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CMA Intermediate · Corporate Accounting and Auditing · Nature, Scope, Objectives and Significance of Auditing

An auditor of Kaveri Textiles Ltd. discovers during the audit that a material misstatement in the financial statements arose due to management override of controls, which went undetected despite the audit being planned and performed in accordance with the Standards on Auditing. Which statement best describes the auditor's position?

The auditor is not necessarily negligent. An audit provides reasonable, not absolute, assurance, and inherent limitations such as management override, collusion and sampling can leave a material misstatement undetected even when the audit is planned and performed in accordance with the Standards on Auditing.

  1. AThe auditor is not necessarily negligent, because the audit gives reasonable assurance and has inherent limitationsCorrect
  2. BThe auditor is automatically liable because the audit objective is to guarantee accuracy
  3. CThe auditor is liable because detecting all frauds is a primary duty
  4. DThe audit is invalid because the misstatement was not detected

Explanation

An audit provides reasonable assurance, not absolute. Inherent limitations, such as collusion, management override and the use of judgement and sampling, mean a properly planned and performed audit may still miss a material misstatement. Therefore the auditor is not automatically negligent; the guarantee idea is wrong.

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