Professional Escepticism

Professional Escepticism

I read in the latest issue of the magazine partida doble the article by professors García Benau and Maestro Chillida entitled Towards an audit standard on the auditor’s responsibility to fraud that addresses issues such as risk in auditing, professional skepticism and information about the fraud.

No Spanish Auditing Standard (NTA) has as its specific objective to regulate fraud in the financial statements. However, the next adoption of the International Auditing Standards (NIA) by the European Commission incorporates new criteria in the detection and reporting of fraud.

In fact, paragraph 15 of ISA 200 reminds that the auditor must plan and execute an audit with an attitude of professional skepticism . This means that the auditor makes a critical assessment – ” with a questioning mentality ” – of the validity of the evidence obtained. Thus he is alert to audit evidence that contradicts or question the reliability of documents and other information obtained from the administration and those charged with governance. In short, when you make inquiries and perform audit procedures and you come across an audit evidence that is not totally “persuasive” you should not be satisfied by the belief that the administration and those in charge of corporate governance are honest and have integrity.


During the seventies there was a loud fraud in the US, captained by the directors of an investment fund. The fraudulent strategy was based on the acquisition of an insurance company, which declared fictitious businesses, multiplying their income and increasing their stock price and therefore the value of the fund. They even sold the insurance policies to insurance companies and even simulated the “death” of the false subscribers. All this with the connivance of the computer center and even with the support of its own printing press, where medical or death certificates were falsified.

The case was included during the 1990s among the material of the Court of Auditors’ seminars as an example of the unfortunate performance of the auditors who incurred six serious errors :
1. They had a certain inferiority complex in front of the triumphant managers;
2. When they discovered some indication they went to the president of the society, which was the brain of the fraud;
3. They had unlimited confidence in the company’s employees;
4. The transactions between the subsidiaries and the parent company were not verified;
5. Confirmation operations were carried out at the company’s premises, which had the telephone punctured;
6. Finally, when they checked the balances, and make any question to the accountancy department, the answer was 100%, in a few hours and always “in accordance” with the accounting.
It is important not to forget that the function of auditors is not to discover fraud.         In the case of the insurer they found no evidence and the scam was discovered by an unhappy accomplice. The mission of the auditors is to “issue a technical opinion” on whether the accounts of an organization faithfully represent reality.


This attitude of professional skepticism, says paragraph 23 of ISA 240, is an attitude that includes an inquisitive mental state and a critical evaluation of the audit evidence and requires a ” continuous questioning about whether the information and audit evidence obtained suggest that there may be a material misstatement due to fraud “. Thus, they establish a series of procedures that the auditor must apply to detect fraud even though he has not found any evidence of this.
Among the Spanish NTAs, there is one from the year 2000 on ” Errors and Irregularities “. It is called ” irregularity ” to the wrongs that are given by intentional actions (while in the NIA this concept is called more expressively: “fraud.” It is clear that for the citizen this concept is clearer, although it incorporates, a priori, a certain value judgment), on the contrary, the term “error” is more aseptic and refers, in the context of that technical standard, to unintentional acts or omissions .

Well, according to the ISAs, the auditors must make inquiries to the management because of the risk that maybe exists and it comes from the financial statements that may contain material inaccuracies due to fraud, and must also investigate the rest of the entity’s personnel and this way they can get information that they could not get otherwise.

Benau and Maestro, in the commented article highlight “the importance of the element of unpredictability that the auditor must introduce to make it difficult for the staff of the entity to hide information”, since it is much easier to detect inaccuracies when they do not wait for some of the procedures that the auditors are going to apply.