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

CA Neha is asked to audit the financial statements of Aravali Traders, a partnership firm, for which an audit is required under a state-level lender's condition and not by law. Before accepting, she notes that the management will prepare the statements and provide full access to records. Which is the correct audit consideration regarding the preconditions for an audit?

An audit can be accepted only when the financial reporting framework is acceptable and management acknowledges its responsibility for preparing the financial statements, maintaining internal control, and giving the auditor access to information. The auditor does not prepare the statements, since that is management's responsibility.

  1. AAn audit can be performed only if the statements are prepared under a framework acceptable to the auditor, and management acknowledges its responsibility for preparing them and for internal controlCorrect
  2. BAn audit needs no precondition once the fee is agreed
  3. CThe auditor must prepare the financial statements herself to ensure they are acceptable
  4. DManagement's responsibility is limited to giving access and not preparing the statements

Explanation

SA 210 requires, as preconditions, an acceptable financial reporting framework and management's acknowledgement of its responsibility for preparing the statements, for internal control and for providing access and information. Option C is wrong because auditor preparation of the statements would impair the distinction between management and auditor responsibilities.

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