Why is professional skepticism important in audit?

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Why is professional skepticism important in audit?

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.

1. Background information of case study

Guess the auditor in the past year qualify the report based on the disclaimer of the opinion report in the new lead,

The basis for disclaimer of opinion stated:

(i) Lack of control over its documentation and non-availability of certain supporting documents.

During the year, the major transaction is

- purchase of x storey shop office (RMx million),

- decrease in other receivables of RMx, and

- increase of amount due to director RMx

2. My assumption based on limited information available :

A. The company purchases the shop office from other receivables by offsetting outstanding.

B. The balance is a loan from the director.

3. My possible reason for the disclaimer:

A. No supporting documents for

Sales & Purchase agreement (assertion: existence, occurrence and accuracy),

Title deed (assertion: rights & obligation)

Correspondence letter with other receivables and director to settle the shop office (assertion: completeness)

Impairment testing as it was reviewed by director to estimate recoverable value (assertion: valuation)

B. Insufficient audit evidence and information of amount due to director.

No director’s confirmation is obtained (assertion: existence, accuracy)

No documentation is obtained for the transaction such as loan to company RMx this year (assertion: occurrence, completeness)

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

I will not qualify if there is an alternative procedure to obtain sufficient evidence.

If I am unable to obtain sufficient evidence and it is pervasive, I will disclose a disclaimer of opinion.

According to ISA 705 para 2, there are three types of modified opinions, namely, a qualified opinion, an adverse opinion, and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate depends upon:

(a) The nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, maybe materially misstated; and

(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements.

If the background of the issue is what I assumed in the question

The company purchases the shop office by offset other receivables and directors. It can be pervasive as the transaction is connected with 3 major parts of elements of the financial statement.

But first, we can find an alternative way to test. Any proof that Company owns the shop house such as Sales & Purchase agreement signed, a title deed, quit rent & assessment, water and electricity bill and etc.

Any correspondence/ resolution that other receivables sell to the company by contra outstanding?

Any correspondence/ resolution that the director loan to the company settles the outstanding whether by cash or personal loan?

Any recent sales of a similar shophouse on the property website?

We also can ask the director to sign the confirmation and prepare a representation letter to confirm the balance.

Reference:

-ISA 705 (Revised) Modifications to the Opinion in the Independent Auditor’s Report, para 2

-ISA 500 Audit evidence:

Obtain sufficient appropriate audit evidence to draw a reasonable conclusion to base auditor’s opinion

-ISA 505 External Confirmations:

written response to the auditor from the third party

-ISA 580 Written Representations:

written representations from management and, where appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor;

-ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment:

Identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.

Disclaimer

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal, or other professional advice.

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