A Model and Literature Review of Professional Skepticism in Auditing

This paper reviews research that examines professional skepticism (hereafter, PS) in auditing.Consistent with much research and with recent regulatory concerns, the paper defines PS as ''indicated by auditor judgments and decisions that reflect a heightened assessment of the risk that an assertion is incorrect, conditional on the information available to the auditor.''In many circumstances the assertion in question will be a client's assertion that the financial statements are free of material misstatement, but the definition could apply to other assertions as well (e.g., attesting to the effectiveness of a client's internal controls).This definition reflects more of a ''presumptive doubt'' than a ''neutral'' view of PS, implying that auditors who exhibit high PS are auditors who need relatively more persuasive evidence (in terms of quality and/or quantity) to be convinced that an assertion is correct.Depending on how an auditor's decisions are evaluated, it is possible under this definition for an auditor to exhibit too much PS, in that they could design overly inefficient and expensive audits.The paper provides a model that describes how audit evidence combines with auditor knowledge, traits, and incentives to produce judgments that reflect PS.The model also describes how, given a judgment that reflects some level of PS, the judgment combines with auditor knowledge, traits, and incentives to produce actions that reflect relatively more or less PS.The model highlights that auditors' pre-existing knowledge, traits, and incentives all combine (and potentially trade off or interact) to affect the amount of PS in audit judgment and audit actions.This perspective also facilitates understanding how audit firms can influence PS in practice via hiring, training, performance appraisal, review, decision aids, incentives, and changes in tasks and institutions.For example, prior research suggests the following about particular elements of the model: