1. Page 1 Professional Skepticism Prof. Annette Köhler, IAASB Member and Working Group Chair IAASB Meeting September 22, 2015

2. Page 2 Calls for enhanced auditor PS from many stakeholders –Regulator and audit oversight authorities –Outreach and other national initiatives –Academic research Working Group established comprising of representatives from IAASB, IESBA and IAESB –Collaborated approach that includes other standard setting boards Why Tackle Professional Skepticism (PS) Now?

3. Page 3 Representatives of the PSWG (from the IAASB, IESBA, and IAESB) –Members to serve as “ambassadors” or “champions” on the topic on behalf of their respective standard setting boards (SSBs) –PSWG Chair to function as a “facilitator” thereby encouraging discussions with SSBs IAASB already committed to a project, others SSBs not yet at this stage, but the topic of professional skepticism is relevant to: –IAESB’s consultation on its future Strategy and Work Plan, expected to be issued in November 2015 –IESBA work as part of its broader commitment to support the IAASB’s work aimed at enhancing audit quality, topic addressed IESBA recent Planning Committee meeting Professional Skepticism Working Group (PSWG)

4. Page 4 Being aware of heuristics and biases can assist auditors better mitigate the effect of those biases Accounting firms should create a culture that rewards auditors who exercise skeptical behavior or follow up on issues even if it does not result in an audit finding Change in tone at the top towards serving investors, rather than client is necessary Increased role for others (GPPC, Member bodies, regulators, including prudential and securities regulators, and TCWG, including audit committees) Research suggests that appropriate application of professional skepticism is influenced by a person’s individual ethics and courage Feedback from IAASB CAG

5. Page 5 To identify conceptual issues related to professional skepticism, broadly across the international standards (audit, ethics and education), and a)Identify where further alignment may be needed, or where gaps may exist; and b)Make observations, or recommendations for further action to be considered by the standard setting boards or others, as needed PSWG Objective

6. Page 6 Based on extant international standards (audit, ethics and education) : a)What is professional skepticism (PS)? Are the requirements and expectations clear? (e.g., Are the links between PS, and the concepts of assurance, evidence, engagement risk, due care, integrity, independence of mind, objectivity, and competence sufficiently clear and well understood?) b)What are the skills and competencies required for applying PS? c)What are the impediments affecting the consistent application of professional skepticism? Based on the responses to a–c, what observations can be made about each suite of standards? Key Questions Relevant for Determining a Way Forward

7. Page 7 IAASB Definition and Role of Professional Skepticism IAASB Definition –Attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence Role –Due to inclusion of reference to misstatement AND to evidence, concept is relevant for assurance engagements only – not for AUP or compilation engagements (no mention of professional skepticism in ISRS 4400 or 4410) –Assists in exercising professional judgments to determine whether sufficient appropriate evidence has been obtained => Critical for all evidence-based decisions in all assurance engagements

8. Page 8 PS in the Ethics Code Independence of Mind: The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism (Code of Ethics, Sec. 290.6) Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments => Cognitive biases are primarily captured by the concept of objectivity – not PS

9. Page 9 PS in the Education Standards IFAC member bodies shall prescribe the learning outcomes for professional skills…. (IES 3 Rev.) A competence area is a category for which a set of related learning outcomes can be specified Competence Area Personal (level of Proficiency intermediate), Learning outcome: Apply professional skepticism through questioning and critically assessing all information [=> beyond evidence] (IES 3 Rev.)

10. Page 10 PS in the Education Standards (continue) Competence Area Professional Skepticism (level of Proficiency intermediate), Learning outcomes: Apply a questioning mindset critically to assess financial information and other relevant data [=> beyond evidence] (IES 4 Rev.) Competency of audit engagment partner includes professional skepticism and professional judgment as a key element (IES 8) => PS applies to activities of professional accountants beyond assurance engagements

11. Page 11 Self Interest Lack of skills/competencies Necessary Conditions PS is necessary but not sufficient to obtain sufficient appropriate evidence PS documented (observable) sufficient appropriate evidence Obtaining sufficient appropriate evidence Documentation thereof Independence of mind Objectivity Integrity Due care Concious/subconcious biases Non-compliance Lack of resources/time pressure/ adverse incentives Impediments/DeficienciesNecessary Conditions Explicit reference in Code of Ethics Explicit reference in Education Standards Competence

12. Page 12 Examples of Impediments/Deficiencies, Mitigating Factors, and Key Players Self Interest Concious/subconcious biases Non-compliance Lack of resources/time pressure/ adverse incentives Tone at the top/Firm governance Incentive systems Awareness/Education Recruitment/ Sanctions Staffing/Timing/ Engagement Team Dynamics Education/Training/Experience Impediments/Deficiencies Mitigating Factors Regulators and audit inspection bodies Standard Setters: IAASB/IESBA/IAESB Audit Committees/TCWG Management Firms/Network leaderships Professional Bodies Educational Institutions Key Players Research topics Lack of Skills/competencies

13. Page 13 “Levels” of Professional Skepticism (PS) – A Research Concept Audit and assurance standards (ISA 200.15, ISRE 2400.22, ISAE 3000.37) require that auditor exercises PS, but without “levels” of PS – that is, an invariant concept: –In finalizing ISAE 3000 and ISRE 2400 projects, IAASB decided that level of professional skepticism does not vary by level of assurance (same for limited and reasonable assurance) –ISAs do not use the term “levels of PS” (Exception: ISA 240.A33 in relation to fraud, which speaks of “increased PS ”) Meaning/Implications of appropriately exercising PS, i.e. nature and extent of evidence are context-specific: e.g., audit procedures with respect to accounting estimates differ from audit procedures with respect to cash receipts –Extent to which the exercise of PS leads to the acceptance or rejection of evidence depends on context Concept in line with other auditing standards

14. Page 14 Where Do We Go From Here? Synthesis of relevant research by December 2015 Topic featured in December 2015 ITC addressing potential enhancements to audit quality in relation to quality control, group audits and financial institutions –Supported by global outreach in 2016 to further explore what may be needed Topic to be featured in IAESB SWG to be released in November 2015 IESBA to consider topic more broadly in the context of its liason activites with the IAASB aimed at improving audit quality PSWG to continue to progress activities towards achieving its objective

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