What is reasonable assurance?
Reasonable assurance through audit evidence
Factors affecting reasonable assurance
Inherent Limitations of Accounting and Internal Control
It means a conclusion that the Financial Statements are not materially misstated. An auditor cannot obtain absolute assurance because of limitations described in paragraph below.
Reasonable assurance through audit evidence
Audit evidence:
• For internal control
• For transactions & accounts balances
• For financial statements
Factors affecting reasonable assurance
i) Inherent limitation of an audit, i.e. failure of audit procedures to detect material misstatements in financial statements because of:
a) The use of testing (application of procedures on samples).
b) The inherent limitations of accounting and internal control system.
c) Persuasive nature of audit evidence rather than conclusive (Persuasive: one leading to an opinion; one which causes to believe; Conclusive: final, convincing).
ii) Exercise of judgment by the auditor in gathering of evidence and drawing of conclusion.
iii) Existence of other limitations like related parties etc.
Inherent Limitations of Accounting and Internal Control
• Management over rides
• Collusion with employees
• Collusion with third party
• Unaffordable cost of internal control
• Human error
Accordingly, because of the factors described above an audit is not a guarantee that the financial statements are free from material misstatement, because absolute assurance is not attainable. Further, an audit opinion does not assure the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity