The auditing industry and their corporate clients have strongly rejected any suggestion of replacing the enquiring mind approach to the professional skepticism brought to an audit of financial statements with a presumptive doubt approach. Comment letters to UK Auditing Practices Board proposals to reinforce skepticism in the audit culture indicated a broad consensus that a presumptive doubt standard would increase the cost of the audit without a concomitant benefit and contradict international audit standards, which have essentially codified the enquiring mind standard enunciated by Lord Denning in a famous 1958 opinion. The ISAs took effect in the UK and Ireland for reporting periods ending on or after 15 December 2010.
ISA 200.13 defines professional skepticism in auditing standards as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Two global audit firms, KPMG and Baker Tilly, find the ISA definition consistent with professional skepticism as described by Lord Denning, who said that auditors must come to their task with an enquiring mind, not suspicious of dishonesty, but suspecting that someone may have made a mistake somewhere and a check must be made to ensure that there has been none. Fomento (Sterling Area) Ltd. v Selsdon Fountain Pen Co. Ltd. (1958). In an earlier opinion, Lord Lopes noted that the auditor is not bound to be a detective and does not have to approach the audit with suspicion or with a foregone conclusion that there is something wrong. In re Kingston Cotton Mill Company (1896).
In its comment letter, Baker Tilly said that presumptive doubt is contrary to the risk-based approach in the clarified ISAs. Audits planned on the basis of presumptive doubt would greatly increase the work needed to issue an opinion because auditors would have to plan their audits assuming that all the evidence they had been provided with by management was, at best, wrong or, at worst, a lie. The concomitant increase in audit cost for companies would be unjustified because it would not add to the quality of the audit.
Baker Tilly also noted that the key phrase in the ISA 200.13 definition of professional skepticism is the auditor being alert to conditions that ``may’’ indicate possible misstatement, which is very different from the presumptive doubt approach suggested by the Board under which an auditor assumes that there is possible misstatement. This is reinforced by ISA 200.15 which requires the auditor to plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. Again, the use of ``may’’ indicates that the auditor does not assume that such circumstances do exist, reasoned the audit firm, but nevertheless plans the audit recognizing the possibility that they may.
In its comments, the Confederation of British Industry noted that auditors are required to exercise an enquiring mind. The proposed new test of presumptive doubt seems to require auditors to dig much deeper, said the CBI, and such a change would result in significantly more work for the audit firm and significantly more cost for the audit client company. It is not clear to the CBI that auditor skepticism through the exercise of an enquiring mind has failed. Thus, a move to presumptive doubt is not consistent with the risk-based approach to audit regulation and the requirement for auditors to carry out additional work only where significant risks are identified.
According to conmments by the Institute of Chartered Accountants in England and Wales, auditor skepticism is a fundamental requirement of any audit conducted under international auditing standards and therefore a mindset of professional skepticism should pervade all aspects of ISA audits. The ICAEW questioned whether there should be a presumptive doubt approach. The ICAEW believes that audits conducted with a skeptical mindset in accordance with the clarified ISAs should be sufficient to demonstrate high audit quality to relevant stakeholders and the level of work will be appropriate given the risks identified by auditors in accordance with the ISAs. The ICAEW is not convinced of the need to require or expect anything beyond what is envisaged in the clarified ISAs.
Noting that the term presumptive doubt is not used in the international auditing standards, PwC believes that having an initial mindset of presumptive doubt reflects an approach that assumes management is dishonest. Starting with a presumptive doubt mindset would result in procedures far beyond a questioning mind and the established concept of an enquiring mind. More broadly, it would go against the grain of risk-based standards for an auditor to take a presumptive doubt approach in all circumstances
According to PwC, the auditor starts from a neutral mindset and, based on a robust understanding of the company and its environment, performs a risk assessment to the level of evidence needed to respond to the assessed risk of material misstatement. For significant risks of material misstatement the international auditing standards require the auditor to perform additional procedures.
In its comments, Deloitte also challenged the use of the term presumptive doubt, which the firm believes goes much further than the established concept of an enquiring mind. A change to presumptive doubt would significantly increase business costs and runs contrary to a risk-based approach, which emphasizes the need for the application of further procedures only where significant risks are identified.
In its feedback statement, the Board said that the reaction to what was meant by presumptive doubt was a misunderstanding. The Board said that it had used the term as it had been used in academic research, as meaning the auditor exhibiting a heightened awareness of the risk that the figures could be affected by error or dishonesty rather than making the assumption that there was a misstatement.