On 23 June 2022 the Financial Reporting Council (FRC) published a Professional Judgement Framework including illustrative examples and their expectations about its use in practice.
This guidance is a response to poor professional judgement being noted as a ‘significant contributor’ to recent audit failings. It goes some way to pull together tangible guidance on an intangible subject.
While the guidance is classed as non-prescriptive, the FRC expects firms that choose not to adopt the framework to at least analyse and understand it, and identify and remediate those areas within their own framework that could be enhanced; very much ‘comply or explain’.
The process for implementing the Quality Management Standards (ISQM (UK) 1, ISQM (UK) 2 and ISA (UK) 220) represents an opportunity to ensure your firm has a robust professional judgement framework in place.
Trevor Smith, Director, Quality Assurance at ICAEW’s QAD said: “Application of professional judgement with scepticism and appropriate challenge of management is critical to high quality audits. The lack of these skills is a factor in many weaker audits and we also see good practice, where auditors have applied robust challenges of an audited entity’s management to explain and justify key judgements underlying the information in their financial statements, as explained in our forthcoming audit monitoring report.”
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