Professional skepticism has been emphasized as an important part of the audit process. However, the need to continually emphasize skepticism implies that auditors have a difficult time remaining skeptical.

Required

In your groups address the following questions.

a. What is professional skepticism? How is professional skepticism used in an audit? Explain how professional skepticism is described in international auditing standards. Are there fundamental differences between U.S. and international auditing standards in terms of professional skepticism?

b. Explain why professional skepticism may be difficult for auditors to fully implement on every audit.

c. Identify the top five things an individual auditor and an audit team should do to help achieve the necessary level of professional skepticism.

d. For each of the following cases indicating heightened fraud risk, indicate (a) how a professionally skeptical auditor might interpret the data and (b) how a professionally skeptical auditor might address the possibility of fraud.

● (Case 1) The Company is not as profitable as its competitors, but it seems to have good products. However, it has a deficiency in internal control over disbursements that makes it subject to management override.

● (Case 2) The Company is doing better than its competitors. Although sales are about the same as competitors, net income is significantly more. Management attributes the greater profitability to better management of expenses.

● (Case 3) The Company is financially distressed and is at some risk of defaulting on its debt covenants. The company improves its current ratio and other ratios by making an unusually large payment against its current liabilities, accompanied by highly discounted sales if they customers paid before year end.

● (Case 4) A smaller public company ($165 million in annual sales) has a relatively new CFO who has centralized power under her. Her style is very intimidating even though she is not a CPA and has limited accounting experience. The company has not been able to increase profitability during her time with the company.