Slide 0 - American Accounting Association

Report
Professional Judgment in Auditing:
Professional Judgment Frameworks as
Teaching Tools
John D. Keyser
National Director of Assurance Services
McGladrey LLP
Douglas F. Prawitt
Glen Ardis Professor of Accountancy
Brigham Young University
Jason L. Smith (Moderator)
Associate Professor of Accounting
University of Nevada, Las Vegas
Agenda
Topic
Time
Introduction to two Frameworks: KPMG, McGladrey
20 minutes
What is happening in the Profession
15 minutes
Integrating Professional Judgment into the Classroom
15 minutes
Q&A
10 minutes
Why focus on Professional Judgment?

Increased emphasis on judgment in accounting &
auditing
 Principles-based
accounting and auditing standards
 Movement toward fair value accounting
 Etc.

Increased importance of ability to exercise
effective professional judgment, professional
skepticism
Professional Judgment:
What it looks like, and common threats
The KPMG Professional Judgment
Framework
The KPMG Professional Judgment
Framework
6
Steps in the judgment process
7
Polling Question 1

(CPE Credit)
Within an auditing context, what is professional judgment?
a) Professional judgment is the process of using relevant training, knowledge,
and experience to reach a decision or draw a conclusion in evaluating
evidence, estimating probabilities, or selecting between options.
b) Professional judgment is professional skepticism, which is an attitude that
includes a questioning mind and a critical assessment of audit evidence.
c) Professional judgment is the application of one’s experience to make a
judgment in the absence of supporting evidence, based on the facts and
circumstances of the audit engagement.
d) Professional judgment is the construction of a logical justification to support
an outcome or conclusion that is otherwise not supported by the available
evidence.
The McGladrey Professional Judgment
Framework
McGladrey Professional Judgment
Framework
Steps in McGladrey Judgment Process
Step 1 - Frame the Issue
Consider other perspectives and the implications of
those views:
 Regulator,
manager, user
 Error vs. fraud
 Owner, lender, investor, legal, insurer, customer, audit
committee
 How might a judgment look in the future with the
benefit of hindsight, assuming various outcomes?
12
Steps in McGladrey Judgment Process
Step 2 - Determine Objectives
Determine Objectives:
What is wanted or needed?
 Ask
how you would justify a judgment or decision
 Are you comfortable at a gut level moving ahead with
a judgment process?
14
Step 2 - Identify Alternatives


A decision or judgment can only be as good as the
best alternative considered
Common Pitfalls:
 Consider
only typical or first alternative that comes to
mind
 Do the same thing as prior year
 Decision “triggers”—an alternative masquerading as a
problem or “issue” to be solved
Steps in McGladrey Judgment Process
Steps in McGladrey Judgment Process
Steps in McGladrey Judgment Process
Fundamental Elements of
Professional Judgment Framework

Apply Relevant Knowledge and Learn from
Experience
 Professional
knowledge is brought to bear and
reflection on experiences allows for enhanced
professional judgment going forward

Professional Skepticism


As depicted the judgment process is performed with a mindset
characterized by professional skepticism
Potential Frames

Judgments are informed through explicit consideration of different
perspectives or “frames”
Polling Question 2

(CPE Credit)
Which of the following statements about judgment
frames is correct?
a)
A situation cannot have more than one appropriate frame.
b)
There is often no single best frame for a given situation.
c)
Frames are not used by risk averse individuals.
d)
Professionals should eliminate the use of frames from their
judgment processes.
Judgment Biases
Factors Affecting Judgment
• Time pressure
• Limited resources
• Client, regulatory,
industry
• Limitations due to
judgment “frames”
• Judgment short-cuts
• Bias caused by self
interest
• Judgment traps
• Rush to “solve”
Reality - Descriptive
Bounded Rationality
 Lack important information
 Time and cost constraints
 Limited memory capacity
 Limitations on intelligence and perceptions
What we do: Systematic shortcuts


System 1 (quick) and Satisfice
Heuristics
 We
use simplifying judgment strategies. Rules of thumb
developed over time because of our bounded
rationality.
Example
crossing the street in New York…
Paradox
Our minds routinely solve problems too difficult
for the mightiest computers, but we also make
errors in the simplest of judgments about
everyday events
Judgment Tendencies




Overconfidence: Tendency to be overconfident in
our judgment abilities
Availability: Tendency to judge likelihood of events
by how readily available specific examples are in
our memory
Anchoring: Tendency to insufficiently adjust away
from an initial anchor
Confirmation: Tendency to seek and overweight
confirming evidence
26
A Pervasive Judgment Tendency…
Overconfidence Bias
Most of us are overconfident in our judgment
abilities and do not acknowledge the actual level
of uncertainty that exists.
Overconfident Experts
“Heavier-than-air flying machines are
impossible”
“They couldn’t hit an elephant at this
dist…”
What’s So Bad About Overconfidence?

