Professional Judgment: A Model for Accounting and Auditing Decisions

The transition of U.S. companies from U.S. GAAP to IFRS, along with the related discussion of rules-based versus principles-based standards, is a hot topic in accounting circles. Both sets of standards derive from conceptual frameworks of accounting principles. The differences exist in the extent to which authoritative standards provide guidance in implementing those principles. The common element - regardless of the standards used - is the need to exercise professional judgment in deterrnining and applying an appropriate approach to account for and report a transaction or event.

Similarly, professional judgment is an increasingly important aspect of the independent audit function. Recently issued audit risk standards reflect this emphasis; they describe a broad process and the general types of information the auditor should acquire. The auditor must employ judgment in using that information to identify the risks of material misstatements and develop an appropriate audit response. Professional judgment synthesizes the collection of information and the resulting conclusions.