Auditors provide “reasonable assurance” that the financial statements are “fairl
ID: 340559 • Letter: A
Question
Auditors provide “reasonable assurance” that the financial statements
are “fairly stated, in all material respects.” Questions are often raised as to the
responsibility of the auditor to detect material misstatements, including misappropriation
of assets and fraudulent financial reporting.
a. Discuss the concept of “reasonable assurance” and the degree of confidence that
financial statement users should have in the financial statements.
b. What are the responsibilities of the independent auditor in the audit of financial statements?
Discuss fully, but in this part do not include fraud in the discussion.
c. What are the responsibilities of the independent auditor for the detection of fraud
involving misappropriation of assets and fraudulent financial reporting? Discuss
fully, including your assessment of whether the auditor’s responsibility for the detection
of fraud is appropriate.
Explanation / Answer
a. Reasonable assurance – is an assurance given by auditors that the financial statementsare free from material misstatements.The degree of confidence that financial statement users should have in the financialstatements is very low because auditors may sometimes fail to detect materialmisstatement.
b. Responsibilities of independent auditor in the audit of financial statements:
1.The auditors are responsible for the detecting material misstatements.
2.The auditors express opinion on the financial statements and can makesuggestions about the form and content of the statement.
3.The auditors are also responsible to conduct an audit of the financial statementsin accordance with auditing standards and report the findings of the audit in theauditor’s report.
4.Auditors are also responsible for reasonable assurance.
c.
If an independent auditor uncovers circumstances arousing suspicion as to the existenceof fraud, he or she should weigh the effect of the circumstances on the opinion on thefinancial statements. When the auditor believes that the amount of the opinion can begiven. The auditor should consider the implications for the other aspects of the audit anddiscuss the matter with an appropriate level of management that is at least one levelabove those involved and with senior management. Additionally, the auditor shouldobtain additional evidential matter to determine whether material fraud has occurred oris likely to have occurred. The auditor may suggest that the client consult with legalcounsel. Whenever the auditor has determined that there is evidence that fraud mayexist, that matter should be brought to the attention of the audit committee unless thematter is clearly inconsequential.
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