Herbert M Chain
Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global

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Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance. Herb is a member of MHM’s Audit Methodology Steering Committee.

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Auditors’ professional scepticism

October 3, 2023

What is professional scepticism?

Professional scepticism is an essential attribute of an auditor. It is “an attitude that includes a questioning mind and a critical assessment of audit evidence”. Professional scepticism allows auditors to effectively identify and assess risks of material misstatement, and to obtain and assess critically sufficient appropriate audit evidence to support their opinion on the financial statements.

Auditing standards include and emphasize the importance of professional scepticism, and the failure to exhibit the required level of professional scepticism has resulted in audit deficiencies being identified by regulators in their inspection process. For example, the PCAOB has often identified audit inspection deficiencies in its inspection reports related to professional scepticism, including the failure to identify and assess risks of material misstatement, perform sufficient audit procedures, obtain sufficient appropriate audit evidence, exercise professional scepticism throughout the audit, and properly document the audit work performed and the conclusions reached.

How does professional scepticism affect the auditor’s attitude, behaviour, and audit procedures?

Academic literature has established that we each have varying levels of professional scepticism. “Trait scepticism” refers to the stable personality characteristics that influence how sceptical an individual is in general, regardless of the situation. An auditor who has a high level of trait scepticism may be more likely to question the reliability of evidence and the honesty of management, while an auditor who has a low level of trait scepticism may be more trusting and accepting. We also react differently to situations depending on the audit context – the identified inherent risks, past history with the client, the tone at the top and culture of the client, and other external factors. This is referred to as “state scepticism”, a temporary psychological state. The interaction of trait and state scepticism defines how an auditor will react and behave.

Professional scepticism thus affects the auditor’s attitude, behaviour, and audit procedures in a number of ways. For example, an auditor with a sceptical attitude is more likely to ask questions, challenge management’s assertions, and investigate unusual circumstances, and is less likely to be complacent or to accept management’s assertions at face value. The question facing firms is whether scepticism can be enhanced, or strengthened, i.e., can a staff member with a low level of trait scepticism overcome this personality characteristic – and can staff members, in general, become more aware of situations that should increase their scepticism, increasing their level of state scepticism?

Where is professional scepticism most critical in a financial statement audit?

Professional scepticism is important throughout the audit process, but there are some areas where it is particularly critical. These areas include:

• Risk assessment. The auditor uses professional scepticism to identify and assess the risks of material misstatement due to error or fraud. This includes considering the entity’s industry, business model, and internal controls. Auditors must identify and assess the risks of material misstatement at the financial statement level, assertion level, and account balance level.
• Performance of audit procedures. The auditor uses professional scepticism to design and perform audit procedures that are appropriate to the assessed risks of material misstatement and to use judgment to determine the nature, timing and extent of audit procedures necessary to obtain reasonable assurance that the financial statements are free from material misstatement. This may include obtaining additional audit evidence, performing more detailed tests, or challenging management’s assertions.
• Evaluation of audit evidence. The auditor uses professional skepticism to critically assess audit evidence obtained. This includes considering the reliability, sufficiency, and relevance of the audit evidence.
While professional scepticism is important in all areas and phases of an audit, there are some audit areas, generally involving estimates, that are often complex, involve significant judgment, and are susceptible to management bias, thus requiring a heightened level of professional scepticism. These include:
• Revenue recognition. Revenue recognition is a complex area of accounting; there is a rebuttable presumption that it is also a fraud risk. Auditors need to be sceptical of management’s revenue recognition policies and to critically assess the evidence they obtain to support the recognition of revenue.
• Inventory valuation. Auditors must conclude on the need for obsolescence and/or lower of cost or market reserves when auditing inventory valuation.
• Impairment of assets. Impairment of assets such as property, goodwill and indefinite-lived intangibles requires judgment by management. Auditors need to be sceptical of management’s impairment assessments and critically assess evidence provided by management such as projections and valuation models.
• Contingent liabilities. Contingent liabilities are potential liabilities that may or may not become actual liabilities in the future. Auditors need to be sceptical of management’s identification and disclosure of contingent liabilities.
• Related party transactions. Related party transactions are often at the heart of earnings management and fraudulent financial reporting, and thus exhibit a higher level of inherent risk in accounting and disclosure. Auditors must be alert for undisclosed related parties and determine that they have been appropriately recorded and disclosed.

How can firms and auditors can enhance their professional scepticism?

Having discussed the nature and importance of professional scepticism, what can firms and individual auditors do to enhance professional scepticism?
• Firms must foster a culture of professional scepticism and critical thinking, train staff to question assumptions, challenge assertions, and adopt a sceptical mindset when evaluating evidence, and provide guidance on evaluating management representations and addressing potential biases or conflicts of interest.
• Firms should develop staff’s interviewing skills to effectively gather information and elicit relevant details during audits, and provide training on conducting interviews, including evidence collection and documentation.
• Professionals must assess their own personal biases and blind spots and be honest about the potential for bias in their work and take steps to mitigate those biases.
• Staff must be curious and ask challenging and difficult questions, be willing to probe deeper into management’s explanations, and ask potentially difficult and challenging follow-up questions. Auditors should always be asking themselves “Why?” and “What if?”
• Staff members must perform audit procedures in a critical and objective manner and not merely go through the motions. They should, rather, critically evaluate audit evidence and make sound judgments (the “due care” requirement).
• Professionals must be alert to red flags and conditions that may indicate possible misstatement. These red flags can include unusual transactions, changes in accounting policies, and management turnover.
• Engagement teams must consider the client’s audit risk environment during the planning and execution of the audit engagement, including the tone at the top (i.e., entity level controls, including the culture of the organization), the client’s industry, the size of the client, and the client’s risk profile.


You cannot build a house without a strong foundation; you cannot perform a quality audit without a strong exercise of professional scepticism. While professional scepticism is very much influenced by individual characteristics of the auditor, firms must foster a culture that raises professionals’ awareness of their own biases and constraints affecting the exercise of professional scepticism. Audit quality is dependent on the abilities of auditors to question and critically assess – the very premise of professional scepticism. It must be embedded in everything we do on an audit – in all phases of the engagement and in all audit procedures performed, especially in those audit areas that are complex and subject to the potential of management bias.

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