The International Forum of Independent Audit Regulators (IFIAR) was established in September 2006 by independent audit regulators from 17 countries, including the Public Company Accounting Oversight Board (PCAOB) from the United States.

IFIAR has issued its third survey of regulatory inspection findings of significant audit firms in their jurisdictions.

The initial survey, released in June 2012, was designed to identify common inspection findings of audit firms on a global basis. 

The following table from the IFIAR survey indicates the major areas regulators identified problems in audit work:
Interestingly, a major factor causing these problems was identified in each of the three surveys to date: the lack of professional skepticism.

As cited in the 2014 report, IFIAR said, “A factor underlying many audit deficiencies is insufficient exercise of professional skepticism during performance of the audit. IFIAR believes that enhancing professional skepticism of practitioners contributes significantly to quality financial statement audits and should be a high priority for audit firms, given the recurrence of audit deficiencies.”

The Government Accountability Office indicates, “Professional skepticism is an attitude that includes a questioning mind and a critical assessment of evidence. Professional skepticism includes a mindset in which auditors assume neither that management is dishonest nor of unquestioned honesty.”

In my textbook, Government Performance Audit in Action, we identify professional skepticism as a one of the major characteristics of a good auditor.

Due Professional Care…and Professional Skepticism

The good auditor must exercise due professional care, which requires him or her to be reasonably prudent and competent. Exercising due professional care also requires the auditor to maintain an attitude of professional skepticism. Professional skepticism is an attitude of doubt about the evidence presented to you until you are persuaded as to its validity.
In assessing areas to audit, the auditor must consider issues of materiality, significance, risk, adequacy of internal controls, and situations that suggest fraud, abuse or illegal acts. Exercising due professional care requires consideration of risk and of circumstances that might increase or decrease the likelihood of inefficiency, ineffectiveness, or loss of resources. Therefore, the auditor should keep Murphy’s Law in mind – holding to the preconceived idea that, if something could be wrong, there is a chance something is wrong. This concept is similar to the scientific method used by scientists. A scientist establishes a hypothesis (i.e., a preconceived idea) and systematically tests the validity of it (i.e., gathers evidence). The hypothesis is a tentative assumption made to draw out and test its logical or empirical consequences.
            Professional skepticism influences the type of evidence you may decide to examine before reaching a conclusion. For example, looking at paper documentation in support of an activity may be good for starters, but seeing it with your own eyes (and taking pictures of it) provides much better evidence.

A great example of the lack of professional skepticism is the Dixon, Illinois fraud. Just check out this link to see a partner of a top 10 US audit firm who did not understand what skepticism was in accounting:

Here is a manager of that same firm who believed an invoice was sufficient evidence of an expenditure and she did not see any need to verify the existence of the capital project:

These examples of the lack professional skepticism are disturbing. The auditing function is critical to helping assure accountability. People depend on auditors – but too often, auditors let us down.
Here are some documents that might help auditors focus on the concept of professional skepticism. It’s an important topic if we are to save and improve the existing audit functions that oversee vital activities.

Enhancing Auditor Professional Skepticism – from IFIAR’s Global Public Policy Committee (This is an excellent document. I recommend it to every auditor.)