Professional Documents
Culture Documents
Background
The phrase professional judgment is not new to the accounting and auditing profession; however, there has
been an increased emphasis on the importance of professional judgment as a result of regulation, standard
setting, inspections, and in some areas a move toward more extensive principles-based accounting and auditing
standards. So while professional judgment may not be a new concept, its use is becoming increasingly more vital
to the appropriate application of accounting and auditing standards.
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Identify Issue
Conclude and
document
Gather the
facts
Professional
Skepticism
Analyze Issue
Review
relevant
literature
Analyze Issue:
Apply the applicable accounting or auditing literature, DTT or Member Firm requirements or guidance to the relevant facts
and other information concerning the transaction, event, or situation and assess the most appropriate accounting treatment
or auditing approach under the circumstances. Consider the following:
Do the individuals addressing the issue have sufficient knowledge, experience, and objectivity for the matter being
evaluated?
Do we need to involve additional resources or consult with technical resources e.g. Professional Practice Directors?
Did we analyze the reasonable alternatives, including the pros and cons of each alternative? For example, did we
consider all evidence, including potentially contradictory evidence, and whether any negative evidence was outweighed
by positive evidence?
Did we analyze the business purpose and the form and substance of the transaction, event, or situation?
Did we analyze the audit risks and potential responses to those risks? For example, when assessing risks of material
misstatement of a class of transactions, account balance or disclosure did we analyze the potential misstatements
relevant to the account and the factors that could reasonably increase the likelihood of a material misstatement (by
error or fraud)?
Did we consider whether the treatment that results from applying the relevant literature has been applied consistently
to similar transactions, events, or situations?
Note: The process discussed herein is intended to provide guidance, and is not the only approach to
applying professional judgment. Other approaches can also result in appropriate judgments.
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