Professional Skepticism

1. Professional Skepticism IESBA Meeting New York June 27–29, 2016 Richard Fleck, IESBA Deputy Chair Tone Sakshaug, IESBA Technical Advisor

2. Objectives • Provide an update on the joint professional skepticism (PS) initiative • Provide high-level feedback on the responses to the IAASB’s ITC pertaining to PS • Obtain IESBA’s preliminary views on the approach to be taken to the meaning of PS and its applicability • Inform discussions of the PSWG July 2016 meeting

3. Why a Joint PS Initiative? • Stakeholder calls for enhanced auditor PS have generally been in the context of audits of f/s • But, auditing standards alone not enough to address PS issues (attitude or mindset) • PS is an attitude, that is a necessary but not sufficient condition for performing a quality audit, also important are: • Independence of mind, objectivity, competence, integrity and “fortitude” or “moral courage”, experience, training, culture • Need informed, timely and systematic approach in order to appropriately manage the expectations of stakeholders and to avoid unintended consequences

4. PS In Existing Standards and the Code • Concept of PS is described in IAASB’s standards and historically has been an assurance concept • IAASB Definition of PS for Audits of F/S • An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement, and a critical assessment of evidence. • Same description of PS used differently between IAASB and IAESB. Since 2015 IAESB’s standards have extended the concept of PS to all PAs • Code only mentions PS in the context of describing independence

5. Highlights from Feedback on IAASB ITC • Support for a joint approach by IAASB, IESBA, and IAESB, but important role for others (e.g., TCWG, academics, regulators and firms) • Calls for consistency in how the SSBs describe and use the concept of PS • Clarification needed between PS and the fundamental principles of ethics • Strong link between the application of PS and role of others within firms • Tone at the top/middle (ISQC 1), e.g., audit firm, EP, EQCR, senior staff, including mentoring and communication during the audit • Agreement that PS is relevant throughout the entire audit, but calls for more guidance on how to exercise PS in particular circumstances (e.g., when auditing highly judgmental areas)

6. Relevant Activities Informing IESBA Views To-Date

7. Recap of IESBA Reflections on the Topic • Merit in exploring interaction between PS, objectivity, independence and any other fundamental principles • Can the description of certain fundamental principles or independence do more to clarify the importance of “personal traits” and the “awareness of biases” that affect PS? • Is PS an enabler of the fundamental principles and independence? • Should PS apply to all PAs, or just PAs in public practice? • Timing of PS work in light of current related projects

8. Definition of PS Matters for IESBA Consideration (1) To guide IESBA’s input to PSWG, IESBA’s preliminary views are sought on: 1. Whether all SSBs should adopt a consistent approach to defining PS across their respective suites of international standards? 2. If yes, should the definition of PS be: • The extant IAASB definition and applicable to only assurance engagements? • A generic description and applicable to all PAs?

9. (1) Approach to be Taken by SSBs Recommend supporting the use of the term “professional scepticism” in the same way across all SSBs • To aid understanding • To enhance consistency • To avoid confusion

10. (2) What Approach Should be Taken to Achieve Alignment in the Standards of the SSBs? • Option 1 – Maintain the status quo and use a specific definition of PS that is prescribed for audit and assurance engagements only • Option 2 – Work jointly to develop a new generic definition that can be tailored by each SSB to meet their related, but different remits

11. (2) What Approach Should be Taken to Achieve Alignment in the Standards of the SSBs? Toexplain the issue, consider two alternative approaches: Option 1 – “An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement, and a critical assessment of evidence.” Option 2 – “Applying reason and critical thinking to determine validity as part of one’s role as a PA”

12. What Is the Relationship Between PS and Other Concepts in the Code? To guide IESBA’s input to PSWG, IESBA’s preliminary views are sought on: • The nature of the relationship between PS and other concepts in the Code 4. Whether the concept of PS should apply to all PAs?

13. (3) Interrelated Concepts – PS, the Fundamental Principles, Independence and the Conceptual Framework Independence Professional Skepticism Moral Courage

14. (4) Should PS apply to all Professional Accountants? • In the current Code, PS applies only in the context of providing assurance services. • Is PS linked to other concepts in the Code (professional competency and due care, integrity, independence of mind, objectivity)? • If so, should PS be exercised where PAs are expected to evaluate a situation and make a judgement , e.g. • By PAIPs when assessing compliance with the Code and • By PAIBs when assessing compliance with fundamental principles

15. Future Work ? In the longer term, should IESBA: • Consider • The skills and competencies required to apply PS • The drivers and impediments affecting the consistent application of PS With a view to considering what application material or other guidance might be included in a future version of the Code? • Consider specific references to PS across the Code as a whole?

16. Timing and Next Steps • Next Steps • Interaction with Structure of Code and Safeguards projects • Future project • Timing • July 6-7, 2016 PSWG meeting • September 2016 IAASB/IESBA CAGs • September and December IESBA meetings – TBD