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CFA Level I · CFA Level I Exam · Financial Reporting Quality

Which of the following best describes the main limitation of relying on the auditor's report to detect poor financial reporting quality?

The main limitation is that auditors test samples and rely partly on management's representations, so they provide only reasonable assurance and may miss some misstatements, particularly those involving collusion. They do evaluate estimates and must consider fraud risk, so the other statements are incorrect.

  1. AAuditors test samples and rely on management's representations, so they provide only reasonable assurance and may not detect all misstatements.Correct
  2. BAuditors are prohibited from evaluating management's estimates and judgments.
  3. CAuditors assess compliance with the accounting framework but have no responsibility to consider fraud risk.

Explanation

Audits use sampling and rely partly on management information, so they give reasonable, not absolute, assurance and may miss misstatements, especially when management colludes. Auditors do evaluate estimates and do have responsibilities regarding fraud risk.

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