Scepticism as an enquiring attitude towards information or an expression of doubt is a very broad requirement, especially when addressing fraud risk in audits. In order for the audit team to apply scepticism, or question information before them, they need to be aware of the type of misstatements that may occur, due to error or fraud. Some team members should at least have prior experience in processing records, advising clients, and completing tax and VAT returns. They need to take a keen interest in business failures that occur and the root causes.

Fraudsters and bookkeepers trying to hide their wrongdoing are very creative, and their actions will not be readily visible to the auditor. The auditor needs to be experienced in systems of control, and understanding where, and for what reason assets may have been misappropriated, or records manipulated.

For example, when considering overall control exercised by management, their skills and experience need to be evaluated. Should it be found that they have no financial experience or acumen, enquiring about financial information, especially fraud, would be futile. Investigate where they obtain their financial advice and follow that route. It may be an accounting firm or financial consultant, or a non-executive director. They are normally not approached in audit procedures, but in an extreme case as in the example, it is necessary.

The relationship among members of management, their stakeholders, service providers, and the board of directors is always relevant. When there is dissent among these parties, it will serve the auditor well to hear all sides of the story.

• A disgruntled member of management on their way out has a very large incentive to do the entity harm.
• A service provider that is on the books year in and year out without charges being questioned may indicate a related party with transactions not at arm’s length, which may be fraudulent.
• A non-executive financial director may have their own views on the integrity of management, and concerns affecting the protection of board members against liability.

The industry of the auditee, and areas where assets are misappropriated, should be well known to the auditor, for example:
• The aluminium product manufacturer selling off cuts for cash and not keeping a record.
• Ghost employees or resigned employees not taken off payroll.
• The abuse of the floor plan by a motor dealer.
• Continuous upward revaluation of assets which affects returns of investors, without appropriate value inherent in the assets.

Scepticism may only be applied if the objectives of all the audit procedures and the types of misstatement they wish to identify are understood. Audit procedures need to be adapted to the circumstances and risks of the entity.