Under ISA 200, the "reasonable assurance" obtained by the auditor is a high level of assurance, not an absolute one. It is achieved when the auditor gathers sufficient appropriate audit evidence that reduces audit risk to an acceptably low level; absolute assurance can never be attained because of the inherent limitations of an audit.
Why Is the Auditor's Assurance Never Absolute?
The standard explains that reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor's opinion being persuasive rather than conclusive. For this reason there is always an unavoidable risk that some material misstatements may not be detected, even when the audit is properly planned and performed in accordance with the ISAs.
What Must the Auditor Do to Obtain This Assurance?
The standard requires the auditor to exercise professional judgment and professional skepticism throughout the planning and performance of the audit, and, among other things, to:
- Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, the applicable financial reporting framework, and the entity's system of internal control.
- Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.
- Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained.
What Are the Auditor's Two Overall Objectives?
The standard sets two overall objectives for the auditor conducting an audit of financial statements: to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, and communicate as required, in accordance with the auditor's findings.
What Happens When Reasonable Assurance Cannot Be Obtained?
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor's report is insufficient in the circumstances for purposes of reporting to the intended users of the financial statements, the ISAs require that the auditor disclaim an opinion or withdraw (or resign) from the engagement, where withdrawal is possible under applicable law or regulation.
Legal References
- ISA 200 — Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, Paragraphs 5, 7, 11 and 12.
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