Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole.
On the other hand, absolute assurance provides a guarantee that the financial statements are free from material misstatements.
An audit carried out in accordance with ISAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatements, whether due to fraud or error. In an audit engagement, the auditor provides a higher but not absolute level of assurance that the information subject to the audit is free of material misstatements.
An auditor cannot obtain absolute assurance because there are inherent limitations in an audit that affect the auditor’s ability to detect material misstatements. These limitations result from factors such as:
- The use of testing;
- The inherent limitations of any accounting and internal control system (for example the possibility of collusion);
- The fact that most audit evidence is persuasive rather than conclusive.
Also, the work undertaken by the auditor to form an opinion is permeated by judgement, in particular regarding:
- The gathering of audit evidence, for example, in deciding the nature, timing and extent of audit procedures.
- The drawing of conclusions based on audit evidence gathered, for example, assessing the reasonableness of the estimates made by management in preparing the financial statements.
Further, other limitations may affect the persuasiveness of evidence available to draw conclusions on particular financial statements assertions (for example, transactions between related parties).