20 April 2022

The second key concept in ISA 315 relates to the requirement in ISA 200 para 15 to “…plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated” and para 16 to “exercise professional judgement in planning and performing an audit of financial statements.”

These should be familiar concepts to auditors, however, familiarity does not mean that the concepts are easy to learn or maintain.


An easy way to explain scepticism is from our NZ popular culture – the famous Tui billboards. They were generally based on an assertion made by someone – then mocked with a sceptical “yeah right” – a good concept to keep in mind when the client is telling us a story (though probably unwise to verbalise):

Like a good journalist interviewing a politician, we cannot take claims at face value without evidence, especially if there is a reason why it might be beneficial for the interviewee to present a biased slant on the truth.

The standard gives some helpful tips for applying professional scepticism in para A13, including encouraging the auditor to:

  • Question contradictory information and the reliability of documents;
  • Consider responses to enquiries and other information obtained from the client;
  • Remain alert to conditions that may indicate possible misstatement due to fraud or error; and
  • Consider how the audit evidence obtained supports our identification and assessment of RoMM.

Confirmation bias

Paragraph 13 reminds us that when designing and performing risk assessment procedures we must not bias our work toward obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory. This takes some thought, as we are caught between time constraints (pushing us towards getting the answer quickly) vs. professional curiosity and thoroughness which may be necessary if something doesn’t quite sit right.

Many audit failures are the result of falling for confirmation bias. As per the American Psychological Association, Confirmation Bias is the tendency to look for information that supports, rather than rejects, one’s preconceptions, typically by interpreting evidence to confirm existing beliefs while rejecting or ignoring any conflicting data.

We mostly instinctively see the evidence that supports our presuppositions about the client, and ignore evidence that falls outside of our existing beliefs about them. In fact, it is very difficult not to do this when we are close to the client and involved in the details of the job. It is the reason we have auditor rotation and review of our work.

To counter bias the standard recommends comparing evidence from multiple sources. Para A15 lists these as:

  • Interactions with management, those charged with governance, and other key entity personnel.
  • External parties such as regulators.
  • Publicly available information about the entity.

Professional judgement

ISA 200 para A26 tells us that: “The distinguishing feature of the professional judgement expected of an auditor is that it is exercised by an auditor whose training, knowledge and experience have assisted in developing the necessary competencies to achieve reasonable judgements.”

The experienced auditor will develop a nose for things that don’t add up, just like the good investigative journalist. I have confirmed with many auditors the immense value of just sitting in the client’s tea-room and chatting with the staff (not so easy during COVID restrictions). This isn’t just about finding out surprising facts but assessing the tone of the client.

Brain science confirms that having a ‘hunch’ or a ‘bad feeling’ is often a reliable indicator that we should investigate a bit deeper. Our right-brain function is constantly scanning our environment and we pick up complex patterns and human interactions that alert us that something isn’t quite right. The right brain works much faster than the more cognitive left brain, so we are aware of things emotionally and physically before we really have time to think about them and process them cognitively. So a good auditor learns to use all of their brain.

ISA 315 para 17 also emphasises the importance of the whole team being involved in planning and looking for risks. In a team, even the newest member may think of something that the more experienced have missed. Everybody has different experiences, skills and perceptions to bring to the table. So a good auditor also uses the brains of all their team!

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