Question

1. What is "professional skepticism?" How is it defined, if at all, in the literature? (Cite AICPA, SEC and PCAOB literature)

please privide citetions

Answer 1

Professional skepticism is the state of mind which is ready for the situation that grabs out the errors or questions the financial events and other events while conducting an assurance engagement. It’s basically a skill just like the professional judgment which makes the auditor alert for any particular situation. They are alert for any sort of reactions which may occur in the financial events of the company. They are relevant questions to make sure the reports or the information is true.

Defined in AICPA:-  Professional skepticism is 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 audit evidence. This webcast addresses the sources of unconscious bias that can get in the way of professional skepticism and what can be done to mitigate them. (https://competency.aicpa.org/media_resources/211631-professional-skepticism-the-art-and-science-of-bei)

Defined in SEC:- The auditor must conduct the audit of internal control over financial reporting and the audit of the financial statements with professional skepticism, which is an attitude that includes a questioning mind and a critical assessment of audit evidence. For example, even though a control is performed by the same employee whom the auditor believes performed the control effectively in prior periods, the control may not be operating effectively during the current period because the employee could have become complacent, distracted, or otherwise not be effectively carrying out his or her responsibilities. Also, regardless of any past experience with the entity or the auditor's beliefs about management's honesty and integrity, the auditor should recognize the possibility that a material misstatement due to fraud could be present. Furthermore, professional skepticism requires the auditor to consider whether evidence obtained suggests that a material misstatement due to fraud has occurred. In exercising professional skepticism in gathering and evaluating evidence, the auditor must not be satisfied with less-than-persuasive evidence because of a belief that management is honest. (https://www.sec.gov/rules/pcaob/34-49544.htm)

Defined in PCAOB:- PCAOB standards define professional skepticism as an attitude that includes a questioning mind and a critical assessment of audit evidence. The standards also state that professional skepticism should be exercised throughout the audit process. While professional skepticism is important in all aspects of the audit, it is particularly important in those areas of the audit that involve significant management judgments or transactions outside the normal course of business. Professional skepticism also is important as it relates to the auditor's consideration of fraud in an audit. When auditors do not appropriately apply professional skepticism, they may not obtain sufficient appropriate evidence to support their opinions or may not identify or address situations in which the financial statements are materially misstated. (https://pcaobus.org/Standards/QandA/12-04-2012_SAPA_10.pdf)