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Using Professional Judgment

Practice Aid - March 2010 - For internal use only

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

The phrase professional judgment is not new to the accounting and auditing profession; however, there has
been an increased emphasis on the importance of professional judgment as a result of regulation, standard
setting, 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 vital
to the appropriate application of accounting and auditing standards.

Defining Professional Judgment

Professional 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 of
action that are appropriate in the circumstances of the audit engagement and may be considered a process used
to reach a well-reasoned conclusion that is based on the application of relevant knowledge and experience to the
facts and circumstances that are known by us at the time of the conclusion. A fundamental part of the process is
the involvement of individuals with sufficient knowledge and experience. Professional judgment involves the
identification, without bias, of reasonable alternatives; therefore, careful and objective consideration of
information that may seem contradictory to a conclusion is key to its application. In addition, both professional
skepticism 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 to
rationalize a particular result. Performing the process in form without focusing on the substance does not
constitute 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 Judgment

Because of the nature of our professional responsibilities and the regulatory environment, the judgments we make
will most likely be challenged. Knowledgeable, experienced, and objective persons can reach different conclusions
in applying our professional standards despite similar facts and circumstances. This does not necessarily mean
that one conclusion is right and the other is wrong. Appropriate questioning to understand the procedures
performed and basis for conclusions reached is to be expected.
Contemporaneous documentation of our professional judgments is important. Documentation demonstrates that
we followed a sound process and helps us develop a well-reasoned conclusion. When professional judgment is
challenged, contemporaneous documentation shows the analysis of the facts, circumstances, and alternatives
considered 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 by
the 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 internal
practice reviews and defended in external inspections or other situations.

Deloitte Touche Tohmatsu 2010

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Using Professional Judgment

Practice Aid - March 2010 - For internal use only
Considerations When Applying Professional Judgment
Identify Issue:
Conclude and Document:
Contemporaneously document our
conclusion, with specific discussion of the
issue; applicable facts and evidence
gathered; relevant literature, requirements,
and guidance; individuals consulted;
alternatives considered; analysis
performed; and basis for the conclusion

Did we document the rationale for the

alternative selected (including the
reason why the selected alternative is
preferred to other alternatives or
reasons why the preferred alternative
was not selected)?

Did we assess whether the effort spent

in the process and the extent of
documentation are consistent with the
significance and complexity of the
professional judgment reached?

Identify the accounting or auditing issue requiring the use of

professional judgment. Consider the following:

Have we appropriately identified and stated the issue?

Are there any related issues that need to be

considered in the process?

Identify Issue

Conclude and

Gather the

Analyze Issue


Analyze Issue:
Apply the applicable accounting or auditing literature, DTT or Member Firm requirements or guidance to the relevant facts
and other information concerning the transaction, event, or situation and assess the most appropriate accounting treatment
or auditing approach under the circumstances. Consider the following:

Do the individuals addressing the issue have sufficient knowledge, experience, and objectivity for the matter being

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 outweighed
by 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 misstatements
relevant to the account and the factors that could reasonably increase the likelihood of a material misstatement (by
error or fraud)?

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

Gather the Facts:

Objectively obtain a thorough
understanding of the relevant facts and
information available concerning the
transaction, event, or situation. Consider
the following:

Did we examine source documents and

other materials, interview
knowledgeable client personnel,
experts or other knowledgeable
persons, and consider other available
sources of information?

Did we sufficiently assess, test, and

objectively challenge the
appropriateness and reliability of the
assumptions and data to be used in the
analysis of the transaction, event, or
situation by obtaining sufficient
competent evidence?

Review Relevant Literature:

Identify the accounting or auditing literature
(including relevant standards, rules and
authoritative pronouncements) relevant to the
issue. Consider the following:
Have we identified and reviewed the relevant
accounting or auditing standard, recognizing
that reference to more than one standard
setter may be appropriate to address the
Have we identified DTT and Member Firm
requirements or guidance that may be relevant
in addressing the issue?
Have we considered the underlying principles
in the relevant accounting or auditing
To the extent that one particular standard does
not address the issue directly, have we
considered, by analogy, other pronouncements
or literature as appropriate?

Note: The process discussed herein is intended to provide guidance, and is not the only approach to
applying professional judgment. Other approaches can also result in appropriate judgments.
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Deloitte Touche Tohmatsu 2010

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