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

Sagar & Co., Chartered Accountants, audit the financial statements of Kaveri Textiles Ltd. During planning, a junior asks whether the audit gives a guarantee that no misstatement exists in the financial statements. Under SA 200, what is the correct response?

An audit provides reasonable assurance, which is high but not absolute. Inherent limitations such as testing on a sample basis, management judgments and persuasive rather than conclusive evidence prevent a guarantee. Limited assurance applies to review engagements, not to a statutory audit of financial statements.

  1. AYes, because the auditor examines every transaction and so provides absolute assurance
  2. BNo, the audit provides reasonable assurance, which is a high but not absolute level of assurance, because of inherent limitationsCorrect
  3. CNo, the audit provides limited assurance, as in a review engagement, since sampling is used
  4. DYes, provided the auditor has issued an unmodified opinion, assurance then becomes absolute

Explanation

SA 200 states that the auditor obtains reasonable assurance, a high but not absolute level, that the financial statements are free from material misstatement. Inherent limitations such as sampling, judgment and the nature of financial reporting prevent absolute assurance. Limited assurance is the level in review engagements, so option C is wrong.

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