Question

Read the statements issued by the PCAOB and SEC on May 16, 2005, and briefly describe the apparent underlying cause(s) for the auditors' failures in applying the concept of reasonable assurance. Pay special attention to the portion of the PCAOB's policy statement entitled "The Importance of Professional Judgment."

Answer 1

Auditors failure to apply the concept of reasonable assurance- There are many reasons as quoted by PCAOB some of them are mentioning below- 1- Limitations w.r.t time and cost- Since auditor have to form opinion within reasonable time and cost therefore he may resort to test sampling procedures in some of material areas.

2-Nature of financial statements- Since financial statements are prepared by management which is based on there judgements. there may be subjective decisions taken by management.

3- Nature of audit procedures- Auditor may not perform 100% checking and management may hide the facts with carefully designed scheme. Fraud at higher level is difficult to detect.

4- Similar approach for all clients i.e. not customizing audit plans as per client need-auditors have used a one-size-fits-all audit plan driven by standardized checklists that may have little to do with the unique issues and risks of the particular client's financial reporting processes.

Importance of Professional judgement-The overall objective of Auditing Standard No. 2 is for the auditor to obtain evidence that a company's control system reasonably assures that its financial statements do not contain material misstatements. To accomplish this, the auditor must not only exercise judgment to determine how to apply the standard to audit clients in different industries and of different sizes, but also exercise judgment to focus their work on areas that pose higher risks of misstatement, due either to errors or fraud. Reliance on standardized checklists that lead to a focus on controls in low-risk areas obviously fails to meet this objective.