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INTRODUCTION
The influence of regulation and audit firm structure, policies and business models on auditor judgment is increasingly important in understanding and improving the appropriate exercise of judgment in the performance of audits of financial statements. In this article, I hope to identify issues related to these influences that warrant additional research and consideration. I will use the term 'auditor judgment' to describe any decision or evaluation made by an auditor, which influences or governs the process and outcome of an audit of financial statements. The focus of this article is on judgments that could reasonably vary between competent auditors using the same facts. The term 'audit quality' refers to the degree to which an audit provides a basis for belief that financial statements do not contain material misstatements after the completion of the audit. The quality of auditor judgments directly determines audit quality.
Current discussions of auditor judgment, audit quality and professional skepticism are heavily oriented toward judgments made at the individual audit engagement level. The emphasis of professional standards and of oversight activities has historically been on judgments made by the audit engagement team. Decisions that must, ultimately, be made in the context of a specific audit include:
The assessment of the risks of material misstatements of financial statements, including the potential effects of fraud, bias and business risk.
The identification, performance and assessment of audit procedures to address those risks.
The evaluation of audit evidence to determine the quality and meaning of that evidence and to assess the need for additional evidence based on the process.
The formation of an opinion on the financial statements and the decision whether or not to express that opinion.
Each of these judgments must be made by auditors throughout the audit process and before the date on which an audit opinion is issued, based on evidence that is reasonably available at that time. Ultimately, the auditor's opinion is based on informed judgments and not on conclusive evidence.
My comments are based on my earlier experience as an audit engagement partner supervising audits of both large and smaller public and non-public entities, a member of audit committees of public companies, a member of the staff of the Public Company Accounting Oversight Board (PCAOB), and as a...