Those Pesky Preconceived Ideas

By Sefton Boyars, CPA, CGFM

The Independence Standard of the Yellow Book cites a number of potential personal impairments, including “preconceived ideas toward individuals, groups, organizations, or objectives of a particular program that could bias the audit.”

This sometimes gives auditors pause, because a professional auditor always has some preconceived ideas. Before conducting the audit, he or she would have done appropriate research, including:

• Reviewing previous reports and studies
• Talking with managers, program personnel, and others who have experience with the entity
• Searching the web for background information on the entity
• Reviewing any complaints about the entity
• Conducting analytical tests to check for anomalies

After that research, the auditor would have knowledge about the financial condition of the organization; its success, or lack thereof, with any programs it conducts; previous audit findings and corrective actions; its reputation for following through on commitments, etc.

At that point, a professional auditor has a number of expectations. Do these expectations constitute “preconceived ideas?” After all, they will certainly affect the audit program and the evaluation of the results from the various audit steps.

I believe that the short answer is “no.” While the research does create expectations for the auditor, those expectations were not preconceived. They resulted from the audit process. I consider preconceived ideas to be ones that don’t have a basis in research or analysis; they result from unsupported preconceptions or prejudices. Those do, indeed violate the Independence Standard, and do constitute a personal impairment.

We now have our expectations.

What do we do now?

We have to develop an audit program that addresses those expectations and will result in a low audit risk. That means that if we have concerns about some activity, a type of expense, asset valuation, etc., we must do sufficient testing to address those concerns.

This is when one of the other Yellow Book requirements arises: professional skepticism. Utilizing professional skepticism, we cannot assume that what management tells us is correct or is incorrect. We must obtain persuasive evidence. That requirement keeps us honest and forces us to keep management honest.

The requirement to exercise professional skepticism can actually make life easier for us. All auditors have had the experience of an auditee challenging them because they asked embarrassing questions:

• Are you related to any of the vendors?
• Do you have the receipts for the lodging costs you claimed on your last voucher?
• What was the basis for the special act award for your secretary?

In such cases, the auditee’s response is often not an answer, but rather another question: “Are you calling me a crook?” “What are you implying with that question? “Do you ask these questions in all of your audits?”

Use Professional Skepticism

We can use the requirement for professional skepticism to explain our need to ask the questions. We can explain, for example, that we have heard rumors about favored vendors or conflicts of interest.

If we are to do a professional job, we cannot ignore such comments. One way to address those concerns is to ask questions in a forthright manner. But we must insist on a valid response.

We will also need to corroborate the answers we receive. That requires us to follow up on the answers given, and ask for documentary evidence.

In summary, the standards expect us to conduct appropriate research before conducting an audit in order to properly plan the audit. Our conclusions resulting from that research do not constitute “preconceived ideas.”

To conduct an audit that complies with the Yellow Book, we must fully pursue any issues that arise as a result of that research.

Finally, professional skepticism requires us to obtain persuasive evidence before we consider the issues closed.

About Sefton Boyars, CPA, CGFM

Sefton Boyars was the Regional Inspector General for Audit for the U.S. Department of Education. He retired in 1996 after a 35-year career as a government auditor and audit manager. In his retirement, he presents continuing education courses for a variety of organizations, including federal, state and local governmental organizations, AGA, Management Concepts and NASACT. Sefton is the author of the self-study CPE course Cost Principles for State and Local Governments and Nonprofit Organizations. We are looking for testers for this course interested in earning free governmental CPE credit. If interested, write to leita@yellowbook-cpe.com.