Professional skepticism is an attitude that aims to investigate every aspect of the evidence provided for faults critically. A person who is exercising it does not accept any conclusion immediately, instead looking into the reasoning that led to it and searching for problems. When they find inconsistencies, they begin analyzing the reasons why these mismatches may have emerged, assuming that they were not coincidental but rather the result of some deeper issue. As such, a professionally skeptical person can use minor problems that others would overlook for their seeming insignificance to uncover malpractice or errors committed at earlier steps of the process and contribute to their rectification.
Professional skepticism is important because both mistakes and conscious misconduct are prevalent in business. Many large-scale financial issues, such as the 2008 crisis, can be attributed to a lack of this quality, which led to companies making risky decisions that would then backfire upon them. Errors, on the other hand, can propagate throughout the company accidentally, leading to incorrect predictions or accidental fraud. Acting upon this faulty information, the company can direct its course in a direction where factual prospects are scarce or become liable for accidental misconduct. Since both varieties of the problem can emerge from any level of the company and propagate throughout its entirety with devastating effects, professional skepticism should be applied to all activities, and transparency should be practiced.
The primary barrier to applying professional skepticism is the difficulty of doing so and properly investigating the issue. In the case study presented for this assignment, financial analytics produced unusual result, which the author sought to understand. However, they were unable to draw any information from either the staff accountant or the accounting manager, who referred them to senior management. Accessing them for information can be problematic due to their busy schedules and the seemingly minor scale of the issue. However, doing so is also necessary, primarily due to a lack of transparency, another prominent barrier. The reasoning for the increase in the allowance was not imparted, but the accounting manager performed it regardless.
In the situation presented, I would arrange a meeting with the executive responsible for the decision and question them regarding the reasoning for the change. I would further challenge the reasoning that they presented, highlighting the consistent number of days in A/R and highlighting the reason why the analysis was conducted. If the answer did not satisfy me, I would investigate the company’s relationships with its customers to identify potential reasons why the decision to increase the allowance took place. Ultimately, I would obtain an answer and use it when assessing material misstatement risks while also noting down the potential attempt to conceal the information by the company if one took place.
Per the case, the primary elements necessary for the implementation of professional skepticism are knowledge, a critical attitude, honesty, and perseverance. By expanding their understanding of how businesses operate, auditors can identify potentially concerning irregularities and investigate them. By reviewing the ideas suggested to them critically, they can dismiss unsound assertions and determine the real reasons for particular events. By exercising honesty, they can create an expectation of the same from the people to whom they are talking and identify potentially problematic statements. Lastly, perseverance lets them continue pursuing the problems that they find despite the lack of transparency instead of giving up and assuming that these issues were not signs of underlying concerns.