Professional Judgment

Requirement: Professional Judgment

3.109

Auditors must use professional judgment in planning and conducting the engagement and in reporting the results.

Application Guidance: Professional Judgment

3.110

Professional judgment includes exercising reasonable care and professional skepticism. Reasonable care includes acting diligently in accordance with applicable professional standards and ethical principles. Attributes of professional skepticism include a questioning mind, awareness of conditions that may indicate possible misstatement owing to error or fraud, and a critical assessment of evidence. Professional skepticism includes being alert to, for example, evidence that contradicts other evidence obtained or information that brings into question the reliability of documents or responses to inquiries to be used as evidence. Further, it includes a mindset in which auditors assume that management is neither dishonest nor of unquestioned honesty. Auditors may accept records and documents as genuine unless they have reason to believe the contrary. Auditors may consider documenting procedures undertaken to support their application of professional skepticism in highly judgmental or subjective areas under audit.

3.111

Using the auditor’s professional knowledge, skills, and abilities, in good faith and with integrity, to diligently gather information and objectively evaluate the sufficiency and appropriateness of evidence is a critical component of GAGAS engagements. Professional judgment and competence are interrelated because judgments made depend upon the auditor’s competence, as discussed in 4.01.

3.112

Professional judgment represents the application of the collective knowledge, skills, and abilities of all the personnel involved with an engagement, as well as the professional judgment of individual auditors. In addition, professional judgment may involve consultation with other stakeholders, specialists, and management in the audit organization.

3.113

Using professional judgment is important to auditors in carrying out all aspects of their professional responsibilities, including following the independence standards and related conceptual framework; maintaining objectivity and credibility; assigning competent personnel to the engagement; defining the scope of work; evaluating, documenting, and reporting the results of the work; and maintaining appropriate quality control over the engagement process.

3.114

Using professional judgment is important to auditors in applying the conceptual framework to determine independence in a given situation. This includes identifying and evaluating any threats to independence, including threats to the appearance of independence, and related safeguards that may mitigate the identified threats.²⁶

3.115

Using professional judgment is important to auditors in determining the necessary level of understanding of the engagement subject matter and related circumstances. This includes considering whether the audit team’s collective experience, training, knowledge, skills, abilities, and overall understanding are sufficient to assess the risks that the subject matter of the engagement may contain a significant inaccuracy or could be misinterpreted.²⁷

3.116

An auditor’s consideration of the risk level of each engagement, including the risk of arriving at improper conclusions, is also important. Within the context of audit risk, exercising professional judgment in determining the sufficiency and appropriateness of evidence to be used to support the findings and conclusions based on the engagement objectives and any recommendations reported is integral to the engagement process.

3.117

While this requirement places responsibility on each auditor and audit organization to exercise professional judgment in planning and conducting an engagement, it does not imply unlimited responsibility nor does it imply infallibility on the part of either the individual auditor or the audit organization. Absolute assurance is not attainable because of factors such as the nature of evidence and characteristics of fraud. Professional judgment does not mean eliminating all possible limitations or weaknesses associated with a specific engagement, but rather identifying, assessing, mitigating, and concluding on them.

Figure 1: Generally Accepted Government Auditing Standards Conceptual Framework for Independence

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1. Evaluate circumstances for threats to independence. Threat identified?

1. No - Proceed.
2. Yes - Go to step 2.

2. Is threat related to a nonaudit service?

1. No - Evaluate threat for significance Is threat significant?
2. No - go to 1a, Proceed.

2. Yes - Identify and apply safeguard(s)

1. Assess effectiveness of safeguard(s) Is threat eliminated or reduced to an acceptable level?

1. No - go to step 3a Independence impairment. Do Not Proceed.
2. Yes - Document nature of threat and any safeguards applied. Go to 1a, Proceed.
3. Yes - Go to step 3.

3. Does the nonaudit service impair independence per Government Auditing Standards?

1. Yes - Independence impairment. Do not proceed.
2. No - Was the nonaudit service requested by audited entity management?
3. No - go to step 2a, Evaluate threat for significance. Is the threat significant?

2. Yes - Does management have suitable skills, knowledge and experience?

1. No - go to step 3a Independence impairment. Do Not Proceed.
2. Yes - Document consideration and document understanding with management or those charged with governance.

1. Does the nonaudit service involve preparing accounting records and financial statements?
2. No - go to step 2a, Evaluate threat for significance. Is the threat significant?

2. Yes - See figure 2.

Figure 2: Independence Considerations for Preparing Accounting Records and Financial Statements

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1. Is the nonaudit service preparing financial statements in their entirety from a client-provided trial balance or underlying accounting records?

1. No - Evaluate threat for significance. Is threat significant?
2. Yes, proceed to item 2 (Identify and apply safeguard(s))

2. No, Document evaluation and proceed

2. Yes, Identify and apply safeguard(s)
3. Assess effectiveness of safeguard(s). Is threat eliminated or reduced to an acceptable level?

1. No - Independence Impairment. Do Not Proceed.

4. Yes - Document nature of threat and any safeguards applied.
5. Proceed.

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26. See para. 3.21b for a description of independence in appearance.↩︎

27. See paras. 4.02 through 4.15 for a discussion of competence.↩︎