Audit and Assurance · The concept of audit and other assurance engagements

The Statutory Audit and Its Purpose Explained

Updated 11 October 2026 · Fact-checked

A statutory audit is an independent examination of a company's financial statements required by law. Its purpose, under ISA 200, is to give users reasonable assurance, through an opinion, on whether the statements are prepared in all material respects in line with the framework, often shown as true and fair. Directors prepare; auditors report.

Understand The Statutory Audit and Its Purpose

A statutory audit is an external audit that the law requires for certain entities. Many companies must have one, though some small companies may be exempt under local law. The auditor is independent of the company and reports to the owners (the shareholders).

Why does it exist? Shareholders own the company but directors run it. Directors know more than shareholders and may be tempted to present results in a flattering way. This is the agency problem. An independent opinion adds credibility to the financial statements so that shareholders, lenders and others can rely on them.

The objective of an audit under ISA 200 is to enhance the confidence of intended users in the financial statements. The auditor does this by expressing an opinion on whether the statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. For a fair presentation framework such as IFRS, the wording is that the statements give a true and fair view (or present fairly, in all material respects).

The assurance given is reasonable assurance. This is high, but not absolute. The auditor does not check every transaction and uses testing, judgement and sampling. So the auditor cannot guarantee that the statements are free from error or fraud. The opinion is about material misstatement only.

Responsibilities are split. Directors are responsible for preparing the financial statements, for keeping proper accounting records, for internal control, and for the safeguarding of assets, including the prevention and detection of fraud. Auditors are responsible for forming and expressing an opinion on the statements, after obtaining sufficient appropriate evidence. The audit does not relieve directors of their duties.

Key rules to remember

ISA 200 objective: Audit objective = enhance users' confidence by giving an opinion on whether the financial statements are prepared, in all material respects, in line with the applicable framework; Learn this wording. Say 'opinion', 'material respects' and 'framework'.
Level of assurance: External audit = reasonable assurance (high, not absolute); Never say the auditor guarantees or certifies that the statements are correct.
Division of responsibility: Directors: prepare statements, keep records, run internal control, prevent and detect fraud. Auditors: obtain evidence and express an opinion; Questions often ask you to place a duty with the right party.
True and fair: True and fair view = fair presentation in all material respects under the framework (e.g. IFRS); Not the same as exactly correct or accurate.

How to solve The Statutory Audit and Its Purpose questions

Use this method for any question on the purpose of audit or on director versus auditor duties.

1Identify what is asked: the purpose, the objective, the level of assurance, or who is responsible for a named duty.
2State the definition first. Say that the audit is an independent examination giving an opinion on the financial statements.
3Link to the user: the opinion adds credibility for shareholders and other users, because of the separation of ownership and management.
4Mention reasonable assurance, and why it is not absolute (testing, sampling, judgement, inherent limits).
5For responsibilities, split clearly: directors prepare and control, auditors examine and opine.
6Apply to the scenario. Name the actual facts, such as a director claiming the auditor should find all fraud.
7Conclude with a clear sentence that answers the exact requirement.

Quickest way: Prepare / Opine test

When to use it: Use for Section A or OT case questions that ask who is responsible for something or what an audit achieves.

Ask: does this involve preparing, recording, controlling or safeguarding? If yes, it is the directors.
Ask: does this involve examining evidence and giving an opinion? If yes, it is the auditor.
For wording choices, pick 'reasonable assurance' and 'opinion' over 'guarantee', 'certify' or 'absolute'.
Reject options that say the auditor prepares the statements or prevents fraud.

Common mistakes in The Statutory Audit and Its Purpose

Saying the auditor gives a guarantee or absolute assurance that the statements are correct.
Students think an audit checks everything.
Fix: Write 'reasonable assurance'. Explain that testing, sampling and judgement mean some risk remains.
Saying the auditor is responsible for preparing the financial statements.
Auditors often help with drafting in practice, so the roles blur.
Fix: Directors always prepare and are responsible. The auditor only reports an opinion.
Stating that the auditor is responsible for preventing and detecting fraud.
Students confuse the expectation gap with the actual duty.
Fix: Directors prevent and detect fraud. The auditor must assess fraud risk and obtain reasonable assurance about material misstatement from fraud or error.
Writing that 'true and fair' means the statements are exactly accurate.
The word 'true' suggests precision.
Fix: Say that the statements are fairly presented in all material respects under the framework. Materiality matters.
Giving a generic answer on audit purpose without reference to users.
Students recall a definition but do not explain why it matters.
Fix: Add one sentence on the agency problem and how the opinion raises user confidence.

Worked examples

Example 1

The directors of Kestrel Ltd say that, because the company is audited, they need not worry about errors in the financial statements as the auditor will find them. Explain why this view is wrong. (5 marks)

Show the solution

Directors are responsible for preparing the statements and for keeping proper accounting records and internal control. The audit does not remove this duty.
The auditor's objective is to give an opinion on whether the statements are prepared, in all material respects, in line with the framework.
The assurance is reasonable, not absolute. The auditor tests samples and uses judgement rather than checking every transaction.
The auditor looks for material misstatement only. Immaterial errors may remain undetected.
Fraud and error may still go undetected, because of inherent limitations such as collusion or concealment.

Answer: The view is wrong. Directors remain responsible for the financial statements, records and controls. The auditor gives reasonable, not absolute, assurance on material misstatement through an opinion, so errors may remain after an audit.

Example 2

Which ONE of the following is a responsibility of the external auditor rather than the directors? A) Maintaining adequate accounting records B) Designing internal controls to prevent fraud C) Expressing an opinion on the financial statements D) Preparing financial statements that give a true and fair view

Show the solution

Apply the Prepare / Opine test to each option.
A is keeping records, so it belongs to the directors.
B is designing controls and preventing fraud, so it belongs to the directors.
D is preparing the statements, so it belongs to the directors.
C is giving an opinion after examining evidence, so it belongs to the auditor.

Answer: C

Exam tips

In OT questions, watch for absolute words such as 'guarantee', 'certify' and 'ensure'. They are usually wrong for an audit.
Always split duties between directors and auditors in a written answer. Use two clear headings or paragraphs to earn marks.
Use ISA 200 words: 'opinion', 'reasonable assurance', 'material respects', 'applicable framework'.
In scenario questions, quote the facts. Say what the director said or did, then correct it.
Link the purpose to users and the agency problem. A short link often earns the extra mark.

The Statutory Audit and Its Purpose in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

The Statutory Audit and Its Purpose: frequently asked questions

What is the purpose of an external audit?

The purpose is to enhance the confidence of users in the financial statements. The auditor does this by giving an independent opinion on whether they are prepared, in all material respects, in line with the applicable framework.

Does the auditor have to find all fraud?

No. The auditor must obtain reasonable assurance that the statements are free from material misstatement, whether from fraud or error. Directors are responsible for preventing and detecting fraud.

What does true and fair mean?

It means the financial statements present fairly, in all material respects, the entity's position and performance under the framework, such as IFRS. It does not mean they are perfectly accurate.

Is every company required to have a statutory audit?

No. Requirements depend on local law. Some companies, often small ones, may be exempt, while others such as large or listed companies must be audited.