You have recently graduated from your university course and start work with an audit firm. You meet an old school friend, Nga, for dinner — you haven’t seen each other for several years. Nga is surprised that you are now working as an auditor because your childhood dream was to be a ballet dancer. Unfortunately, your knees were damaged in a fall and you can no longer dance. The conversation turns to your work and Nga wants to know how you do your job. Nga cannot understand why an audit is not a guarantee the company will succeed. Nga also thinks that company managers will lie to you in order to protect themselves, and as an auditor you would have to assume that you cannot believe anything a company manager says to you.

Required

(a) Write a letter to Nga explaining the concept of reasonable assurance, and how reasonable assurance is determined. Explain why an auditor cannot offer absolute assurance.

(b) Explain in the letter to Nga the concept of ‘professional scepticism’ and how it is not the same as assuming that managers are always trying to deceive auditors.