Professional Skepticism (PS) Trish Mulvaney, Task Force Member IESBA Meeting New York June 19-21, 2017

Objectives To consider: Whether there are fundamental concerns or objections to the release of the PSWG publication Task Force proposals for progressing a longer term IESBA PS initiative

Joint PSWG Stakeholder Communication Summarizes key PSWG observations and actions to date as well as intended future SSB actions Observations related to PS in audits include: Impact of environmental factors (e.g., resource constraints, local culture) Awareness of personal traits and biases Building in PS from the outset Standard setting alone not enough

Matters for IESBA Consideration Do IESBA members have any fatal-flaw-type comments on the PSWG PS publication? Do IESBA members have any fundamental concerns or objections to the release of the PSWG PS publication?

Short Term Action: May 2017 PS Exposure Draft (ED) Responsive to recommendations for individual SSB actions from PSWG Stakeholder feedback to IAASB ITC Stakeholder calls to IESBA (including CAG) to address issues relating to PS Discussions with IAASB, IAESB and CAGs

Short Term Action: May 2017 PS Exposure Draft (ED) Proposed new application material to explain how compliance with the fundamental principles supports application of professional skepticism in audit and assurance context Proposed new application material to emphasize importance of obtaining sufficient understanding of facts and circumstances when exercising professional judgment The more complex considerations surrounding the exercise of PS were intentionally excluded from the May 2017 PS ED pending further PS TF analysis

PS Considerations Requiring Further Analysis What are the behavior attribute gaps underlying lack of sufficient PS? Should concept of PS, or aspects of it, apply to all PAs? What are PS implications for non-assurance work? Can/should there be a harmonized definition of PS across IAASB, IESBA and IAESB standards? Would better guidance (e.g., types and impact of bias, overcoming impediments) improve the appropriate application of PS?

Considerations for Meeting Stakeholder Expectations PAs are expected to “act in the public interest” - despite there not being a uniform definition or understanding of the term among stakeholders “…PAIBs should be required to demonstrate enhanced levels of attentiveness and sensitivity to the integrity of information with which they are associated” “… A skeptical mindset might help address familiarity and self-interest threats that are created by inherent conflicts of interest caused by auditors being paid by the entities they audit” “Auditors cannot be expected to detect and resolve all problems … others in the financial reporting supply chain should be required to exercise PS”

TF Approach: Deeper Analysis of Considerations Agenda Item 6-B summarizes: Concerns that have given rise to calls for greater exercise of PS Rationale for addressing those concerns through the Code Ways in which those concerns might be addressed in the Code TF recommends the development of a Consultation Paper to further vet PS issues and obtain views about feasible and pragmatic solutions to enhance application of PS

Matters for IESBA Consideration Does the analysis correctly identify the concerns that have led to calls for greater exercise of PS? Are the ways PS concerns might be addressed feasible and responsive to root cause issues and public expectations? Are there other suggestions that the Task Force should investigate? Do IESBA members agree with the proposal to develop a Consultation Paper to obtain public input?