New Guidance on Professional Judgement for Auditors by Emer Kelly
New Guidance on Professional Judgement for Auditors
by Emer Kelly
In June 2022 the UK’s Financial Reporting Council (FRC) issued the publication “Professional Judgement Guidance”. This guidance for auditors seeks to provide a framework for the auditing profession to improve how they exercise professional judgement. The guidance is the first of its kind and will no doubt become an essential tool for auditors when faced with challenging decisions during an audit.
The guidance was developed with a working group of audit practitioners, independent experts, and colleagues from FRC Enforcement and Supervision. The FRC has identified poor professional judgement as one of the most significant issues affecting audit quality. It is anticipated that use of the guidance by the profession will enhance audit quality by improving the consistency and quality of professional judgement.

The FRC intend the framework to have the status of non-prescriptive guidance. It is intended to be persuasive, encapsulating good practice.

Professional judgement is defined in ISA (Ireland) 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing as follows;

The application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

Professional judgement sits at the cornerstone of the audit process and the need for quality judgement and decision making is fundamental. This is particularly true in the assessment of areas such as risk, going concern, the appropriateness and sufficiency of audit evidence. These are typical areas where an auditor’s professional judgement can be called upon. This list is not exhaustive, and each circumstance is different. There is no precise formula for professional judgement but with a framework the auditor can look objectively at the set of circumstance and use the framework to guide them and support them in their decision making.

The guide notes that when professional judgement is not exercised effectively, audit quality suffers and states that the most significant quality issues identified by the FRC’s Audit Quality Review (AQR) team over a number of years involve the poor exercise of auditor professional judgement in some capacity.

The guidance includes a framework for making professional judgements, followed helpfully by a series of illustrative examples.

At a time when firms are considering the impact of the move to the new suite of quality management standards by December of this year, this guidance is timely, and it is recommended that firms review the guide and incorporate its contents into their quality management policies and procedures.

The intent of the guide is that it can be used in multiple circumstances and in a variety of ways, for example:

  • At a firm-wide level, it may be incorporated into the firm’s training, methodology and other intellectual resources.
  • More widely, it may be an important consideration in the design, implementation, and operation of a system of quality management in accordance with ISQM (Ireland) 1.
  • It can be used by individual practitioners at any level of seniority in the conduct of an audit or assurance engagement, as a stand-alone guide to the application of professional judgement.
  • Although written for auditors, it may be useful for others in the financial reporting chain, or for specialists in other fields providing expert input into an audit, in making their own professional judgements.
  • It could be useful for audit committees, and those charged with governance of audited entities more broadly, in enhancing their understanding of an auditor’s judgement process.
The Framework
The framework consists of four main components:

  • Mindset – an appropriate mindset for auditors exercising professional judgment;
  • Professional Judgement Trigger and Process – a suggested professional judgement process, together with a reminder to remain alert to situations which may require professional judgement;
  • Consultation – effective communication with a range of relevant parties; and
  • Environmental Factors – factors that may be present in the environment of those making a judgement, that can impact on how challenging it is to exercise professional judgement in an appropriate manner.
This section highlights five aspects of mindset as follows:

  • Appreciation of the purpose of audit and its public interest benefits
  • Professional Scepticism
  • Understanding of biases and other relevant psychological factors – these include:
  • Availability bias
  • Confirmation bias
  • Groupthink
  • Overconfidence
  • Anchoring bias
  • Automation bias
  • Sensitivity to uncertainty
  • Commitment to quality
Professional Judgement Trigger and Process
This section of the framework includes a number of steps which may aim to structure the way in which a judgement is carried out and documented, as well as a “trigger” step setting out the importance of staying alert to when professional judgement might be called for, and when a more formal judgement process might be warranted.

The discrete steps, although not intended to imply that decision making is linear, are provided for as follows:

  • Remain alert to situations which require the exercise of professional judgement
  • Consider who is the right person to make this judgement
  • Appropriately frame the issue
  • Marshal your information
  • Carry out the analysis
  • Stand back, and conclude
  • Document, communicate and reflect
This element of the framework focuses on the benefits of consulting with others, whether that is internally within the firm or for example with an external expert or an engagement quality reviewer.

This section promotes the advantages of encouraging a healthy culture of debate and challenge within the audit team to support the exercise of objectivity and scepticism.

Environmental Factors
This is especially important and encourages the auditor and the audit team to consider specific factors in their environment that may impact on their decision-making process.

Within the audit firm the framework considers the culture of the firm, its resources, training, and processes. For example, considering the reward structures such as compensation and promotion within the firm.

Other considerations by the firm should be around the time and resources available to them to make judgements. For example, is the auditor under pressure to make a judgement or reach a deadline and are there restrictions on the capability and capacity of the team to make the judgement?

Within the audit client itself then there may be factors related to management and those charged with governance that should be considered, such as the culture of the client entity, the audit committee (if there is one) and the provision of clear and timely information to support a well-timed judgement process.

Illustrative Examples
Very usefully the guide also provides a series of examples, which provide an overview of how the framework could be applied in a number of scenarios.

The cases presented provide helpful examples of professional scepticism and good self-awareness.

The risk of groupthink and confirmation bias are also explored.

One of the examples explores a challenging judgement around going concern. The challenges of anchoring bias are outlined. All three examples show the potential steps in the decision-making process and how the framework can be applied in practice to different scenarios.

Application of the Framework by Audit firms
Audit firms are encouraged to become familiar with the contents of the framework and to consider how best the high-level principles presented can be incorporated into audit methodologies and practice.

The guide should be used an important consideration in the development of a Quality Management System in accordance with ISQM (Ireland) 1.

There are real advantages to using the illustrative examples provided as training tools for audit staff and trainees, to support and demonstrate a strong culture within the firm of sound decision making and the robust challenging of professional judgements, all ultimately leading to enhanced audit quality.

The principles and framework presented can also be used across many areas of practice, where an auditor or accountant is faced with circumstances that require sound and professional judgement. This framework provides a strong basis upon which to reach informed and consistent judgements and it should provide a useful tool for firms of all sizes and disciplines.

Emer Kelly
Emer Kelly
Manager, Quality Assurance CPA Ireland