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Significance of Critical Thinking in Internal Auditing, by: Alaa Abdul Aziz Abu Naba’a
10-Mar-2021
More than 500 leaders of internal auditing have participated in a study conducted by Whitley Penn in USA. The study revealed that 96% of them emphasized the significance of critical thinking in the performance of audit engagements, while 49% emphasized the need to train internal auditors on this skill.( ) In another study conducted by the Institute of Internal Auditors (IIA), in cooperation with Robert Half International Inc., (A leading recruitment firm), Richard Chambers (IIA’s CEO) and Paul McConnald Robert Half’s CEO), emphasized the importance of critical thinking for internal auditing.
Moreover, the IIA introduced a questionnaire which was distributed to internal auditing leaders around the world, that included questions about the most important five skills which internal auditors must master; the skills that should be considered in the selection and recruitment process. The results of the questionnaire were posted in one of the publications of the IIA (The Pulse of the Profession). The summary of the questionnaire results is as follows:
The most important five skills, from the point of view of internal auditing leaders, in a descending order (from the most important to the least important):
1) Analytical and Critical Thinking - 77% of the participants considered that analytical and critical thinking is a crucial skill, this percentage rose to 79% among the participants from the Fortune 500 - the largest 500 US firms in terms of revenues;
2) Communication Skills - 66% of the participants considered that communication skills are important;
3) Data Mining and Analytics - 47% of the participants considered that the skill of data mining and analytics is important;
4) Business Acumen - 41% of the participants considered that business acumen is an important skill;
5) General IT Knowledge - 39% of the participants considered that the general knowledge in IT is an important skill.
What is Critical Thinking?
There are many definitions of critical thinking, such as the following:
1) The ability to validate assumptions, ideas, stories, or information, in order to discern whether they are valid, somewhat valid, or non-valid, then evaluating them based on, and in conformance with, previously agreed upon standards.
2) Critical thinking is situation sensitive, contains internal corrective controls, and is based on specific foundations to reach judgements.
The ultimate goal of critical thinking is to reach logical and sound judgements based on precision, control, clarity, depth, and breadth (known as Intellectual Standards).
Many professionals get confused between logical thinking and critical thinking, so to make the difference clear; logical thinking is the organization of ideas and the sequence and correlation between them in a manner that leads to a clearer meaning or outcome based on sound arguments (a series of processes and methods that can be used to handle a situation in a sequential manner). On the other hand, critical thinking is a range of processes or special skills that may be individually or collectively used, without any specific sequence.
Critical thinking is not a synonym to decision making or problem-solving, and it is not associated with the adoption of a structured strategy to address a situation. The problem-solving process starts with a problem and aims at finding a way to solve this problem, while critical thinking starts with an allegation, conclusion, or information and aims at validating the truth behind them.
Critical Thinking in the International Professional Practices Framework (IPPF)
The term of critical thinking was not explicitly stated in the implementation guidance of internal auditing. However, some of the traits, which were referred to in the guide, that an internal auditor should possess, are similar to the traits of a critical thinker. In addition, some practices that are closely linked to critical thinking were stated, for instance, the (INTERNATIONAL STANDARDS FOR THE PROFESSIONAL PRACTICE OF INTERNAL AUDITING (The standards)), in the standard 1220 - Due Professional Care - the terms “prudent” and “competent” were stated, these traits are among the traits of critical thinkers.( ) In the standard 2310 - Identifying Information - a reference was made to one of the components of the critical thinking methodology, according to the following text which was quoted from the standard: “Internal auditors must identify sufficient, reliable, relevant, and useful information to achieve the engagement’s objectives,” Moreover, in the standard 2320 - Analysis and Evaluation - another component was referred to as follows: “Internal auditors must base conclusions and engagement results on appropriate analyses and evaluations.”
In the practice guide of the Core Principles for the Professional Practice of Internal Auditing;( ) and in the explanation of the second principle “Demonstrates competence and due professional care” it was stated that internal auditors should think in a critical manner to identify the root causes of control failure in order to provide appropriate solutions to the organization.
