Compliance Management, Audit and Due Diligence · Audit Principles and Techniques

Basic Principles Governing an Audit under SA 200

Updated 11 October 2026 · Fact-checked

The basic principles governing an audit are the ethical principles in SA 200: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Add independence and professional skepticism. Together they let the auditor get reasonable assurance that the financial statements are free from material misstatement and report on them.

Understand Basic Principles Governing an Audit

An audit is only as credible as the person doing it. SA 200 therefore starts with the auditor's conduct. It sets out the overall objectives of the auditor and the ethical and professional attitude needed to meet them.

The overall objectives (para 11) are two. First, to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. This lets the auditor express an opinion on whether they are prepared, in all material respects, in accordance with the applicable financial reporting framework. Second, to report on the financial statements and communicate as required by the SAs, in line with the findings.

The Code of Ethics sets five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Integrity means being straightforward and honest. Objectivity means not letting bias, conflict of interest or the influence of others override judgment. Competence and due care mean having the skill for the work and applying it carefully. Confidentiality means not disclosing client information without proper authority or a legal or professional duty. Professional behaviour means complying with law and avoiding conduct that discredits the profession.

Independence is required in the public interest. The Code describes it as having two parts: independence of mind and independence in appearance. It protects the auditor's ability to form an opinion without being affected by influences that compromise it. It supports integrity, objectivity and skepticism. Law adds to the Code. SA 200 refers to section 141(3) of the Companies Act, 2013 (disqualifications for appointment as auditor) and section 144 (prohibited non-audit services).

Professional skepticism (para 15) means the auditor plans and performs the audit recognising that circumstances may exist that cause material misstatement. It is a questioning attitude. A belief that management is honest does not relieve the auditor of skepticism or allow the auditor to accept less-than-persuasive evidence (para A22). It reduces the risk of overlooking unusual circumstances, over-generalising from observations, and using inappropriate assumptions in setting the nature, timing and extent of procedures (para A19).

Key rules to remember

Overall objectives of the auditor (SA 200, para 11): (a) Reasonable assurance that financial statements as a whole are free from material misstatement (fraud or error) → opinion; (b) Report and communicate as required by SAs; Reasonable assurance is a high level of assurance, not absolute assurance.
Fundamental ethical principles: Integrity + Objectivity + Professional competence and due care + Confidentiality + Professional behaviour; Five principles in the Code of Ethics. Independence is a separate requirement for audit engagements.
Independence: Independence = independence of mind + independence in appearance; Section 141(3) covers disqualifications; section 144 lists prohibited non-audit services.
Professional skepticism (para 15): Plan and perform the audit recognising that financial statements may be materially misstated; Honest-management belief does not justify accepting less-than-persuasive evidence (A22).
Risks reduced by skepticism (A19): Overlooking unusual circumstances; over-generalising; inappropriate assumptions on nature, timing, extent; Learn all three; examiners ask for them.

How to solve Basic Principles Governing an Audit questions

Principle questions are case-based. Spot which principle is under pressure, then apply it to the facts.

1Read the facts and list what the auditor did or was asked to do.
2Match each fact to a principle: honesty (integrity), bias or conflict (objectivity), relationship or service (independence), disclosure (confidentiality), skill or care (competence), or acceptance of weak evidence (skepticism).
3State the principle or SA 200 provision in one or two lines, using its own words.
4Apply it: explain why the fact breaches it or how it is satisfied.
5Add the legal link where relevant, such as section 141(3) for disqualification or section 144 for prohibited services.
6Conclude clearly and give the practical step, such as declining the service, adding safeguards or collecting more evidence.

Quickest way: Principle-spotting grid

When to use it: Use it for short case questions with limited time.

Write the five principles plus independence and skepticism as a one-line list.
Tick the one the facts point to.
Write: rule, facts, conclusion, in three short paragraphs.
Close with the remedy: decline, safeguard, or obtain more persuasive evidence.

