Audit question:

Jim Beau, CPA, has a client base of small retail enterprises and individual tax clients. Antonio, Jims brother and a major shareholder of Pink Pools Manufacturing Company (PPMC), has recently been appointed as the chief executive officer of PPMC. Antonio is seeking the services of an external auditor. He asks Jim why external auditors can provide only reasonable assurance (and not absolute assurance) as to whether the financial statements are free of material misstatements. Antonio wants Jim to accept an appointment as PPMCs external auditor for the year ending December 31, 2020.

Required:

a. Using the appropriate Canadian Auditing Standards, explain whether Jim would be able to comply with these standards and any applicable rules of professional conduct, if he decided to accept the audit engagement of PPMC. Also, comment on what actions he should take and whether there are any other professional services he is permitted to offer PPMC.

b. The term professional judgment is frequently used in the auditing literature. List four actions the auditor should take to ensure that professional judgment is properly exercised in an audit engagement.

c. List five reasons why it is not possible in an audit to obtain absolute assurance that the financial statements are free of material misstatements.