In the IIA’s Global Internal Audit Competency Framework ( ) critical thinking was considered as one of the main competencies that internal auditors should possess in order to be able to meet the requirements of the IPPF. In the global Competence Framework, a subset of competencies relevant to critical thinking were identifiedas follows
1) Maintains curiosity and exercises professional skepticism.
2) Selects and uses a variety of manual and automated tools and techniques to obtain data and other information on business process.
3) Analyzes and appraises the efficiency and effectiveness of business processes.
4) Ensures that the relevant tools and techniques are used during the business process analysis.
5) Applies problem solving techniques for routine situations.
6) Selects and uses appropriate research, business intelligence and problem-solving techniques to analyze and solve complex situations.
7) Uses critical thinking to identify and propose tactics for business process improvement.
8) Assists management in finding practical solutions to address issues identified through audit activity.
9) Applies data collection, data mining, data analysis and statistical techniques.
10) Ensures that information in decision making is relevant, accurate and sufficient.
11) Utilizes benchmark research to support decisions and key messages.
The Relationship between Objectivity and Critical Thinking
Intellectual independence is one of the most important traits needed for critical thinking; independence is the basis of objectivity. The standard 1100 - Independence and Objectivity - provides that internal auditors must be objective in performing their work. Objectivity is an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made. Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others.
The auditor should be an objective critical thinker and should have the ability to identify logical fallacies in the introduced evidence and arguments during the planning, implementation, and the reporting phases of the various audit engagements. The correctness of data doesn’t simply mean, from the internal auditing perspective, that the argument or evidence is correct; the logic might not be sound, this is the case of logical fallacies. The human brain did not adapt to using logic accurately, there are logical traps to which an auditor might be attracted, that’s why an auditor should be aware of these traps and should try to criticize them.
Some of the most common logical fallacies are as follows:
1) Non-sequitur: this fallacy occurs when the outcome of an argument/ evidence is not necessarily based on the givens, in other words, the outcome could be right or not, but the argument might not be sound due to the non-sequitur between the givens and the outcome. All logical fallacies share the Non-sequitur fallacy.
2) Argument from authority: this type of fallacies is the easiest to discern, as it occurs when the outcome is based on the judgements of experienced person/s in the subject of the argument/evidence; for example: the financial manager in a company owns practical and professional certificates and is experienced in the subject matter, he/she says that something is right, then you believe that it must be right. Most probably the argument will contain a confirmation on the number of the years of experience of the authority figure, or an indication to her/his educational level or certificates. The opposite of this fallacy may also be used: “the argument is provided by someone who doesn’t possess (experience, education, or certificates), so her/his argument must be false, this could be stated under the ad hominem fallacy. In practice, this fallacy could be challenging, the experiences or certificates of a person may be considered when analyzing an argument made by such a person, yet the consensus of experts on a subject should also be considered. Argument from authority doesn’t make an argument valid, after all, we all are human. Many other fallacies stem from this one, such as the argument from popularity, which means building an argument on a certain given: “a proposition must be true because the majority of people believe it is true.” Another type of fallacies is the argument from antiquity; building an argument on a given data, in other words, “if it has been known from time immemorial, it must be right.”
3) Strawman: misrepresentation of an opponent's position to facilitate criticizing its argument and to tout one's own argument.
4) Post hoc ergo propter hoc: this might be the most common fallacy, it follows a straightforward pattern; if event Y followed event X, event Y must have been caused by event X, so the reason and outcomes for two events are assumed based on the chronological order of such events.
5) Appeal to emotion: an attempt to appeal to emotions rather than presenting a strong sound argument. It is worth noting that sometimes a logically sound argument may elicit emotions, or have an emotional aspect, yet the fallacy occurs when the emotions are used instead of arguments or evidence, or to disguise the weakness of the argument/evidence.
