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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

Ananya, a CA, is auditing Himalaya Foods Ltd. The audit committee chairman asks her to confirm that her audit report provides an absolute guarantee that the financial statements are completely free of any misstatement. Which response is correct under SA 200?

Ananya should decline the request. An audit provides reasonable assurance, which is high but not absolute, because of inherent limitations such as testing on a sample basis, use of judgement and possible management collusion. Limited assurance applies to review engagements, not to statutory audits.

  1. AAgree, since the auditor must obtain absolute assurance on all financial statements
  2. BDecline, because the auditor obtains reasonable assurance, which is high but not absolute, owing to inherent limitations of an auditCorrect
  3. CAgree, but only if the company has a strong internal audit department
  4. DDecline, because the auditor gives only limited assurance, as in a review engagement

Explanation

SA 200 requires the auditor to obtain reasonable assurance that the financial statements as a whole are free from material misstatement. This is a high level of assurance but not absolute, because of inherent limitations such as sampling, judgement and management override. Limited assurance applies to review engagements, not an audit.

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