## Professional Skepticism

### Definition

Professional skepticism refers to an attitude that includes:

1. A questioning mind

2. Being alert to conditions which may indicate possible misstatement due to error or fraud

3. A critical assessment of audit evidence

> Professional skepticism is an attitude, not just a procedure. It must be applied throughout the entire audit.

### What Professional Skepticism Requires

The auditor must maintain professional skepticism throughout the audit, recognising the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor's past experience of management's honesty.

### Specific Areas Requiring Skeptical Alertness

Situation	Why Skepticism is Needed
Audit evidence contradicts other evidence	Inconsistency may signal manipulation or error
Reliability of documents is questioned	Documents may be forged or altered
Conditions indicating possible fraud	Fraud risk requires heightened scrutiny
Circumstances suggesting additional procedures	Standard procedures may be insufficient

### Professional Skepticism vs Professional Judgment

Professional skepticism = questioning attitude and critical evaluation of evidence
Professional judgment = the application of relevant training, knowledge, and experience in making decisions

Both are required throughout an audit — skepticism informs the questions asked; judgment informs the conclusions reached.

Worked example

### Example 1

Contradictory evidence: The auditor obtains a bank confirmation showing a balance of ₹50 lakhs, but the client's cash book shows ₹55 lakhs. Professional skepticism requires the auditor to investigate the discrepancy rather than accepting management's explanation without verification.

### Example 2

Fraud indicators: An auditor notices that a major supplier was only registered two weeks before a large payment was made to it, and the supplier's address matches a director's home address. Professional skepticism demands the auditor extend procedures — not simply accept the invoice as valid.

### Example 3

Document reliability: During inventory audit, the auditor receives purchase invoices that appear to have been photocopied and reused with different dates. Skepticism about document reliability requires the auditor to seek independent confirmation from the supplier.

⚠️ Common exam mistakes

Describing professional skepticism as 'suspicion of fraud' — it is a questioning attitude and critical assessment, not outright suspicion or distrust of management.
Treating professional skepticism as only applicable to fraud risks — it applies to error risks, document reliability, and the adequacy of procedures as well.
Confusing professional skepticism (an attitude) with professional judgment (an application of expertise) — both are required and they work together.

Reference:

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