## Ethical Requirements, Professional Skepticism, and Professional Judgement

### Ethical Requirements

An auditor conducting an audit of financial statements must comply with the following ethical requirements:

1. Integrity — straightforward and honest

2. Objectivity — free from bias and conflicts of interest

3. Professional competence and due care — maintain knowledge and skill; act diligently

4. Confidentiality — do not disclose information without authority or legal right

5. Professional behaviour — comply with laws; avoid actions that discredit the profession

Independence is a sub-element of objectivity and has two dimensions:

Independence of mind — actual freedom from bias
Independence of appearance — perceived freedom from bias by a reasonable third party

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### Professional Skepticism

Definition: Having a questioning and alert mind — not assuming that management is dishonest or honest, but maintaining a questioning attitude.

Professional skepticism involves being alert to:

(a) Fraud Risk Factors — conditions indicating possible fraud
(b) Contradictory audit evidence — evidence that conflicts with other evidence obtained
(c) Reliability of documents — questioning whether documents may be forged or incomplete

> Exam signal: Professional skepticism is NOT suspicion. It is a questioning mindset. The auditor neither assumes wrongdoing nor accepts everything at face value.

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### Professional Judgement

Definition: The application of relevant training, knowledge and experience in making informed decisions about the appropriate courses of action in the audit.

Professional judgement is required throughout the audit — in planning, risk assessment, designing procedures, and forming conclusions.

Concept	Key Phrase	Practical Meaning
Professional Skepticism	Questioning and alert mind	Alert to fraud indicators, contradictions, document reliability
Professional Judgement	Training, knowledge, experience	Making informed decisions on appropriate courses of action

Worked example

### Example 1

Professional Skepticism in Practice:

An auditor receives a bank confirmation letter. Rather than automatically accepting it, professional skepticism requires the auditor to:

Check whether the letter is directly from the bank (not through management).
Verify the letter's authenticity if there are signs it may have been tampered with.
Cross-reference the balance with other evidence (e.g., bank reconciliation, cash book).

The auditor is alert to the reliability of the document — one of the three areas of skepticism.

### Example 2

Professional Judgement in Practice:

A company's receivables include a ₹20-lakh balance from a customer who has not paid in 18 months but management claims is good. The auditor uses professional judgement — drawing on knowledge of industry norms, the customer's public financial position, and audit experience with similar clients — to decide whether to accept management's assertion or to require a provision for doubtful debts.

⚠️ Common exam mistakes

Confusing professional skepticism with suspicion — skepticism is a questioning mindset, not an accusation of wrongdoing.
Listing only two of the five ethical requirements — all five (integrity, objectivity, professional competence, confidentiality, professional behaviour) are examinable.
Forgetting that independence has two dimensions: independence of mind AND independence of appearance — both must be maintained.
Describing professional judgement as 'using common sense' — the correct phrase is the application of relevant training, knowledge and experience.
Treating professional skepticism and professional judgement as the same concept — skepticism is an attitude/mindset; judgement is a decision-making process.

Bare-Act text Requirements — Professional Scepticism, Para 15 · SA 200 · click to expand

The auditor shall plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated.

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