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FRC issues professional judgement guidance

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James Barbour By James E Barbour CA, Director, Policy Leadership

7 July 2022

Main points

  • The FRC has issued professional judgement guidance for auditors.
  • The new guidance includes a framework for making professional judgements and a series of illustrative examples
  • The guidance will be of particular use for auditors and central technical teams but will also have wider interest for those interested in audit quality, such as audit committee members and investors

James Barbour CA highlights the professional judgement guidance for auditors issued by the FRC

The Financial Reporting Council (FRC) has published guidance for auditors to improve how they exercise professional judgement. The new guidance includes a framework for making professional judgements and a series of illustrative examples. The guidance will be of particular use for auditors and central technical teams but is also relevant for those interested in audit quality, such as audit committee members and investors.

The guidance is non-authoritative; it is intended to be persuasive rather than prescriptive, encapsulating good practice. However, practitioners who chose not to use or consider this guidance will need to be prepared to explain how they have complied with the relevant engagement standards.

Firms who already have a professional judgement framework are not required to adopt the FRC’s. However, the FRC would expect those firms to analyse and understand the FRC’s Framework and identify and remedy any areas where their own frameworks could be enhanced. The FRC would also encourage those firms to assess how and in what circumstances they apply their frameworks. They believe that the process for implementing the new Quality Management Standards (ISQM (UK) 1, ISQM (UK) 2 and ISA (UK) 220) represents a significant opportunity to ensure that any professional judgement framework that is being applied helps address risks to audit quality within the firm. The FRC also encourages those firms who do not yet have their own professional judgement framework to consider the merits of developing one or applying the FRC’s. Crucially, it is not simply the existence of a framework which is important, but how effectively it is utilised in the specific circumstances of a firm, or of an engagement.

The framework, when applied by individual practitioners, is intended to enhance the quality and consistency of the exercise of professional judgement in two ways:

*           Understanding the nature of a more structured approach can help individuals and teams improve

their more intuitive judgement-making, for example by deepening their understanding of areas

where they may be most susceptible to biases and other judgement traps.

*           Where a more structured approach is appropriate, the framework can help auditors take account

of all relevant considerations and achieve a high quality of judgement.

The framework consists of four main components which are broken down into a series of sub-components as follows:

1          Mindset

An appropriate mindset for auditors exercising professional judgement.

Sub-components:

(i)         Appreciation of the purpose of audit and its public interest benefits

(ii)        Professional scepticism

(iii)        Understanding of biases and other relevant psychological factors

(iv)       Sensitivity to uncertainty

(v)        Commitment to quality

2          Professional Judgement Trigger and Process

A suggested professional judgement process, together with a reminder to remain alert to situations which may require professional judgement.

Sub-components:

(i)         Remain alert to situations which require the exercise of professional judgement

(ii)        Consider who is the right person to make this judgement

(iii)        Appropriately frame the issue

(iv)       Marshal your information

(v)        Carry out the analysis

(vi)       Stand back, and conclude

(vii)       Document, communicate and reflect

3          Consultation

Effective communication with a range of relevant parties.

4          Environmental Factors

Factors that may be present in the environment of those making a judgement, that can impact on

how challenging it is to exercise professional judgement in an appropriate manner.

Sub-components

(i)         Audit firm: culture, resources, training and processes

(ii)        Quantity and quality of relevant information available

(iii)        Time and resources available

(iv)       Audited entity: management and those charged with governance

The framework and illustrative examples are also available as standalone documents. The illustrative examples provide an over of the application of the framework in a range of scenarios.

The FRC has also published a paper which outlines its expectations in relation to the guidance. This highlights that as stated above the Framework is intended to have the status of non-prescriptive guidance which is consistent with a range of other guidance (Practice Notes for example) which “are persuasive rather than prescriptive and are indicative of good practice… Auditors should be aware of and consider Practice Notes applicable to the engagement. Auditors who do not consider and apply the guidance included in a relevant Practice Note should be prepared to explain how the engagement standards have been complied with.”

Practitioners are therefore expected to be aware of guidance that the FRC issues, and to consider its relevance to audit and assurance engagements. The FRC’s intent is that:

*           It can be applied at a firm-wide level, and potentially incorporated into the firm’s methodology;

*           It may be an important consideration in the development of a Quality Management System in

accordance with International Standard on Quality Management (ISQM) (UK) 1;

*           It can also be applied in the circumstances of an individual audit engagement as a stand-alone

guide to the application of professional judgement;

*           It can be used by individual practitioners at any level of seniority in the conduct of an audit or

assurance engagement, and provides high-level principles and a benchmark for the application of

professional judgement.

The Framework sets out principles that can be applied to help deliver high quality professional judgement, an indicative process to follow, risks and mindset traps, and illustrative examples. Any of these aspects of the material can be applied in a variety of circumstances – and indeed prescription might be impracticable or have outcomes which are inconsistent with the FRC’s objectives. The FRC’s intent is not to create unnecessary process or documentation, but to enable better and more consistent professional judgement. The FRC highlights that although the Framework itself is non-prescriptive, the application of professional judgement in the conduct of audits (and other assurance engagements) is a requirement of the auditing standards.

In terms of applying a Professional Judgement Framework in practice, there is currently divergent practice with some firms focusing on central methodology and/or training applications, and others focusing instead on more complex and subjective professional judgements made at the engagement level. The FRC believes that it is a matter for audit firms to decide which approach will be more effective in their individual circumstances. It is that assessment of how a framework can drive better and more consistent professional judgements that is critical, and how it can (or could) help manage risks to quality management. Audit firms will therefore need to understand what additional opportunities there are to ensure that a professional judgement framework is understood and socialised within the firm, and that appropriate expectations are set for how it can be used.

The conditions necessary for the reporting of high-quality sustainability information

By Anne Adrain, Head of Sustainability and Reporting

28 February 2022

ICAS report explores the key factors to be considered in relation of assurance on sustainability related information

By James E Barbour, Director, Policy Leadership

19 May 2022

2023-03-MarksElectrical 2023-03-MarksElectrical
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