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

During the audit of Ganga Pharma Ltd, the auditor performs all planned procedures and obtains evidence, yet the audit report states the opinion gives reasonable, not absolute, assurance. A client director asks why. Which is the most accurate reason under SA 200?

Absolute assurance is impossible because of inherent limitations: testing on a sample basis, limitations of internal control, judgement in financial reporting and evidence that is persuasive rather than conclusive. Hence the auditor provides reasonable assurance, a high but not absolute level, as explained in SA 200.

  1. ABecause the auditor is permitted to examine only a small percentage of the transactions by law
  2. BBecause inherent limitations such as testing on a sample basis, limitations of internal control, and evidence being persuasive rather than conclusive prevent absolute assuranceCorrect
  3. CBecause the auditor's fees are fixed so the work is limited
  4. DBecause auditors are not required to assess risks of material misstatement

Explanation

SA 200 explains that inherent limitations arise from the nature of financial reporting, the use of testing, internal control limitations and the fact that most evidence is persuasive rather than conclusive. Hence only reasonable assurance, a high but not absolute level, can be given. Fees or an alleged legal cap on testing are not the reasons, and risk assessment is required.

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