Research Objectives

The scope and direction of this research pivots on the assumption, embedded within the Auditing Standards, that all members of audit teams are capable of a professional level of scepticism. The issue of whether auditors do in fact exercise a professional level of scepticism, as mandated by the Auditing Standards, has not been resolved by prior, discipline-specific, research.

This study seeks to develop understanding of ‘professional’ scepticism, and explores the notion of levels of scepticism for the purpose of distinguishing a range of ‘professional’ scepticism. A scale measure of scepticism is developed, and the results compared with the professional level boundary to explore whether auditors exercise ‘professional’ scepticism, as mandated by the Auditing Standards.

To achieve the objective of devising an appropriate scale, a conceptual model is developed to demonstrate interrelated concepts in the literature. The model draws upon literature which aligns with the definition of professional scepticism in the Auditing Standards, with the view that “an attitude that includes a questioning mind” (AUASB, 2013b) constitutes an inherent trait, while “critical assessment” (AUASB, 2013b) is a learned skill.

1.5.1 Research Questions

Given that auditors have been criticised for exercising insufficient scepticism during the audit process (Beasley et al, 2001), in attempting to contribute to understanding of the main problem, this research will explore the following specific questions:

RQ 1: Do auditors and other groups exhibit different levels of scepticism? and

RQ 2: Do auditors exhibit professional scepticism?

1.5.2 Importance

This research extends published academic discourse by introducing the skill aspect of professional scepticism into measurement. Prior research has attempted to measure only the trait aspect, which is acknowledged as only part of professional scepticism (Hurtt, 2009).

Further, prior measures have resulted in relative measures of scepticism, comparing auditors with other auditors, rather than establishing a discrete measure or benchmark of professional scepticism. Relative measures are problematic for the purpose of distinguishing levels. The combination of a dual-factor approach (encompassing both Trait and Skill) and discrete measurement (professional

scepticism benchmark) is intended to enable assessment of auditors’ default scepticism; that is, the basic mindframe experienced in the absence of workplace- specific risks or cues to initiate a heightened state of scepticism.

Such a measure may be useful for the purpose of comparing performance with the requirements of the Auditing Standards, and may provide guidance as to the nature of professional developments to improve scepticism via a proactive approach. That is, prior to audit failure and examination in the courts.

The dual-factor approach is also an important step in progressing understanding of what scepticism is, and how it might manifest in the audit environment. Prior research has established that professional scepticism entails more than the Trait foundation (Hurtt, 2009), so it is necessary for this contribution to encompass the existence of another construct. For the purposes of this research, that construct is defined as Skill. This term is inspired by reference to the task of ‘critical assessment’ in the Auditing Standard definition of professional scepticism. Although many terms have been used by academic authors to describe this other factor3, it is generally accepted that it is distinct from, and offers support to, Trait scepticism, and is related to assessment of evidence (Grenier, 2014; Harding & Trotman, 2015). Previous studies which specifically refer to Skill include Anderson (2009) and Nelson & Tan (2005).

For the purpose of guiding the nature of professional development activities, the research also offers an additional indicator. This may simplify identification of types of training which are most appropriate for auditors with a sceptical position which would be considered below the ‘professional’ benchmark, by identifying whether the deficiency is related to audit risk or to audit inefficiency. This may lead to improved 3

For example, self-criticism (Grenier, 2014), state scepticism (Hurtt, 2009), or inward scepticism (Harding & Trotman, 2015; Grenier, 2014).

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training outcomes for auditors, lower audit risk for audit firms, and mitigation of liability.

Findings may also be of significant interest to professional bodies, in terms of continuing professional development and evaluation of accredited education components, and to independent regulators relying on the assumption that all auditors are sceptical at the professional level. It is important to identify a benchmark to differentiate the professional level of scepticism, if identification is possible, because the profession and the regulatory bodies may need to consider fresh remedial measures if there is found to be an expectation gap between the requirements explicit in the auditing standards and auditors’ capacity to comply.

There already exists a well-known Audit Expectation Gap which refers to asymmetry between preparers and users of audit reports, whereby users’ perceptions of audit work far exceed the scope of audit engagements. Koh and Woo (1998, p.147) blame this asymmetry for what they term as a “legal liability crisis facing the accounting profession”. Indeed, this gap is linked to many courts’ determinations regarding reasonable care, foreseeability and proximity, forging the balance between the auditor’s role of watchdog, versus claimants’ perception of a bloodhound which ought to identify all error and fraud (Kingston Cotton Mill 1896). However, continuing calls for accountability indicate that the balance and symmetry are not yet achieved, and De Martinis and Burrowes (1996) argue that more recent court actions against auditors have even widened the gap. Koh and Woo (1998) agree, noting that the public requires someone to be held accountable for corporate failures, and judges continue to expect more from auditors.

De Martinis and Burrowes (1996, p.17) use the terminology “performance gap” to describe the audit scope problem described above. The regulatory expectation gap to

which this research refers, is similar in that it potentially involves information inconsistency, but the players are different: In this instance, the potential misalignment is between auditors and the regulatory authorities. An extreme example of the effects of this gap is that if auditors are constrained by some variable such that some or all are inherently unable to perform at the required professional level of scepticism, then they are inherently prone to breach of the legally enforceable auditing standards. We do not currently have an identified benchmark; nor a reiterative method of reliably measuring auditors’ scepticism to compare with it, and therein lies a substantial information gap given that auditors are obliged to maintain a standard they can not objectively or reliably identify.

Research outcomes which inform a framework to improve understanding of auditors’ professional scepticism and its efficacy are fundamentally important for the purpose of understanding whether auditors are capable of fulfilling their legal obligations, and, if not, how that gap might be contracted. This research is expected to reinvigorate academic discourse in the scepticism component of professional judgement.