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Chapter 4

BU477 Chapter Notes - Chapter 4: Confirmation Bias, Ethical Decision, Financial Statement

Course Code
Helena Keirstead

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Chapter 4: Professional Judgement and Ethics
Framework for Professional Judgment:
Application of relevant knowledge and experience within context of providing
auditing and accounting opinions
Professional Judgement: Analytical and systematic, objective prudent and
carried out with integrity and recognition of responsibility to those affected by its
o Making the right judgement and providing your duty of care in auditing
Must Prove that Decision is:
o Well thought out
o Objective
o Meets GAAP and GAAS
o Evidence to support decision
o Maximize likelihood of good consequence
o Carried out truthfulness and forthrightness
o Considers impact on financial statement users
Both complex and difficult
Frameworks help guide thinking and encourage auditors to be aware of
judgement bias
Identify and Define Issue:
We must clear about what we want to solve because we don’t want to solve the
wrong problem
Try to take on different perspectives to determine the real issue
Can also determine why the issue is there when approaching multiple viewpoints
Also, avoids judgement trap in jumping/rushing to solve the problem
Gather the Facts and Information:
Often evaluating the information that is readily available for auditors
Auditor should understand client’s business
Get information from multiple sources to limit information bias
Perform Analysis and Evaluate Alternatives:
Analyze relevant facts and evaluate alternatives
Auditor should be aware of potential judgement tendencies, traps and bias that
can limit evaluation of alternatives
Reach and Document Conclusions:
Take a stand back view, a broader perspective of the information and how the
content relates to other evidence in the file
Documentation supporting why this is the right conclusion
Why other options considered and discarded
This document is a safeguard towards any alleged biases allegations
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Auditor’s Mindset and Judgement Tendencies:
Professional skepticism is important ‘a questioning mind’
Must always question everything both supporting and contradictory evidence
Must exercise objectivity in everything
Professional Skepticism:
o Questioning Mind Tendency to inquire with some sense of doubt
o Search for knowledge desire to investigate beyond the obvious
o Suspension of Judgement Withholding judgement and not jumping to
o Interpersonal Understanding Recognition that personal desires can lead
to bias decisions
o Autonomy Decide on your own instead of others influence
o Self-Esteem Self-confidence to resist persuasion and challenge
Judgement Traps
Confirmation Bias:
o Put more weight on information that is consistent with initial belief
o Avoids contradictory evidence
o Auditor overestimate own ability to perform tasks
o Inability to see different points or contradictory evidence
o When auditors don’t involve specialists when they should
o Judgement is anchored by initial numerical number and not adjusting
when forming final judgement
o Have a final answer and working backwards to determine how it was
o Ignore procedures on how the answer was created
o They base or forecast based on previous events or experiences
o This bias decrease when rare events occur
Framework for Ethical Reasoning:
Resolving Ethical Dilemmas
o Ethics: Set of moral principles or values
This helps guide individuals during decision making processes
o Fundamental Ethical Principles:
Professional Behaviour maintain good reputation and service
public interest
Integrity and due care Be straightforward and honest and fair with
professional relationships
Professional competence Maintain a high level of competence.
Confidentiality Must remain confidential to information acquired
during professional encounters
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