator for the Office of the Auditor General of Canada. This includes email, fax, mail and hand delivery, or use of any other method of distribution or reproduction. CPA Canada Handbook sections and excerpts are reproduced herein for your non-commercial use with the permission of The Chartered Professional Accountants of Canada (“CPA Canada”). These may not be modified, copied or distributed in any form as this would infringe CPA Canada’s copyright. Reproduced, with permission, from the CPA Canada Handbook, The Chartered Professional Accountants of Canada, Toronto, Canada.

1041 Applying Professional Skepticism
Dec-2022

Overview

This section explains:

The concept of professional skepticism
Why applying professional skepticism throughout the audit is important
Documenting professional skepticism

CPA Canada Copyright

CPA Canada Assurance Standards

Office

Annual Audit

Performance Audit, Special Examination, and Other Assurance Engagements

CSQM 1.31 The firm shall establish the following quality objectives that address the performance of quality engagements:

(c) Engagement teams exercise appropriate professional judgment and, when applicable to the type of engagement, professional skepticism. (Ref: Para. A78)

Professional Judgment and Professional Skepticism (Ref: Para. 31(c))

CSQM 1.A78. Professional skepticism supports the quality of judgments made on an assurance engagement and, through these judgments, the overall effectiveness of the engagement team in performing the assurance engagement. Other pronouncements of the IAASB may address the exercise of professional judgment or professional skepticism at the engagement level. For example, CAS 220 provides examples of impediments to the exercise of professional skepticism at the engagement level, unconscious auditor biases that may impede the exercise of professional skepticism, and possible actions that the engagement team may take to mitigate such impediments.

CAS 200.15 The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. (Ref: Para. A21-A25)

CAS 200.A21 Professional skepticism includes being alert to, for example:

Audit evidence that contradicts other audit evidence obtained.
Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.
Conditions that may indicate possible fraud.
Circumstances that suggest the need for audit procedures in addition to those required by the CASs.

CAS 200.A22 Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of:

Overlooking unusual circumstances.
Over generalizing when drawing conclusions from audit observations.
Using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and evaluating the results thereof.

CAS 200.A23 Professional skepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances, for example, in the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount.

CAS 200.A24 The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary. Nevertheless, the auditor is required to consider the reliability of information to be used as audit evidence. In cases of doubt about the reliability of information or indications of possible fraud (for example, if conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document may have been falsified), the CASs require that the auditor investigate further and determine what modifications or additions to audit procedures are necessary to resolve the matter.

CAS 200.A25 The auditor cannot be expected to disregard past experience of the honesty and integrity of the entity's management and those charged with governance. Nevertheless, a belief that management and those charged with governance are honest and have integrity does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less-than-persuasive audit evidence when obtaining reasonable assurance.

CAS 220.14 In creating the environment described in paragraph 13, the engagement partner shall take responsibility for clear, consistent and effective actions being taken that reflect the firm's commitment to quality and establish and communicate the expected behaviour of engagement team members, including emphasizing: (Ref: Para. A31 -A35)

(d) The importance of each engagement team member exercising professional skepticism throughout the audit engagement.

AS 220.A34 The engagement partner is responsible for emphasizing the importance of each engagement team member exercising professional skepticism throughout the audit engagement. Conditions inherent in some audit engagements can create pressures on the engagement team that may impede the appropriate exercise of professional skepticism when designing and performing audit procedures and evaluating audit evidence. Accordingly, when developing the overall audit strategy in accordance with CAS 300, the engagement team may need to consider whether such conditions exist in the audit engagement and, if so, what actions the firm or the engagement team may need to undertake to mitigate such impediments.