6) Ad hominem: this fallacy occurs when someone attacks the character of an opponent rather than discusses the argument/evidence made by that opponent; it’s worth noting that insults per se are not considered logical fallacies. However, if the argument/evidence is considered wrong only because of a personal trait in the opponent’s character, then this is a fallacy. This fallacy is used to weaken the argument/evidence of the opponent without discussing the argument/evidence per se.
7) Slippery slope: saying that an event will occur as a result of some other events that will ultimately end in a negative outcome, that’s why the first event should not occur at the first place: For example, Mazen tells Saleh: “If you did not do that thing in that manner, the mission will not be accomplished, and you will not get your bonus, then if you didn’t get your bonus you wouldn’t be able to buy a new car. Do you really want to buy a new car? Then you have to follow that manner to get the things done.” This fallacy is used to avoid discussing an argument, and to divert attention to other hypothetical matters.
8) Anecdotal Evidence: using the stories and the experiences of others to prove that something is true, or using evidence that was not appropriately collected as an argument/evidence, along with many other fallacies.
The Most Prominent Skills Associated with Critical Thinking
1) The ability to identify the credibility of the information source, and the strength of the evidence or allegation;
2) The ability to identify:
a. The mysterious allegations, evidence, or arguments;
b. The contradictions or inconsistencies in the path of reasoning from premises to facts;
c. Unclear or implicit assumptions in the information provided to the internal auditor.
3) The ability to distinguish between the facts that could be proven or validated and the self or subjective allegations or arguments, and to distinguish between the relevant and the irrelevant information, allegations, and reasons;
4) The ability to avoid bias (standard 1120 - individual objectivity);
5) The ability to identify logical fallacies in the arguments and evidence provided to the auditor as explained above.
Characteristics of a Critical Thinker
1) Familiar with the topic and doesn’t argue without prior knowledge;
2) Possess the skills of asking the appropriate questions along with addressing the problems and probabilities to narrow the scope of the research, and knows when to ask for more information about anything that is unknown or incomprehensible;
3) Able to judge and discuss the postulates;
4) Able to distinguish between the outcomes that might be right and the outcomes that has to be right;
5) Avoids the common mistakes in his/her conclusions, on top of which:
a. The halo effect: auditors should be cautious of the halo effect which is one of the assessment problems, this occurs when one of the sub-factors affects the whole assessment of a topic. In evaluating an employee, for instance, who is not administratively disciplined, the auditor may be affected by this employee’s lack of discipline, therefore the evaluation of all the other factors will be based on the negative impression about that employee, then the employee gets weak evaluations based on that effect, this is known as the halo effect.
b. Rigorous Research: the amount of the collected information is not the point, the point is the validity, reliability, and reasonability of the information.
c. Lasting Success: the effectiveness of the current controls doesn’t guarantee their ongoing effectiveness. Effectiveness is relative and is associated with the business environment, and changes over time, therefore it is not lasting.
6) Searches for the reasons and alternatives, and uses scientific reliable resources and makes references to these sources if appropriate (standard 2320 - analysis and evaluation). Auditors should also avoid hearsay evidence that is not supported with reliable information, and should avoid being superficial in thinking and using generalizations, in order to avoid providing subjective judgements;
7) The evidence on which the auditor bases his/her opinion should be strong;
8) Handles complicated situations using logical methods;
9) Takes a stand, or otherwise, based on the availability of evidence, and takes all the aspects of a situation seriously;
10) Stays in touch with the main point or the substance of the topic;
11) Be aware that audit clients have different impressions about a certain idea;
12) Separates emotional thinking from logical thinking, and has the tolerance and ability to deal with opposing opinions;
13) Ready to rethink about the questions or assumptions that raise on a continuous manner.
Conclusion
Internal auditors’ mastery of critical thinking enhances their objectivity and reporting skills. Standard No 2420 - quality of communication - indicates that communications must be accurate, objective, clear, concise, constructive, complete, and timely.
Critical thinking combines talents and skills and could be learned and practiced.