Question

Being an auditor You have recently graduated from your university and started work with an accounting firm. You meet an old school friend, Kim, for dinner—you haven’t seen each other for several years. Kim is surprised that you are now working as an auditor because your childhood dream was to be a ballet dancer. Unfortunately, your knees were damaged in a fall and you can no longer dance. The conversation turns to your work and Kim wants to know how you do your job. Kim cannot understand why an audit is not a guarantee the company will succeed. Kim also thinks that company managers will lie to you to protect themselves, and as an auditor you would have to assume that you cannot believe anything a company manager says to you.

Required: Compose a letter to Kim explaining the concept of reasonable assurance, and how reasonable assurance is determined. Explain why an auditor cannot offer absolute assurance. Describe the concept of professional skepticism and how it is not the same as assuming that managers are always trying to deceive auditors. Explain to Kim why her perceptions are a perfect example of the expectations gap.

**For Accounting - Audit Class. Please write a short essay on the above. Please type your word. Do not send a picture or your handwriting.

Answer 1

Solution:
a) Write a letter to Kim explaining the concept of reasonable assurance, and how reasonable
assurance is determined. Explain why an auditor cannot offer absolute assurance.

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There is a gap between Kim’s expectations and the level of auditor performance. An audit provides reasonable assurance, not absolute assurance. The audit enhances the reliability and credibility of the information included in a financial report but is not a guarantee that the financial report is free from error or fraud, or that the company will not fail. Partly, this is because of the nature of financial reporting. It requires judgements about accounting estimates and the choice and application of various accounting methods. There is usually not one ‘right’ answer for a company’s profit. The auditor cannot guarantee the profit reported by the company is ‘right’, only provide assurance about the appropriateness of the accounting method selection and application and the accounting estimates. Another reason the assurance is not absolute is the nature of the audit process. Auditors cannot review every transaction and account balance, therefore they use sampling (which could mean that representative items are not selected for testing). Some transactions and balances are difficult to gather reliable evidence about, clients can conceal evidence, and auditors have a limited time frame in which to complete the audit.

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b) Describe the concept of professional skepticism and how it is not the same as assuming that managers are always trying to deceive auditors. Explain to Kim why her perceptions are a perfect example of the expectations gap.

Professional scepticism is required of an auditor. It is an attitude that requires the auditor to remain independent of the client and its staff. The auditor has a questioning mind and thoroughly investigates all evidence presented by their client. This does not mean that they regard the client as a liar, but that they need to do more than simply take the client’s word about anything. Usually, there will be confirming evidence which supports the client’s statements (e.g. copies of contracts, minutes of meetings, etc.). Evidence gathered from independent third parties is generally regarded as more reliable than that gathered from the client. Managers will not always try to deceive auditors, but auditors must take the responsibility of gathering evidence to verifying managers’ statements. The auditor needs to be alert to the fact that some managers will try to deceive auditors sometimes.