Why is professional skepticism important for auditors

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Why is professional skepticism important for auditors

The importance of professional skepticism in an audit of financial statements.

Professional skepticism is defined under IAASB’s Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements:

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.

A case study on audit skepticism with our senior as part of training and grooming activity. The opinion expressed by our senior below is solely on personal judgment.

Issue:

Based on the disclaimer of opinion report in the new lead, establish the ground the auditor in past year qualify the report?

What is your opinion if you are the auditor ? Will you qualify ? Will you not qualify? State your reason

Opinion :

I will express an unmodified opinion with emphasis of matter to highlight the uncertainty on the valuation of investment property.

a) Not documentation to verify the value of investment property, RMx and the value is directly provided by company director.

b) Director didn’t sign the director confirmation as audit evidence to confirm the director outstanding amount, RMx

Background information

Base on the disclaimer opinion, client did not provide audit evidence to prove the value of investment property, properly due to IP is directly transfer form relevant person to company.

We may perform the alternative test to confirm the IP recoverable value is equal to RMx by checking the market value of the property

Besides that, company also need to disclose the value of IP and the outstanding amount of amount due to the director on the representation letter as evidence the value is directly represented by company management.

I will highly the lack of internal control on documentation since they did not keep the documentation on transfer the IP from personal to Company director.

Supporting:

1. ISA 570 (Revised) (18) - Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary.

2. ISA 701 (9) - The auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit. (Ref: Para. A9–A18).

3. ISA 705 (6) - The auditor shall modify the opinion in the auditor’s report when: (a) The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or (Ref: Para. A2–A7) (b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. (Ref: Para. A8–A12)

4. ISA 706 (8) If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided: (Ref: Para. A5–A6)

(a) The auditor would not be required to modify the opinion in accordance with ISA 705 (Revised)3 as a result of the matter; and

(b) When ISA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report. (Ref: Para. A1–A3)

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