Duchess Saudia T.

Arabia #69 in Multiple Choice

C. Fraudulently prepared Financial Statements are often different to detect

 Auditors rely on management’s written presentations, and it would be difficult to detect
fraud if the management lacks integrity – the quality of being honest and having strong
moral principles. So if the management doesn’t make an honest assessment of the
financial statements, it would lead the auditor into making false representations of
financial statements because he based on unreliable evidences
 Although the auditor performs procedures to detect material misstatements when
auditing financial statements, such procedures may not be effective in detecting
misstatements resulting from collusion among employees and management’s
circumvention of internal control. The majority of insider fraud losses are cause by this
collusion. It is posing threats to businesses because it involves larger damages & is more
difficult to detect. When more employees are involved, there are more opportunities to
commit fraud and it is easier to circumvent or overcome the anti-fraud controls since
the employees are typically familiar with the controls that have been put in place, and
then conceal the fraud longer
 Evidence obtained by the auditor doesn’t consist of “hard facts.” It comprises pieces of
information and impressions which are gradually accumulated during the course of an
audit which persuades the auditor about the fairness of the financial statements. Thus,
audit evidence is generally persuasive- from the word “persuade”, meaning to make
someone believe on something, rather than conclusive- meaning it is undeniably true or
100% certain that it is the truth.
D. Auditors believe that reasonable assurance is sufficient in the vast majority of cases
 An auditor is required to obtain reasonable assurance whether financial statements give
true and fair view or in others words, he must be reasonably sure that financial
statements are free from material misstatements.
 Absolute assurance means that there is absolutely no misstatement in the financial
statement and thus financial statements are absolutely reliable and relevant for the user
of financial statements. On the other hand, reasonable assurance is also a high level of
assurance but it means that auditor has conducted the engagement in a way that he is
reasonable to the best possible extent provided the situation circumstances he is
reasonable sure that financial statements are free from material misstatement but there
might be some misstatements that go undetected.
 All professions accept that some form of judgment is involved when rendering an
opinion, and that those judgments aren’t always perfectly accurate. The auditor does
not provide absolute assurance but reasonable assurance, because there are certain
limitations.
 An example is the limitation “sampling risk”, wherein instead of examining the entire
population, the auditor would only examine a small portion of the population, because
it would be costly and would take a lot of time on examining the entire population for
that would be impractical.
 Cost-benefit limitations- conducting audit engagement requires resources which auditor
might not have or in auditor’s judgment cost of gaining additional assurance will be
higher than the benefit gained and thus not obtained.
 Even with good faith and integrity, mistakes in judgment can be made because auditors
are humans and can therefore commit human error.