Reasonable assurance definition
/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).
Example of Reasonable Assurance
An auditor of a manufacturing company conducts an audit of the company's inventory balance. To provide reasonable assurance:
She performs substantive procedures, such as observing a physical inventory count at year-end to ensure inventory exists.
She verifies the valuation of inventory by reviewing the company's cost accounting methods and recalculating the cost of a sample of items.
She evaluates the completeness and accuracy of inventory records by testing journal entries and reviewing cutoff procedures.
She considers the risk of fraud by performing analytical procedures to detect unusual fluctuations in inventory levels.
Through these procedures, the auditor collects sufficient and appropriate evidence to form an opinion on the inventory balance. However, reasonable assurance is achieved with the recognition that absolute assurance is unattainable due to inherent audit limitations, such as the possibility of undetected collusion in falsifying records.