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

CA Arvind is auditing Himalaya Pharma Ltd. for the year ended 31 March. Management contends that the audit must give a guarantee that the financial statements contain no misstatement whatsoever. Which response reflects the inherent limitations of an audit under SA 200?

An audit gives reasonable assurance, a high but not absolute level. Inherent limitations such as testing on a sample basis, limits of internal control, judgement and evidence being persuasive rather than conclusive prevent a guarantee that no misstatement exists. So management's contention should be rejected.

  1. AAgree, because reasonable assurance means absolute assurance if the auditor tests every transaction
  2. BAgree, but only for companies with turnover above Rs 100 crore
  3. CDisagree; an audit provides reasonable assurance, not absolute assurance, because of limitations such as use of testing, inherent limits of internal control and persuasive rather than conclusive evidenceCorrect
  4. DDisagree; an audit provides no assurance at all and only reports on compliance with the Companies Act

Explanation

SA 200 states that reasonable assurance is a high but not absolute level of assurance. Inherent limitations include sampling, internal control limits, and evidence being persuasive rather than conclusive. The first option is wrong as it equates reasonable with absolute assurance.

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