The document was issued in response to concerns regarding auditors' treatment of subjective and challenging matters, including increasingly complex business transactions, principles-based standards, and estimates. It outlines an example of a decision-making process grounded in five essential actions:
- Identify and define the issue
- Gather the facts and information and identify the relevant literature
- Perform the analysis and identify alternatives
- Make the decision
- Review and complete the documentation and rationale for the conclusion
In addition, the document identifies several of the more common judgement tendencies and traps that can potentially lead to bias and weaken professional skepticism. These are illustrated by examples of these tendencies and strategies for avoiding them are included.
Judgement in financial reporting has received increasing attention in the recent past. During its last meeting the IASB's IFRS Advisory Council discussed principles-based accounting and confirmed that it is reasonable to expect preparers to exercise judgement and that the IASB should not restrict itself by including possible anti-abuse precautions in its standards. Judgement is also a point that is raised in connection with the disclosure overload. In March 2014, the IASB issued ED/2014/1 Disclosure Initiative (Proposed amendments to IAS 1) aimed at clarifying IAS 1 to address perceived impediments to preparers exercising their judgement in presenting their financial reports.
For more information, see the Professional Judgment Resource and press release on the CAQ's Web site.