Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
Reasonable Assurance
ISAs require the audi<strong>to</strong>r <strong>to</strong> obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due <strong>to</strong> fraud or error.
Reasonable assurance is a high but not absolute level of assurance. It is obtained when the audi<strong>to</strong>r has
obtained sufficient appropriate audit evidence <strong>to</strong> reduce audit risk (that is, the risk that the audi<strong>to</strong>r expresses
an inappropriate opinion when the financial statements are materially misstated) <strong>to</strong> an acceptably low level.
The audi<strong>to</strong>r cannot provide absolute assurance due <strong>to</strong> the inherent limitations in the work carried out. This
results from the majority of audit evidence (on which the audi<strong>to</strong>r draws conclusions and bases the audi<strong>to</strong>r’s
opinion) being persuasive rather than conclusive.
Inherent Limitations of an Audit
The following exhibit outlines some of the inherent limitations of audit work performed.
Exhibit 3.1-1
Limitations
The Nature
of Financial
Reporting
Nature of Audit
Evidence Available
The Nature of
Audit Procedures
Timeliness
of Financial
Reporting
Reasons
The preparation of financial statements involves:
• Judgment by management in applying the applicable financial reporting
framework; and
• Subjective decisions or assessments (such as estimates) by management
involving a range of acceptable interpretations or judgments.
Most of the audi<strong>to</strong>r’s work in forming the audi<strong>to</strong>r’s opinion consists of obtaining and
evaluating audit evidence. This evidence tends <strong>to</strong> be persuasive in character rather
than conclusive.
Audit evidence is primarily obtained from audit procedures performed during the course
of the audit. It may also include information obtained from other sources such as:
• Previous audits;
• A firm’s quality control procedures for client acceptance and continuance;
• The entity’s accounting records; and
• Audit evidence prepared by an expert employed or engaged by the entity.
Audit procedures, however well designed, will not detect every misstatement.
Consider the following:
• Any sample of less than 100% of a population introduces some risk that a
misstatement will not be detected;
• Management or others may not provide, intentionally or unintentionally, the
complete information required. Fraud may involve sophisticated and carefully
organized schemes designed <strong>to</strong> conceal it; and
• Audit procedures used <strong>to</strong> gather audit evidence may not detect that some
information is missing.
The relevance/value of financial information tends <strong>to</strong> diminish over time, so a balance
needs <strong>to</strong> be struck between the reliability of information and its cost.
Users of financial statements expect that the audi<strong>to</strong>r will form his or her opinion within
a reasonable period of time and at a reasonable cost. Consequently, it is impracticable
<strong>to</strong> address all information that may exist, or <strong>to</strong> pursue every matter exhaustively on the
assumption that information is in error or fraudulent until proved otherwise.