September 21, 2020

Let’s Use the Center for Audit Quality’s New Auditor Judgment Tool to Decide on Lunch

The CAQ released a new Professional Judgment Resource today, "designed to provide auditors with an example of a decision-making process to facilitate important auditing and accounting judgments in a professionally skeptical manner." Get excited, people, this is awesome stuff:

The Resource is aimed at assisting auditors who are responding to judgment challenges arising from the increasing complexity of business transactions, the development of principles-based (or objectives-based) auditing and accounting standards, the increasing focus on estimates, and other highly subjective elements.

The Professional Judgment Resource outlines an example of a decision-making process grounded in five essential actions that include identifying and defining the issue and reviewing and completing the documentation and rationale for the conclusion. Additionally, the Resource identifies several of the more common judgment tendencies and traps that can potentially lead to bias and weaken professional skepticism, and includes illustrative examples of these tendencies, as well as strategies to avoid them.

Fantastic! Immediately I thought "what if this could be used for other purposes, such as deciding whether or not I should get blackout drunk?" and it's like the CAQ read my mind:

While the Resource was developed with auditors in mind, it can be a useful tool for all participants in the capital markets.

That was all the permission I needed to see if the tool can help me decide what to have for lunch.

The steps involved are simple enough. Remember the key here is to exercise professional skepticism and good judgment without the influence of bias:

  • Identify and Define the Issue
  • Gather the Facts and Information and Identify the Relevant Literature
  • Perform the Analysis and Identify Alternatives
  • Make the Decision
  • Review and Complete the Documentation and Rationale for the Conclusion

Let's start with the first step:

Identify and Define the Issue

Although it may seem intuitive, auditors should not underestimate the importance of appropriately identifying and defining the issue (i.e., the transaction, event, or situation). This step is not always as easy as it may seem, and it can be susceptible to judgment tendencies, such as overconfidence or anchoring (discussed in more detail below). Indeed, failing to properly identify the issue (or issues) may lead to incomplete analysis and result in an inappropriate judgment.

Identifying and defining the issue involves careful analysis of the situation and often involves interaction and discussion with others to understand the situation and its potential effect on the audit. While it may not always be possible to identify all of the relevant considerations at the beginning of the judgment process, auditors should take the time to carefully define the primary issue to be addressed, as well as develop perspectives on other considerations that may need to be analyzed to support the overall conclusion.

Well, I know I have to eat. But let's say it's only 10am. Am I planning lunch? Is it technically breakfast since my "breakfast" consisted of the half a bottle of beer I forgot to drink last night and a big iced coffee? I exercise my professional skepticism and ask myself if I'm really hungry at all. I mean, I should be because I didn't eat anything today but what if I'm not? Can I trust my gut?

The resource tells us to pay attention to practical considerations, such as the impact to financial statements and the level of uncertainty that impacts the issue's outcome. In this case, it's just lunch so normally I'm not all that concerned about it but for the purposes of using the tool, I have considered the impact to financial statements (lunch will set me back up to $20) and am fairly certain that no uncertainty exists unless the sky opens up and dumps about a foot of rain on downtown Richmond. Moving on…

Gather the Facts and Information and Identify the Relevant Literature

Having devoted appropriate time and attention to identifying and defining the issue, an auditor will need to obtain a thorough understanding of relevant facts and information available concerning the issue. This often includes an analysis of the information that is readily available, as well as information that may need to be obtained from others, such as subject matter experts. Gathering the facts and information often entails discussions with those from the company who are knowledgeable of, or who are instrumental to, the execution of the transaction. It may also involve those who were involved with or had oversight of the matter.

So, at this point, I pulled all the takeout menus out of my kitchen drawer and then went to Yelp. Yelp people are subject matter experts on lunch, right? That was easy.

Perform the Analysis and Identify Potential Alternatives

This aspect of the decision-making process entails analyzing the issue based on the facts and information gathered, the relevant authoritative literature identified, and prior positions taken in similar situations by the company, the audit firm (e.g., “national office” technical or policy positions), or by the same auditor (though an auditor’s analysis of prior positions taken should be carefully evaluated in the full context of the facts and information gathered in order to mitigate potential judgment tendencies that lead to bias). As a result of performing such activities, an auditor is often in a position to identify and assess a reasonable set of plausible alternatives and perform an objective evaluation of the expected outcome of each alternative.

This was the tricky part. I'm on a low carb diet so, much like an auditor referring back to last year's file, I pretty much eat the same thing all the time (SALL — Same As Last Lunch). I am clearly biased toward protein. I have recognized this bias but eating a loaf of Wonder bread isn't going to help me have a better lunch.

The resource then prompts me to ask myself:

Have I considered: „

The relevant technical literature, professional standards, and industry information, recognizing that reference to more than one source may be appropriate to address the issue? „

Whether I have understood the form and substance of the transaction? „

Whether the treatment that results from applying the relevant literature has been applied appropriately to similar transactions, events, or situations?

Dude, tool, did you not see the part where I said I looked at the menus and even went to Yelp? Yes, I considered the relevant technical literature. I still don't know what to have for lunch.

Make the Decision

Having performed the analysis, an auditor reaches a decision. An auditor’s judgment may result in concluding that there is only one appropriate response to an issue, or that there are multiple responses that could reasonably be applied in the circumstances. This involves asking which alternative best addresses the issue identified by the auditor. Making the judgment might involve an auditor’s consideration of common judgment tendencies, traps, and biases.

FINALLY. Two hours later (ended up spending a little time looking up bars on Yelp and reading funny reviews about people's cats hahaha did you know people review their cats on Yelp?), I'm starving and ready for this to be over. In the interim, I think I ate a few Chips Ahoy that are not supposed to be in my cabinet. This is a previously reported material weakness that continues to exist, as there is no internal control over the cookie stash.

Regardless, I feel good about this. I did the research, looked at my biases, considered the alternatives and I'm confident in my decision. I'm going to have the exact same thing I had yesterday (SALL): bacon and egg salad.

While the bacon is frying, I consider the final step in the resource's process:

Review and Complete the Documentation and Rationale for the Conclusion

Documentation represents the written record of the basis for an auditor’s judgment and it ultimately provides the support for the auditor’s report. Documentation is also a way to evidence professional skepticism by identifying both the relevant information (which includes contradictory or inconsistent information identified and how the auditor addressed such information) and the reasonable alternatives the auditor identified and evaluated in reaching the conclusion. For example, in the analysis of confirming and disconfirming evidence it is important to document the rationale followed, which helps to show that appropriate professional skepticism was exercised.

Consider this my documentation should the PCAOB swing by my crib this afternoon and be like "we need to make sure you're protecting the integrity of lunch over there."

I have also reached the conclusion that this was a massive waste of time since I knew all along I was going to eat the same thing I ate yesterday. But at least I have documentation of the entire process.

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