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Using Professional Judgment

Practice Aid - March 2010 - For internal use only

Deloitte Touche Tohmatsu 2010 Page 1 of 2

The purpose of this practice aid is to help our professionals as they apply professional judgment. The manner inwhich this practice aid is applied and the extent of documentation will depend on, but will not be limited to, thematter being considered, its materiality, complexity (of the matter and the environment in which is it beingconsidered), and the subjectivity of the professional judgment. This practice aid is intended as a resource forcritically thinking through issues and arriving at conclusions.

BackgroundThe phrase professional judgment is not new to the accounting and auditing profession; however, there hasbeen an increased emphasis on the importance of professional judgment as a result of regulation, standardsetting, inspections, and in some areas a move toward more extensive principles-based accounting and auditing

standards. So while professional judgment may not be a new concept, its use is becoming increasingly more vitalto the appropriate application of accounting and auditing standards.

Defining Professional JudgmentProfessional judgment is defined as The application of relevant training, knowledge and experience, within the

context provided by auditing, accounting and ethical standards, in making informed decisions about the courses ofaction that are appropriate in the circumstances of the audit engagement and may be considered a process usedto reach a well-reasoned conclusion that is based on the application of relevant knowledge and experience to thefacts and circumstances that are known by us at the time of the conclusion. A fundamental part of the process isthe involvement of individuals with sufficient knowledge and experience. Professional judgment involves theidentification, without bias, of reasonable alternatives; therefore, careful and objective consideration ofinformation that may seem contradictory to a conclusion is key to its application. In addition, both professionalskepticism and objectivity are essential to the process and to reaching an appropriate conclusion.Professional judgment is not an arbitrary decision, a substitute for professional skepticism, or a method torationalize a particular result. Performing the process in form without focusing on the substance does notconstitute well-reasoned professional judgment.

Professional judgment is critical to efficiently and effectively planning, performing, and concluding in an audit.Auditors use professional judgment to focus on the most important aspects of an audit; to determine the nature,timing, and extent of audit procedures; and to appropriately challenge the accounting, reporting, and other

conclusions reached and financial statement assertions made by management.

Applying Professional JudgmentBecause of the nature of our professional responsibilities and the regulatory environment, the judgments we makewill most likely be challenged. Knowledgeable, experienced, and objective persons can reach different conclusionsin applying our professional standards despite similar facts and circumstances. This does not necessarily meanthat one conclusion is right and the other is wrong. Appropriate questioning to understand the proceduresperformed and basis for conclusions reached is to be expected.

Contemporaneous documentation of our professional judgments is important. Documentation demonstrates thatwe followed a sound process and helps us develop a well-reasoned conclusion. When professional judgment ischallenged, contemporaneous documentation shows the analysis of the facts, circumstances, and alternativesconsidered as well as the basis for the conclusions reached. The extent of documentation and the effort expended

in the process will vary with the significance and complexity of an issue.

When the professional judgment process is appropriately applied and contemporaneously documented, it is much

easier to support and defend our conclusions. Conversely, decisions that appear to be arbitrary; not supported bythe facts, evidence, or professional literature; or not well-reasoned or documented are more difficult to support.However, well-reasoned and well-documented professional judgments will be respected in our internalpractice reviews and defended in external inspections or other situations.

7/25/2019 Using Professional Judgment

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Using Professional Judgment

Practice Aid - March 2010 - For internal use only

Deloitte Touche Tohmatsu 2010 Page 2 of 2

Considerations When Applying Professional Judgment

Professional

Skepticism

Identify Issue

Gather the

facts

Review

relevant

literature

Analyze Issue

Conclude and

document

Note: The process discussed herein is intended to provide guidance, and is not the only approach toapplying professional judgment. Other approaches can also result in appropriate judgments.

This publication is for internal distribution and use only among personnel of Deloitte Touche Tohmatsu and its member firms, and its and their respective

subsidiaries and affiliates.

This publication contains general information only. Deloitte Touche Tohmatsu is not, by means of this publication or the information contained herein,

rendering accounting, business, financial, investment, legal, tax or other professional advice or services, and this publication and the information contained

herein are not a substitute for such professional advice or services.

This publication and the information contained herein are provided AS IS, without warranty of any kind, express or implied. Without limiting

the foregoing, Deloitte Touche Tohmatsu does not warrant that this publication or the information contained herein will be error-free or will meet

any particular criteria of performance or quality, and expressly disclaims all implied warranties, including, without limitation, warranties of

merchantability, title, fitness for a particular purpose, noninfringement, compatibility, security, completeness, and accuracy.

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If any of the foregoing is not fully enforceable for any reason, the remainder shall nonetheless continue to apply.

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independent entity. Please see www.deloitte.com/aboutfor a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.

Identify Issue:

Identify the accounting or auditing issue requiring the use of

professional judgment. Consider the following: Have we appropriately identified and stated the i ssue? Are there any related issues that need to be

considered in the rocess?

Conclude and Document:

Contemporaneously document ourconclusion, with specific discussion of theissue; applicable facts and evidencegathered; relevant literature, requirements,and guidance; individuals consulted;alternatives considered; analysisperformed; and basis for the conclusionreached. Did we document the rationale for the

alternative selected (including thereason why the selected alternative ispreferred to other alternatives orreasons why the preferred alternativewas not selected)?

Did we assess whether the effort spentin the process and the extent ofdocumentation are consistent with thesignificance and complexity of theprofessional judgment reached?

Analyze Issue:

Apply the applicable accounting or auditing literature, DTT or Member Firm requirements or guidance to the relevant factsand other information concerning the transaction, event, or situation and assess the most appropriate accounting treatmentor auditing approach under the circumstances. Consider the following: Do the individuals addressing the issue have sufficient knowledge, experience, and objectivity for the matter being

evaluated? Do we need to involve additional resources or consult with technical resources e.g. Professional Practice Directors?

Did we identify reasonable alternatives? Did we analyze the reasonable alternatives, including the pros and cons of each alternative? For example, did we

consider all evidence, including potentially contradictory evidence, and whether any negative evidence was outweighedby positive evidence?

Did we consider preferability or diversity in practice?

Did we analyze the business purpose and the form and substance of the transaction, event, or situation? Did we analyze the audit risks and potential responses to those risks? For example, when assessing risks of material

misstatement of a class of transactions, account balance or disclosure did we analyze the potential misstatementsrelevant to the account and the factors that could reasonably increase the likelihood of a material misstatement (byerror or fraud)?

Did we consider whether the treatment that results from applying the relevant literature has been applied consistentlyto similar transactions, events, or situations?

Review Relevant Literature:

Identify the accounting or auditing literature(including relevant standards, rules andauthoritative pronouncements) relevant to theissue. Consider the following:

Have we identified and reviewed the relevantaccounting or auditing standard, recognizingthat reference to more than one standardsetter may be appropriate to address theissue?

Have we identified DTT and Member Firmrequirements or guidance that may be relevantin addressing the i ssue?

Have we considered the underlying principlesin the relevant accounting or auditingliterature?

To the extent that one particular standard does

not address the issue directly, have weconsidered, by analogy, other pronouncementsor literature as appropriate?

Gather the Facts:

Objectively obtain a thoroughunderstanding of the relevant facts andinformation available concerning thetransaction, event, or situation. Considerthe following: Did we examine source documents and

other materials, interviewknowledgeable client personnel,experts or other knowledgeablepersons, and consider other availablesources of information?

Did we sufficiently assess, test, andobjectively challenge theappropriateness and reliability of theassumptions and data to be used in theanalysis of the transaction, event, orsituation by obtaining sufficientcompetent evidence?

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