Question

You have recently graduated from your university course and start work with an audit firm. You meet an old school friend, Nayan, for dinner — you haven't seen each other for several years. Nayan 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 Nayan wants to know how you do your job. Nayan cannot understand why an audit is not a guarantee the company will succeed. Nayan also thinks that company managers will lie to you in order to protect themselves. As an auditor, you would have to assume that you cannot believe anything a company manager says to you.

Required: (a) Write a letter to Nayan explaining the concept of reasonable assurance, and how reasonable assurance is determined. Explain why an auditor cannot offer absolute assurance (b) Explain in the letter to Nayan the concept of 'professional scepticism' and how it is not the same as assuming that managers are always trying to deceive auditors

Answer 1

Answer a:-

189,

ABS Street,

New York

October 17, 2020

Dear Nayan,

I hope this letter finds you well. I am enjoying my new job and work culture. Though sometimes I miss my dancing school but I always try to overcome the feeling by concentrating more on my new job.

Nayan, as we were discussed about the role of an auditor and how an audit is not a guarantee the company will succeed. We had to discuss about reasonable assurance but since you had to rush your home, our conversation was stuck so It would be a pleasure for me to explain you about reasonable assurance.

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.

Again, I must emphasize we need to be reasonably sure and NOT absolutely sure. There is a big difference if you are absolutely sure about something or reasonably sure. The reason why auditor is unable to obtain absolute assurance is not because auditor’s do not conduct audit engagements with enough care rather there are limitations and these limitations restricts the auditor to obtain only reasonable assurance and even with such limitations and restrictions auditor tries his best to provide some level of assurance to the users to reinforce their confidence in the financial statements. Such limitations that restricts the auditor to gain absolute assurance are known as Inherent limitations of an Audit like persuasive evidence instead of conclusive evidence, human error, absence of clear instructions on accounting treatment etc.

I hope this makes you clear how challenging being an auditor is and the level of accountability that is required in being an auditor.

Regards,

Teja

Answer b:-

189,

ABS Street,

New York

October 17, 2020

Dear Nayan,

I hope this letter finds you well. I am enjoying my new job and work culture. Though sometimes I miss my dancing school but I always try to overcome the feeling by concentrating more on my new job.

Nayan, as we were discussing about about the role of auditor and how audit is not a guarantee the company will succeed. We had to discuss about professional skepticism as well but you were in a hurry on that day and our conversation was not complete.so I decided to write this letter to you. It would be a pleasure for me to explain you professional skepticism.

Professional skepticism is the state of mind which is ready for the situation that grabs out the errors or questions the financial events and other events while conducting an assurance engagement. It’s basically a skill just like the professional judgment which makes the auditor alert for any particular situation. Professional skepticism is actually an attitude of the questioning mind.

Nayan, it is wrong to assume that managers are always trying to deceive auditors. They might be doing so but they might also be not doing so. We always should have a questioning mind. We have to apply professional skepticism in examining each document and enquiring the managers as well. Then only we can conclude that whether managers are trying to deceive us or not.

  

I hope this makes you clear how challenging being an auditor is and the level of accountability that is required in being an auditor.

Regards,

Teja