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

CA Rohan is auditing Pragati Steels Ltd. The company's accountant has estimated the provision for warranty at a figure Rohan finds slightly aggressive, but no other evidence contradicts it. Rohan is considering how to approach the area. Which response best reflects professional scepticism and professional judgment as required by SA 200?

The auditor should keep a questioning mind, critically assess the assumptions and evidence behind the warranty estimate, and apply professional judgment to its reasonableness. Blind acceptance lacks scepticism, and replacing it with his own figure would usurp management's responsibility for the financial statements.

  1. AAccept the estimate fully, because management has more knowledge of the business than the auditor
  2. BReject the estimate and substitute his own figure in the financial statements
  3. CPlan and perform the audit with a questioning mind, critically assess the basis of the estimate and evidence, and exercise judgment on its reasonablenessCorrect
  4. DIgnore the estimate because it is below materiality for the financial statements as a whole without evaluating its nature

Explanation

SA 200 requires the auditor to plan and perform the audit with professional scepticism, recognising that circumstances may cause financial statements to be materially misstated, and to critically assess audit evidence. Professional judgment is used to decide on the reasonableness of such estimates. Accepting the estimate without challenge fails scepticism, and substituting the auditor's own figure would amount to preparing the financial statements, which is management's role.

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