Print Edition
      April 2013

Good judgments

By Phil Cowperthwaite
Illustration: Mike Ellis

Threats of inherent bias in making judgments can be overcome if processes include appropriate safeguards

Professional skepticism and judgment are two hot-button issues in the audit world. Many experienced auditors are finding the mounting questions vexing, with the implied criticism of their judgment process. “I have been auditing for years. My judgments are just fine, thank you very much,” is a common refrain.

This attention to auditor judgment and skepticism comes at the same time as advances in cognitive psychology. There is increased attention on the way our brains are programmed to make judgments: it turns out that making good judgments is not intuitive and is much more difficult than initially realized. Specifically, our brains are programmed to make snap judgments, often based on little evidence and guided by strongly built-in unconscious biases. While the ability to react quickly and decisively may be vital to survival in life and death situations, it is not usually helpful in conducting an audit.

Many larger firms have developed sophisticated strategies for overcoming our unconscious biases and promoting sound processes for making judgments. These methodologies work well in team environments where auditors can question each other’s process and judgments. But the audit team on a micro-entity, defined as a low-risk engagement with client revenue less than $1 million, a small client staff and no onsite CFO engagement, is often one person. It can be a real challenge for one person to overcome the threats of inherent bias in making judgments, but it can be done if your judgment processes include appropriate safeguards.

Inherent unconscious bias in the judgment process
A recent spate of books on unconscious bias in the judgment process (Daniel Kahneman’s Thinking, Fast and Slow, Dan Ariely’s Predictably Irrational, and Richard Thaler and Cass Sunstein’s Nudge) shed light on our conscious and unconscious thinking processes and the challenges in making good judgments. Some of the factors auditors may not be conscious of include:

These are a number of serious unconscious threats to an auditor’s ability to make good judgments. What auditors are not capable of is changing their very nature. Auditors are human after all and cannot change the basic workings of their brains. What auditors can do is introduce safeguards to protect against unconscious bias. This is also essential to ensure a skeptical attitude. However it’s managed, auditors need to make good judgments on every engagement.

Barriers to making good judgments in micro-entity audits
Larger firms in Canada have developed sophisticated safeguards to shield the judgment process of audit teams from unconscious bias (e.g. Elevating Professional Judgment in Auditing and Accounting: The KPMG Professional Judgment Framework). These mechanisms include:

These safeguards are designed primarily for an engagement executed by a team of auditors.

There are, however, a number of complications that make eliminating bias in the judgment process in a micro-entity audit a challenge. The audit team on a micro-entity engagement is typically one person and, in some cases, two people, such as a junior staff person and the engagement partner.

Also, management is often not knowledgeable about accounting and financial reporting, which makes the initial identification of issues all the more difficult. Second guessing one’s own judgment is especially hard when it likely involves unconscious bias. Implementing excessively formal and rigid judgment processes is not conducive to an efficient or effective micro-entity engagement where flexibility is essential.

Develop a process to reduce unconscious bias
The good news is that there are safeguards you can implement in even the smallest audits to significantly reduce the impact of inherent and unconscious bias in judgment.

Safeguards take both time and conscious effort, and they will only work if the professional implements them diligently. The even better news is that the process of conscious decision-making gets easier with practice. Documenting the process, a valuable safeguard in its own right, means you will have complied with the documentation requirements for significant judgments as you make them — an added bonus.

The following 10-step process should help an auditor working on a micro-entity audit reduce bias in making significant judgments:

Audits of micro-entities may be low risk by definition, but significant judgments are still necessary and auditors must still approach these engagements with a skeptical attitude. Unconscious biases can have a detrimental impact on auditor judgments. Regardless of the size of the audit team, it is important to have safeguards to protect against these unconscious threats. A rigorous process to help reduce unconscious bias in making judgments is essential in even the smallest of audits.


Phil Cowperthwaite, FCA, is a partner of Cowperthwaite Mehta and a member of the IFAC’s Small and Medium Practices Committee

Technical editor: Ron Salole, vice-president, standards, CICA




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