CAS 220.A35 Impediments to the exercise of professional skepticism at the engagement level may include, but are not limited to:

Budget constraints, which may discourage the use of sufficiently experienced or technically qualified resources, including experts, necessary for audits of entities where technical expertise or specialized skills are needed for effective understanding, assessment of and responses to risks and informed questioning of management.
Tight deadlines, which may negatively affect the behaviour of those who perform the work as well as those who direct, supervise and review. For example, external time pressures may create restrictions to analyzing complex information effectively.
Lack of cooperation or undue pressures imposed by management, which may negatively affect the engagement team's ability to resolve complex or contentious issues.
Insufficient understanding of the entity and its environment, its system of internal control and the applicable financial reporting framework, which may constrain the ability of the engagement team to make appropriate judgments and an informed questioning of management's assertions.
Difficulties in obtaining access to records, facilities, certain employees, customers, vendors or others, which may cause the engagement team to bias the selection of sources of audit evidence and seek audit evidence from sources that are more easily accessible.
Overreliance on automated tools and techniques, which may result in the engagement team not critically assessing audit evidence.

CSAE 3001.41 The practitioner shall plan and perform an engagement with professional skepticism, recognizing that circumstances may exist that cause the underlying subject matter to deviate from the applicable criteria. (Ref: Para. A75-A79)

Professional Skepticism and Professional Judgment

Professional Skepticism (Ref: Para. 41)

CSAE 3001.A75 Professional skepticism is an attitude that includes being alert to, for example:

Evidence that is inconsistent with other evidence obtained.
Information that calls into question the reliability of documents and responses to inquiries to be used as evidence.
Circumstances that suggest the need for procedures in addition to those required by relevant CSAEs.
Conditions that may indicate likely deviation.

CSAE 3001.A76 Maintaining professional skepticism throughout the engagement is necessary if the practitioner is, for example, to reduce the risks of:

Overlooking unusual circumstances.
Overgeneralizing when drawing conclusions from observations.
Using inappropriate assumptions in determining the nature, timing and extent of the procedures, and evaluating the results thereof.

CSAE 3001.A77 Professional skepticism is necessary to the critical assessment of evidence. This includes questioning inconsistent evidence and the reliability of documents and responses to inquiries. It also includes consideration of the sufficiency and appropriateness of evidence obtained in the light of the circumstances.

CSAE 3001.A78 Unless the engagement involves assurance about whether documents are genuine, the practitioner may accept records and documents as genuine unless the practitioner has reason to believe the contrary. Nevertheless, the practitioner is required by paragraph 55 to consider the reliability of information to be used as evidence.

CSAE 3001.A79 The practitioner cannot be expected to disregard past experience of the honesty and integrity of those who provide evidence. Nevertheless, a belief that those who provide evidence are honest and have integrity does not relieve the practitioner of the need to maintain professional skepticism.

OAG Policy

All members of an engagement team shall plan and perform the assurance engagement with professional skepticism. [Nov-2011]

OAG Guidance

Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate a possible deviation or misstatement due to error or fraud, and a critical assessment of evidence. (CAS 200.13(l) and CSAE 3001.14(t))

Applying professional skepticism

All assurance engagements

Professional skepticism is relevant and necessary throughout all assurance engagements. The following table provides examples of the areas where professional skepticism is particularly important:

Area	Examples
Acceptance and continuance	Considering integrity of management
Risk assessment	Questioning responses to inquiries and other information obtained from management and those charged with governance Revising risk assessment as a result of identified material or significant inconsistent information
Developing an audit plan	Incorporating unpredictability in our audit plan Increasing the extent of use of external confirmations or obtaining additional corroborative evidence from third parties in the areas of higher risk Planning for sufficient procedures to evaluate the reliability of data to be used during the audit
Laws and regulations	Remaining alert for instances of non-compliance when performing other audit procedures
Significant and unusual transactions	Considering the rationale for such transactions and corroborating management's explanations with further evidence, including review of related contracts

Annual audits

In addition to the examples identified for all assurance engagements above, the following are other examples of areas where professional skepticism is particularly important when performing annual audits:

Area	Examples
Risk assessment	Identifying significant Financial Statement Line Items (FSLIs) that are susceptible to the risk of material misstatement due to fraud or error Taking into account all audit evidence obtained from the risk assessment procedures, whether corroborative or contradictory to assertions made by management Evaluating whether the audit evidence obtained from the risk assessment procedures provides an appropriate basis for the identification and assessment of the risks of material misstatement.
Accounting estimates	Evaluating reasonableness of management assumptions and challenging those assumptions Determining whether changes in the estimates or in the method for making them from the prior period are appropriate Reviewing judgments made by management to identify bias indicators (including results of retrospective reviews)
Going concern	Evaluating management plans for future actions
Related parties	Remaining alert for information that may indicate previously unidentified or undisclosed relationships or transactions, e.g., as part of review of minutes Investigating an unusual transaction to understand if the counterparty involved is related to the entity