Common mistakes in Basic Principles Governing an Audit

Listing independence as one of the five fundamental principles.
Independence is taught alongside the principles and feels like part of the list.
Fix: SA 200 lists integrity, objectivity, competence and due care, confidentiality and professional behaviour. Treat independence as a separate requirement that supports them.
Saying the auditor gives absolute assurance.
Students confuse an audit with a guarantee.
Fix: The objective is reasonable assurance about the financial statements as a whole, not absolute assurance.
Treating independence as only a matter of mind.
The word suggests a mental state.
Fix: State both limbs: independence of mind and independence in appearance.
Relaxing skepticism because management has been honest in the past.
Past experience builds trust.
Fix: Para A22 says that belief does not relieve the auditor of skepticism or allow less-than-persuasive evidence.
Confusing skepticism with suspicion or distrust.
Both involve doubt.
Fix: Describe it as a questioning attitude that stays alert to possible misstatement and evaluates evidence critically.

Worked examples

Example 1

The auditor of Sundaram Textiles Ltd also keeps its books of account and has done so for years. Management says the auditor knows the business best. Examine the issue under the basic principles of audit.

Show the solution

Principle involved: independence, supported by objectivity.
Independence has two parts: independence of mind and independence in appearance. It protects the opinion from influences that could compromise it.
Law adds to the Code. Section 144 of the Companies Act, 2013 lists prohibited non-audit services, and section 141(3) lays down disqualifications for appointment as auditor. The aim is to keep the auditor independent of the company.
Application: an auditor who keeps the books would be reviewing their own work. This creates a self-review threat to objectivity and weakens independence in appearance. Familiarity with the business does not cure this.
Conclusion: the auditor should check whether the service falls within the prohibited services. If it does, the auditor must not provide it. Otherwise the auditor should not continue as auditor.

Answer: The arrangement threatens objectivity and independence. The auditor should not combine both roles where the service is prohibited under section 144, and must preserve independence of mind and in appearance.

Example 2

During the audit of Bharat Foods Ltd, the auditor has always found the managing director honest. This year, inventory records show unusual round-sum adjustments near year-end. The auditor accepts the MD's verbal explanation. Comment.

Show the solution

Principle involved: professional skepticism (SA 200, para 15).
Rule: the auditor plans and performs the audit recognising that circumstances may exist that cause material misstatement.
Para A22: the auditor need not disregard past experience of management's honesty. But a belief in their honesty does not relieve the auditor of skepticism or allow less-than-persuasive evidence.
Application: the round-sum year-end adjustments are an unusual circumstance. A verbal explanation is weak evidence. Accepting it risks overlooking unusual circumstances (A19).
Conclusion: the auditor should obtain corroborating evidence, such as supporting documents and records, and reassess risk and procedures.

Answer: The auditor was wrong to accept a verbal explanation. Professional skepticism requires persuasive evidence for the unusual adjustments, despite management's past honesty.

Exam tips

Quote SA 200 para 11 objectives and para 15 skepticism almost word for word; examiners reward exact conditions.
In case questions, name the principle first, then apply the facts. Do not just list all principles.
Always mention both limbs of independence and, where relevant, sections 141(3) and 144.
For skepticism answers, add the three risks it reduces (para A19) and the para A22 point on honest management.
Finish with a practical step: decline the service, add safeguards, or obtain further evidence.

Practice questions from Audit Principles and Techniques

Basic Principles Governing an Audit in other exams

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

CA IntermediateSA 200 and Basic Principles Governing an Audit

Basic Principles Governing an Audit: frequently asked questions

What are the fundamental principles of professional ethics for an auditor under SA 200?

They are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. They come from the Code of Ethics. Independence is required separately for audit engagements.

What is professional skepticism in audit?

It is the attitude of planning and performing the audit recognising that the financial statements may be materially misstated. It means questioning and critically assessing evidence. It stays even if management has been honest before.

What are the overall objectives of the auditor under SA 200?

The auditor obtains reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and expresses an opinion on them. The auditor then reports and communicates as required by the SAs.

What is the difference between independence of mind and independence in appearance?

Independence of mind is the state of mind that lets the auditor form a conclusion without being affected by compromising influences. Independence in appearance means avoiding facts and circumstances that would lead a reasonable observer to doubt the auditor's integrity or objectivity.