Question: One aspect of the audit process seems particularly puzzling. The independent auditor merely provides
reasonable assurance. The risk that a material misstatement is included in the accompanying financial statements
is only reduced to a low level and not to zero. Why do decision makers who may be risking significant amounts of
money not insist on absolute and complete assurance? Because of the potential for financial loss, decision makers
surely must want every possibility of incorrect reporting to be eliminated by the work of the independent auditor.
Is reasonable assurance that no material misstatements are present truly adequate for decision makers who must
rely on a set of financial statements for information?
Answer: Independent auditors provide reasonable assurance but not absolute assurance that financial statements
are presented fairly because they contain no material misstatements according to U.S. GAAP. A number of
practical reasons exist as to why the assurance level is limited in this manner.
First, many of the figures found on any set of financial statements are no more than estimations. Auditors do not
possess reliable crystal balls that allow them to predict the future. The uncertainty inherent in these estimations
immediately eliminates the possibility for absolute assurance. For example, reporting the amount of cash that
will be collected from a large group of accounts receivable is simply a carefully considered guess. It is presented
according to U.S. GAAP but it is still an estimate.
Second, organizations often take part in so many transactions during a period that uncovering every potential
problem or issue is impossible. Usually, in analyzing most account balances, the auditor only has time to test
a sample of the entries and adjustments. Without examining every individual event, absolute assurance is not
possible. Material misstatements can always be missed if less than 100 percent of the transactions are tested.
Third, an independent auditor visits a company for a few weeks or months each year to carry out testing
procedures. Company officials who want to hide financial problems are sometimes successful at concealment.
Auditors can never be completely certain that they have not been victimized by an elaborate camouflage scheme
perpetrated by management. Thus, they are not comfortable providing absolute assurance.
Fourth, informed decision makers should understand that independent auditors can only provide reasonable
assurance. Through appropriate testing procedures, risk of a material misstatement is reduced to an acceptably
low level but not eliminated entirely. Investors and creditors need to take that limitation into consideration
when assessing the financial health and future well being of an organization presented through a set of financial
statements. Although the risk is small, their decisions should factor in the level of uncertainty that is always