Question

Auditors provide "reasonable assurance" that the financial statements are "fairly stated, in all material respects." Questions are often raised as to the responsibility of the auditor to detect material misstatements, including misappropriation of assets and fraudulent financial reporting.

a. Discuss the concept of "reasonable assurance" and the degree of confidence that financial statement users should have in the financial statements.

b. What are the responsibilities of the independent auditor in the audit of financial statements? Discuss fully, however, do not include fraud in the discussion.

c. What are the responsibilities of the independent auditor for the detection of fraud involving the misappropriation of assets and fraudulent financial reporting? Discuss fully, including your assessment of whether the auditor's responsibility for the detection of fraud is appropriate.

Answer 1

a)

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.

b)

Auditor's responsibility is to draw an opinion on the financial statements and state if the same exhibits true and fair view of the entity to the stakehilders. The auditor’s respnsibility is to report and thereby state :

1. whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
2. whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
3. whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
4. whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
5. whether, in his opinion, the financial statements comply with the accounting standards;
6. the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
7. whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
8. any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
9. whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls;
10. such other matters as may be prescribed.