A common challenge for new auditors is finding a practical balance between professional skepticism and maintaining a positive relationship with the client. While staying on good terms is important for longevity, independence cannot be sacrificed, or credibility will be threatened. The International Audit and Assurance Standards Board found this issue important enough to establish the Professional Skepticism Consultation Group (PSCG), with the purpose “to provide input and support to task forces or working groups, or to staff, as needed, on professional skepticism-related matters, including how the auditor exercises professional skepticism and maintains professional skepticism throughout the audit.”
In April 2025, the IAASB issued International Standard on Auditing 570, Going Concern, followed in July by International Standard on Auditing 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.
The Going Concern standard is based on the presumption that the audited entity is a viable organization that will continue operations for the foreseeable future, generally considered to be at least the next year. The standard lays out responsibilities for both management and the auditor.
Management is required on an ongoing basis to consider factors that could impact the organization’s future, recognizing that uncertainty increases the further into the future the factors are taken into account. How large and well-established the entity is, how complicated the business and industry are, how physical and political circumstances come into play, can all influence the entity’s ability to survive and thrive.
The auditor must evaluate management’s assessment, acquiring adequate evidence, and form an opinion as to the reasonableness of the assessment, recognizing that such assurance of the future cannot be given as much weight as opinions on the past.
The Fraud standard (ISA240) was considered necessary due to an increase in corporate failures over the past few years. Though the auditor cannot guarantee that fraud has not occurred with regard to audited financial statements, the standard states that
“The auditor’s responsibilities relating to fraud when conducting an audit in accordance with this ISA, and other relevant ISAs, are to: (a) Plan and perform the audit to obtain reasonable assurance about whether the financial statements taken as a whole are free from material misstatement due to fraud. These responsibilities include identifying and assessing risks of material misstatement in the financial statements due to fraud and designing and implementing responses to address those assessed risks. (b) Communicate and report about matters related to fraud.”
ISA 240 enhances audit documentation requirements as summarized by the Standard’s Fact Sheet:
1. Reinforcing the Exercise of Professional Skepticism Throughout the Audit
2. Clarifying and Emphasizing Auditor Responsibilities
3. Strengthening Ongoing Communication throughout the Audit with Management and Those Charged with Governance about Matters Related to Fraud
4. Applying a Fraud Lens on Risk Identification and Assessment
5. Adding Robust Work Effort Requirements When Fraud or Suspected Fraud is Identified
6. Enhancing Transparency on Key Audit Matters Related to Fraud in the Auditor’s Report
7. Enhancing Audit Documentation Requirements
Even with these enhanced requirements for the auditor, the standards clearly state that “The primary responsibility for the prevention and detection of fraud rests with both management and those charged with governance of the entity.” The tone at the top of integrity and responsible oversight are crucial to minimize the potential for fraud.
Further details can be found at ISA 570 Going Concern and ISA 240 Fraud.
