Breaking down the definition:
Reasonable assurance: It is a fundamental principle that even though an audit provides the highest level of assurance, it is not absolute assurance. Not absolute given because of inherent limitations, a limitation is that it is sample based, we select a sample of transactions to test based on materiality.
Inherent limitations arise from:
-The nature of financial reporting: FS involves judgement by management in applying the entity's applicable financial reporting framework. FS involve subjective decisions or assessments or a degree of uncertainty and acceptable judgements made.
-Nature of audit procedures- Management may intentionally or unintentionally not provide complete info. Auditor cant be certain of completeness of info. Fraud, e,g falsified doc which may cause the auditor the audit info is valid when it is not.
-Audit to be conducted at a reasonable time at reasonable cost. Auditor will have to provide reasonable assurance and reasonable cost not all transactions will be audited because of the sample basis.
-Inherent limitations of internal control systems- internal control can only reduce risk but not eliminate it, eg inappropriate management override.
Misstatement due to fraud or error: Misstatement is the difference between the reported amount, classification, presentation or disclosure of a financial statement item and the amount, classification, presentation or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can occur due to fraud or error.
-fraud is an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage.
-error is an unintentional misstatement in financial statement including the omission of an amount or disclosure.
When obtaining reasonable assurance auditor should maintain professional scepticism.
Free from material misstatement: When an auditor performs the audit, he or she will identify misstatements but only be concerned with the material ones.
Opinion and report: Auditors report- the auditor will state whether the financial statements are prepared in all material aspects in accordance with an applicable accounting framework.