AU-C Section 200.18: Professional Judgment

AU-C Section 200.18 says:

"The auditor should exercise professional judgment in planning and performing an audit of financial statements."

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.

Since the requirements of GAAS, ethical standards, and accounting principles are frameworks and do not specifically reference every situation the auditor might encounter, the auditor has to leverage his knowledge and experience in planning, performing, and reporting on the audit.

Areas where the auditor is required to use his professional judgment include his assessment of:

• materiality and audit risk;
• the nature, timing, and extent of audit procedures used to meet the requirements of GAAS and gather audit evidence;
• whether sufficient appropriate audit evidence has been obtained, and whether more needs to be done to achieve the objectives of GAAS and thereby, the overall objectives of the auditor;
• the evaluation of management's judgments in applying the entity's applicable financial reporting framework; and
• the drawing of conclusions based on the audit evidence obtained.

The level of professional judgement required of the auditor is obtained through relevant training, knowledge, and experience.  In cases where the auditor does not have the knowledge or experience to exercise sound professional judgement, he should consult with others within and/or outside of the audit firm to assist him in making reasonable judgments. 

The professional judgement exercised by the auditor should reflect a competent application of auditing standards and accounting principals under the facts and circumstances known by the auditor up to the auditor's report date.  It also should be exercised and documented throughout the audit; this means the auditor is required to prepare audit documentation sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the significant professional judgments made in reaching conclusions on significant findings or issues arising during the audit.  Professional judgment should not be used as a scapegoat for decisions that are not otherwise supported by the facts and circumstances of the engagement or by sufficient appropriate audit evidence.

https://www.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/au-c-00200.pdf