- 10 Marks
Question
c) Reasonable assurance is the highest level of assurance auditors may provide. However, due to the limitations of auditing, it is impossible to guarantee ‘absolute’ assurance. Some users of financial statements, however, have the misconception that an audit provides absolute assurance and that the audit opinion guarantees that the financial statements are ‘accurate.’ The ‘Expectations Gap’ refers to these and other misunderstandings regarding the work of an auditor.
Required:
i) State FOUR (4) inherent limitations of an audit that makes it impossible to provide ‘absolute’ assurance.
(6 marks)
ii) State THREE (3) misconceptions about the role an auditor plays. (4 marks)
Answer
c)
i) Inherent limitations of an audit that make it impossible to provide ‘absolute’ assurance:
- Financial information includes subjective and judgmental matters.
- Inherent limitations of controls used as audit evidence.
- Management representations may sometimes be the only source of evidence available.
- Evidence is often persuasive rather than conclusive.
- Auditors do not examine 100% of transactions and balances, but instead, test on a sample basis.
ii) Misconceptions about the role an auditor plays:
- A belief that auditors test 100% of transactions and balances (they use sampling).
- A belief that auditors are required to detect all fraud (auditors assess material misstatements, which may be due to fraud).
- A belief that auditors are responsible for preparing financial statements (this responsibility lies with management).
- Tags: Audit Expectations, Audit Limitations, Misconceptions, Reasonable Assurance
- Level: Level 2
- Uploader: Dotse