Why professional skepticism is important

Professional skepticism plays a fundamentally important role in the audit, and forms an integral part of the auditor’s skill set. It facilitates the appropriate exercise of professional judgment, particularly regarding decisions about:

the nature, timing and extent of audit procedures to be performed to reduce the risk to an appropriate level;
whether sufficient appropriate audit evidence has been obtained and whether more needs to be done to achieve the objectives of the relevant assurance standards;
the evaluation of management’s judgments (particularly regarding the application of the entity’s applicable financial reporting framework in the context of an annual audit);
the drawing of conclusions based on the audit evidence obtained.

The application of professional skepticism enhances the effectiveness of an audit procedure and of its application and reduces the possibility that we might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results.

Emphasizing importance of professional skepticism

Professional skepticism within the engagement team is influenced both by the actions of the engagement leader and other members of the engagement team.

The actions of the engagement leader and appropriate messages to other members of the engagement team need to emphasize that quality is essential in performing audit engagements and the importance to audit quality of, for example, the engagement team’s ability to raise concerns without fear of reprisals and in issuing auditor’s reports that are appropriate in the circumstances.

An ideal opportunity to address and emphasize with the engagement team the importance of maintaining professional skepticism throughout the assurance engagement is at a team meeting early on in the planning of the engagement.

The engagement leader may further emphasize the importance of professional skepticism when taking responsibility for:

the direction, supervision and performance of the audit engagement;
review of work performed and discussion;
In this regard, the engagement leader, in particular, has much knowledge and experience to impart in helping less experienced team members develop a critical and questioning mind through review of, among other matters, critical areas of judgment and significant risks.
the engagement team undertaking appropriate consultation on difficult or contentious matters and the implementation of the conclusions reached from such consultations.

While activities at the firm level and engagement level contribute to the mindset of professional skepticism, it is nevertheless the responsibility of each individual auditor to maintain an attitude of professional skepticism.

Documenting professional skepticism

Given that professional skepticism is a state of mind, we may not document every aspect of how we applied skepticism throughout the audit. Nevertheless, audit documentation remains critical in evidencing professional skepticism because it provides evidence that the audit was planned and performed in accordance with relevant assurance standards. As explained above, it is important to apply professional skepticism throughout the audit and document this accordingly, including when considering significant matters.

Professional skepticism is often demonstrated in the various discussions held with the audit team, management, and those charged with governance. That is why it is important that we properly document such discussions to demonstrate how professional skepticism was applied. Examples of circumstances where documentation is particularly important include:

significant decisions reached during the team discussion regarding the susceptibility of the financial statements to material misstatement;
probing questions and management responses as part of normal audit procedures, e.g., understanding controls;
identified or suspected non-compliance with laws and regulations, and the results of discussions with management;
basis for conclusions regarding the reasonableness of accounting estimates, including consideration of subjective and objective factors;
identified information that is inconsistent with the final conclusion regarding a significant matter;
basis for conclusions on the reasonableness of areas of subjective judgments;
basis for adequacy of disclosures;
basis for conclusions about the authenticity of a document when further investigation is undertaken.

Examples of how professional skepticism can be effectively documented at each stage of the audit include, but are not limited to the following:

Document the thought process, alternative views considered, and changes to our approach in the course of the audit, not just the evidence supporting the final conclusion.
Document how we challenged management views, assumptions, not just how we accepted them.
Document the basis for unusual, one-time transactions and related business rationale.
Include a complete and comprehensive record of discussions with management, particularly in areas of uncertainty.
Document how we assessed the reliability of the source of documents, specifically those prepared by the entity.
Document professional skepticism in the significant matters.

Documentation in specific areas

Examples of how professional skepticism can be demonstrated in specific areas: