In order to express an opinion, the auditor obtains a level of assurance about whether
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What is 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. 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 (such as generally accepted accounting principles). This article was first published in the July 2010 edition of Accounting and Business magazine.Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. One hour of learning equates to one unit of CPD. We'd suggest that you use this as a guide when allocating yourself CPD units.The International Auditing and Assurance Standards Board (IAASB) makes it clear that an understanding of this ISA is crucial to auditors, as this ISA sets out how the objectives, requirements, application and explanatory material contained in all ISAs are to be understood and applied. ISA 200 should be seen as the starting point in developing an understanding of the Clarified ISAs. It contains basic objectives and requirements that should be followed in all audits of historical information. It is such a
fundamental standard that all the other ISAs contain a prompt saying they should be read in conjunction with ISA 200. So while some of the points made below will be familiar and should be obvious to the competent auditor, the points are worthy of revision. There are several key elements to ISA 200:
ISA 200 also contains a useful introduction that sets out the scope of the standard and explains some of the basic concepts used by auditors. In common with all Clarified ISAs, application and other explanatory material is provided to enhance the understanding and provide suggestions as to how a requirement could be addressed. ObjectivesISA 200 states there are two overall objectives of the auditor. First: '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.' Secondly: 'To report on the financial statements, and communicate as required by the ISAs in accordance with the auditor's findings.' In addition, ISA 200 contains an objective relating to situations where reasonable assurance cannot be obtained, in which case the auditor, depending on the circumstances, may qualify the audit opinion, or disclaim an opinion, or withdraw from the assignment. The IAASB believe these objectives are clearly worded and reflect what the auditor ultimately is responsible for achieving. The achievement of these objectives is supported by the other Clarified ISAs. RequirementsISA 200 contains five separate requirements. Ethical requirements'The auditor shall comply with relevant ethical requirements, including those pertaining to independence, related to financial statement audit engagements.' ISA 200 reminds us that the auditor is bound by one or more ethical codes, depending on the jurisdiction in which the auditor operates. The ethical code, including compliance with quality control measures, therefore underpins the conduct of an audit. Similar wording was used in the old version of ISA 200. Professional scepticism'The auditor shall plan and perform an audit with professional scepticism, recognising that circumstances may exist which cause the financial statements to be materially misstated.' The ISA explains that it is necessary to maintain an attitude of scepticism throughout the audit, and is especially important in the critical assessment of audit evidence. Again, this was a requirement of the old ISA 200. Professional judgment'The auditor shall exercise professional judgment in planning and performing an audit of financial statements.' The old version of ISA 200, though recognising the need to exercise professional judgment during the audit, did not have a specific requirement in relation to it. The Clarified ISA 200 states that professional judgment is essential to the proper conduct of the audit; for example, in making decisions regarding materiality, the evaluation of management's judgments, and the drawing of conclusions. In fact, professional judgment will be used in almost all key decisions regarding the conduct of the audit. A definition of professional judgment is provided in ISA 200: 'The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.' The IAASB considers that this definition explains what is
meant by professional judgment and hopes the new requirement will emphasise the importance of sound professional judgment as part of the audit process. ISA 200 also recognises that consultation on contentious matters may assist the auditor in making informed and reasonable judgments. There is also a need for professional judgment to be appropriately documented. Sufficient appropriate audit evidence and audit risk'To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion.' This covers old ground and the relevant application material summarises what is meant by sufficient and appropriate evidence, and emphasises the concepts enshrined in the risk-based approach to auditing. The IAASB sees this as augmentation of existing guidance, and does not change the underlying principles relating to the use of the audit risk model. Conduct of an audit in accordance with ISAsThis is possibly the most significant area of ISA 200, as it contains several requirements specific to ensuring that the auditor complies with the objectives and requirements of the Clarified ISAs. Each requirement relating to the conduct of the audit in accordance with ISAs will be looked at in turn.
ConclusionThe objectives and requirements of ISA 200 underpin all audits of historical financial statements, regardless of the size or complexity of the entity being audited. The IAASB states that ISA 200 should be read and studied by all auditors, even though many of the concepts are familiar from the previous incarnation of the standard. Lisa Weaver is ACCA's examiner for advanced audit and assuranceWhat is the level of assurance given by the auditor?Audits. The most rigorous level of assurance is provided by an audit. It offers a reasonable level of assurance that your financial statements are free from material misstatement and conform with GAAP.
What is expression of opinion in auditing?An auditor's opinion is a certification that accompanies financial statements. It is based on an audit of the procedures and records used to produce the statements and delivers an opinion as to whether material misstatements exist in the financial statements.
How does the auditor obtain reasonable assurance?Sufficient Appropriate Audit Evidence
Reasonable assurance is obtained when the auditor has thereby reduced audit risk to an acceptably low level.
When the auditors express an opinion on financial statements?16. The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
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