Usually, in most countries, every company is obliged by law to prepare its annual financial statements as well as get them audited by a statutory auditor.
The responsibility of a statutory or independent or external auditor, as per the International Standards of Auditing (ISA), is to obtain all relevant information from the management and those charged with governance of a company, critically analyze and assess the information and prepare an auditor’s report.
Such an auditor’s report includes his opinion on whether the financial statements made by management show a true and fair view of the company, are prepared as per the applicable financial reporting framework, and are free from misstatement.
To ensure the audit is performed accurately, there is a set of rules for every auditor out there to follow i.e. International Standards of Auditing (ISA). ISA 200 directs the auditor to use professional judgment and professional skepticism while performing the audit.
Professional judgment is a behavior that requires you to make decisions, analyses, or evaluations on the basis of the knowledge, skills, training, or experience you possess, as an auditor, in accordance with the standards, laws, regulations, or principles of the applicable financial reporting framework in your country.
ISA 200 describes professional judgment as follows:
‘The application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.’
Where professional skepticism is the attitude of having an inquisitive mind and having to question audit evidence intuitively for its sufficiency and appropriateness, professional judgment is the application of your knowledge, skills, and training regarding auditing and accounting to make informed decisions and deciding how to respond to particular situations during the audit.
The International Auditing and Assurance Standard Board (IAASB) argues that professional skepticism influences the professional judgment of an auditor.
You need to be able to have an inquisitive mind to question the audit evidence (professional skepticism) and then apply your skills on such evidence to reach a conclusion about how it must be dealt with (professional judgment).
Uses of professional judgment:
According to ISA 200, professional judgment is vital in making decisions about the following:
- Before commencing the audit, the auditor needs to apply professional judgment in deciding materiality and risk of audit
- To come up with the appropriate audit plan as per the circumstances, the auditor must use professional judgment. The extent, timing, and nature of audit procedures are determined by the application of both, professional skepticism, and judgment.
- It lets the auditor decide whether the audit evidence obtained is sufficient and appropriate for the audit. If not, the auditor can further evaluate new audit procedures or course of action by applying professional judgment.
- The professional judgment allows the auditor to think in a perspective that questions whether all the objectives of the ISAs are being met. If not, it helps in deciding what further needs to be done.
- In accounting, a few line items like calculation of the provision for bad debts require judgment from the management. The professional judgment allows the auditor to assess whether such judgments are implying fraud or error and whether they’re in accordance with the applicable financial reporting framework.
- Conclusions and assessments regarding audit evidence obtained require the auditor to apply professional judgment as well.
An audit without professional skepticism or professional judgment is of low value which is why; every auditor must use it scrupulously. It is an important part of auditing and is used to prepare the base of audit in particular circumstances of a company.