Overconfidence Can Lead To:
 Taking
on too many projects
 Over promising on deadlines
 Considering only one alternative
 Truncating information search or even skipping
evidence gathering
 Snap judgments
 Avoidance or poor execution of judgment model
29
Confirmation Tendency
 We
tend to have preferences
 We tend to seek confirming evidence
 We give confirming evidence greater weight than disconfirming
evidence
 We often cannot know something to be true without checking to
see how it might be false
30
What is Happening in the Profession
with Respect to Enhancement of
Professional Judgment?
Goals of McGladrey Professional
Judgment Initiative




Shared frame of reference, common vocabulary
Enhance the ability of audit professionals to
consistently exercise quality judgment
Enhance on-the-job training/coaching during
engagements
Build confidence to exercise professional judgment
effectively and efficiently
McGladrey Training
Timing
Course Name
Audience
Summer 2012
Introduction to the Framework
Partners, Managers, Incharges
Fall 2012
Professional Judgment in the
Trenches
All
Spring 2013
Professional Judgment Self-study
New hires and those
needing refresher
Summer 2013
Fraud and the McGladrey PJF
Partners, Managers, Incharges
Analytical Procedures
In-charges
Summer 2014
Auditing Accounting Estimates
under the McGladrey PJF
Partners, managers, incharges
Ongoing
Infuse into all courses
Various
McGladrey – Other Efforts



Consultation forms
Practice aids
Interoffice inspection
CAQ

Working Group
 Member



firms participate
Professional Judgment Thought Leadership
Description of a judgment process
Discussion of common traps and biases
Polling Question 3

(CPE Credit)
The confirmation bias is a subconscious tendency to
do which of the following?
a) Seek evidence that confirms a biased judgment
b) Seek evidence that confirms a previously held view
c) Underutilize confirmations in the testing of accounts receivable
d) Seek evidence that disconfirms a previously held view
Integrating Professional Judgment into
the Classroom:
Can Accounting Students Learn
Professional Judgment in the Classroom?
Can You Really Teach Good Judgment?
 Is
it a natural ability or a skill that can be developed?
 True
or False: Either you have it or you do not…
 Good



News!
It is a skill that can be learned and developed
It helps to know what “good judgment” looks like and the common
threats to good judgment
The sooner you start learning how to make good professional
judgments, the better!
38
Factors in Developing the Ability to
Exercise Good Professional Judgment
 Do
you agree the following factors contribute to the
development of good judgment?
 Natural
ability
 Personal experience
 Observing others including mentors
 Self-studies/books
 AND…
 Formal
training
39
How does a visual illusion relate to judgment?
Source: http://www.michaelbach.de/ot/sze_shepardTables/index.html
40
GRAPHIC OF GOLF SWING
The KPMG Professional Judgment
Framework
42
Practice makes permanent
Phil Mickelson Golf Swing
43
Threats to good judgment
 Not
following a good process
 Judgment “traps” and “biases”
 Mental shortcuts



Help simplify a complex situation
Can facilitate more efficient judgments
USUALLY effective
44
The purpose and benefits of the topic
 Mindset,
skills, and techniques behind good judgment begin to
form at a young age
 Training, deliberate practice, and experience can improve
judgment
 It is important for students to have a solid foundation in good
judgment
45
How does awareness help with this
illusion?
Source: http://www.michaelbach.de/ot/mot_mib/index.html
46
KPMG Professional Judgment
Framework Monograph
audit
Elevating Professional
Judgment in Auditing
and Accounting:
The KPMG Professional
Judgment Framework
kpmg.com
McGladrey Monograph
Polling Question 4

(CPE Credit)
You just cannot teach professional judgment; either
you have it or you do not.
a) True
b) False
Q&A

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