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PCAOB describes professional skepticism as a general duty of care that needs to be applied by the auditor throughout the duration of the audit engagement. Professional skepticism involves the auditor having a clear and questioning mind regarding the assertions that are presented by management or other client personnel. The auditor is instructed to not take the words or data presented by management as sufficient and appropriate audit evidence but rather the auditor needs to thoroughly audit the evidence with a questioning mind to achieve reasonable assurance about the persuasiveness of the evidence. Skepticism is composed of three elements; auditor attributes, mindset and actions. The PCAOB instructs the auditor to always question evidence presented by the auditor for the probability of loss, fraud or financial misstatement.
Will, the auditor, exercised professional skepticism in this case when it came to the mysterious cash ticket payments for the tickets on 11/16. Having been friends with Jessica, Will needed to exhibit a higher level of skepticism. When Jessica produced the deposit slip for the $320 ticket and asserted that the deposit slip had probably fallen in between two cabinets in the vault, Will had the opportunity of taking Jessica’s assertion as sufficient and appropriate evidence but rather decided to investigate further and noticed that the year on the bills was different than the year of the ticket and that the ink on the deposit slip was different. Will then widened the sample size to see if this was a singularity or evidence of an ongoing issue/fraud.
The two main conditions that could have affected his skepticism were his relationship with the process owner he was auditing and the materiality levels set forth for the audit. Jessica Randle, the wife of Will’s best friend, was the process owner for the area Will was currently auditing. This presents an issue in that skepticism can sometimes be influenced by the relationships auditors have made with the people they are auditing. An auditor is more likely to believe the assertions made by someone they know and trust, and this directly hinders on their skepticism. Will might also have decided to not pursue further with his investigation of cash deposits that are missing their deposit slip due to the amounts ($320), being below the materiality threshold of $5,000. This, coupled with the fact that he felt as if he was irritating his superiors by asking many questions might have caused Will to simply abandon further investigating the area. If Will had not been exercising professional skepticism, he would simply have taken Jessica’s assertion as to why the deposit slip was missing as sufficient and appropriate evidence and moved on with another audit area. Jessica would have never gotten caught, and the fraud might have continued.
The Generally Accepted Auditing Standards require that the auditor must maintain independence in mental attitude in all matters relating to the audit. There are two types of independence that are required of auditors. Independence in appearance relates to others’ perceptions of auditors’ independence. It is of the utmost importance that users of the financial statements believe that the auditor is independent. For instance, if an auditor were to own even one share in a company that he or she was auditing, third party users would likely see that auditor as lacking independence even if the auditor was truly unbiased and considered that share irrelevant.
The Code of Professional Conduct addresses the issue of personal client relationships. The familiarity threat states that auditors “having a close or long standing relationship with an attest client or knowing individuals or entities (including by reputation) who performed nonattest services for the client” lack independence. Part e. of this section states that a member of the attest engagement team whose close friend is in a...
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