Successful not-for-profit auditors have a wealth of technical knowledge and skills, including a thorough understanding of accounting and auditing standards and the laws and regulations applicable to tax-exempt organizations. On top of all that, they gain and maintain a detailed understanding of their auditee organizations, including each one’s mission and programs, business strategy and operations, and control environment. Between the significant new accounting standards becoming effective, recent tax legislation, and proposed changes to the auditor’s report, auditors have no shortage of technical proficiencies to gain. Technical skills are honed through ongoing professional experience and training, and fortunately, there are numerous resources pointing to applicable guidance.
But not-for-profit auditors also need a range of skills that are more subjective in nature. These skills are arguably as important, but they often do not lend themselves as well to guidance materials and practice aids. Professional skepticism is one of these softer skills. According to the auditing standards, professional skepticism is an attitude that involves a questioning mind and a critical assessment of audit evidence. It is required for all audits performed under generally accepted auditing standards.
There is a fine line to walk, because the goal is to neither assume that management is dishonest nor assume unquestioned honesty. This sentiment was captured aptly by President Reagan when, in relation to a nuclear treaty, he said to Soviet leader Mikhail Gorbachev, “Trust, yes, but verify.” So, while as auditors, we trust our clients—otherwise we wouldn’t have them as clients—we are obligated by professional standards to evaluate the information we obtain from management and those charged with governance.
Each auditor’s application of professional skepticism will be as different as their personal characteristics. However, it is important for all auditors to be aware of their own personal biases as well as the motivations and pressures that may affect their professional judgement during an audit.
Threats to the proper exercise of professional skepticism include:
- Time Pressures. Working too quickly can compete with an auditor’s ability to apply professional skepticism. The following, often compound, factors can lead to a time crunch:
- Fee Pressures. Not-for-profits frequently negotiate for lower audit fees. Lower fees typically mean compressed time budgets and increased pressure to get the job done.
- Workload Compression. Auditors are often overwhelmed by the workload compression that comes with similar deadlines for similar clients. Even when individual engagement fees and time budgets are adequate, there is only so much time to complete the work.
- Loss of Key Audit Personnel. An audit firm may have planned for adequate staffing and ample time budgets for each engagement, but the unexpected absence or loss of key audit personnel can add significant time pressures.
- Loss of Focus. Auditors, like all humans, can be distracted by personal challenges that divert their focus from the audit engagement. This can hamper the auditor’s critical thinking—a core component of professional skepticism.
- Familiarity. Auditors that have developed long-term relationships with clients are more likely to make assumptions in current-year engagements based on the results of prior audit engagements.
- Complacency. Sometimes there is no good reason for a lack of professional skepticism. Sometimes we’re just not paying attention.
With so many competing pressures, what can an auditor do to ensure a healthy level of professional skepticism?
1. Involve other personnel. One of the most effective methods to support healthy professional skepticism is to bring new personnel to the engagement team. This involvement can come in a variety of ways and can be an effective means of questioning assumptions. For example:
- A concurring partner reviews the audit plan.
- The engagement is part of the firm’s annual inspection or peer review.
- New hires are added to the engagement.
- Employees are removed from one engagement and reassigned to another.
2. Encourage questions and creative thinking in engagement planning meetings. The engagement planning meeting is an important opportunity to foster professional skepticism. These meetings should encourage creative thinking and the questioning of assumptions. Sometimes the most unfeasible ideas can lead to a substantive discussion about possibilities for material misstatement that have not been previously considered. Even when they don’t result in a change to the audit plan, these planning meetings promote the proper focus on skepticism.
3. Use a risk-based approach when prioritizing audit procedures. In planning an audit, consider performing the audit procedures that address the most significant risks in a not-for-profit organization first. Not only will this help mitigate the effects of time pressure on the audit, but it also will encourage the application of professional skepticism. Professional skepticism is especially critical in the high-risk areas of an audit, such as those that involve significant management judgment.
4. Play devil’s advocate. It’s important to have difficult conversations with auditee staff. This gets easier with practice. Let your clients’ personnel know it is your job to be the skeptic. As a not-for-profit auditor, it is your job to find the areas where money could go missing, where management may have biases, or where mistakes could be made. Explaining that you are merely doing your job can make the interaction less personal and less awkward.
5. Emphasize the importance of documentation. No article addressing audit quality is complete without some mention of documentation. This will be no exception. It is often in the final assembly and review of audit evidence that audit risks are fully understood or testing and documentation deficiencies are identified. Make sure clients know you reserve the right to perform further procedures at that point. Remember, your audit documentation can provide evidence that you satisfied your own professional skepticism. Be sure to leave room for applying and documenting it, even in the final phases of the audit.
6. Provide and attend fraud-focused training. As stated earlier, so much of our training and practice aids focus on the technical aspects of auditing and accounting. Be sure you and your audit team receive regular training on fraud and the importance of a questioning mind and skeptical attitude.
For more tools and resources to help you with your not-for-profit audits, visit the AICPA Not-for-Profit Section’s Assurance Resource Library.