The exercise of due professional care allows the auditor to obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by error or fraud. Absolute assurance is not attainable because of the nature of audit evidence and the characteristics of fraud. Therefore, an audit conducted in accordance with generally accepted auditing standards may not detect a material misstatement. [Paragraph added, effective for audits of financial statements for periods ending on or after December 15, 1997, by Statement on Auditing Standards No. 82.] Copyright © 2002, American Institute of Certified Public Accountants, Inc.
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Reasonable assurance is a high level of assurance regarding material misstatements, but not an absolute one. Reasonable assurance includes the understanding that there is a remote likelihood that material misstatements will not be prevented or detected on a timely basis. To achieve reasonable assurance, the auditor needs to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. This means that there is some uncertainty arising from the use of sampling, since it is possible that a material misstatement will be missed. When conducting an audit of financial statements, the high-level objectives of the auditor include obtaining reasonable assurance as to whether a client’s financial statements are free from material misstatement, thereby allowing the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (such as generally accepted accounting principles). September 01, 2022/
According to International Standards on Auditing ISAs, auditor is required to obtain reasonable assurance whether financial statements give true and fair view or in others words he must be reasonably sure that financial statements are free from material misstatements. Again, I must emphasize he needs to be reasonably sure and NOT absolutely sure. There is a big difference if you are absolutely sure about something or reasonably sure. Making the two level of assurances easy to understand in context of financial statements and audit engagements or other assurance engagements, absolute assurance means that there is absolutely no misstatement in the financial statement and thus financial statements are absolutely reliable and relevant for the user of financial statements. On the other hand reasonable assurance is also a high level of assurance but it means that auditor has conducted the engagement in a way that he is reasonably i.e. to the best possible extent provided the situation circumstances he is reasonable sure that financial statements are free from material misstatement but there might be some misstatements that go undetected. The reason why auditor is unable to obtain absolute assurance is not because auditor’s do not conduct audit engagements with enough care rather there are limitations and these limitations restricts the auditor to obtain only reasonable assurance and even with such limitations and restrictions auditor tries his best to provide some level of assurance to the users to reinforce their confidence in the financial statements. Such limitations that restricts the auditor to gain absolute assurance are known as Inherent limitations of an Audit. Inherent Limitations of an auditInherent limitations of an audit arise due to the following reasons:
A term of art in the audit profession that is tossed around but not well-understood is “reasonable assurance.” What does it actually mean when an audit report attests with reasonable assurance that the financial reporting or internal controls are reliable? Accountants, auditors, their clients, and even regulators generally acknowledge that it is impossible to assert with absolute certainty that an event will or will not occur or even whether or not it has already occurred. All professions accept that some form of judgment is involved when rendering an opinion, and that those judgments aren’t always perfectly accurate. In the U.S. criminal justice system, for example, a very high burden of proof—“beyond a reasonable doubt”—is required to convict an individual, yet glaring mistakes still occur under this system. Even in the world of science, where research, carefully controlled experiments, and peer-reviewed results are expected to lead to a closer approximation of truth, presumptions are in continual flux and can be upended by new evidence. |