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

Sahyadri Textiles Ltd's management asks its auditor, Mehta & Co., to confirm that the company's financial statements are 'absolutely accurate and free from every error'. Which response best reflects the nature of an audit under the Standards on Auditing?

The auditor should decline the wording because an audit provides reasonable assurance, not absolute assurance, that the financial statements are free from material misstatement. Inherent limitations such as sampling, judgement, and possible collusion mean no audit can guarantee that statements are exactly accurate or error free.

  1. AAgree, because an audit gives a guarantee that the financial statements are exactly correct
  2. BDecline the wording, because an audit gives reasonable assurance that the statements are free from material misstatement, not absolute assuranceCorrect
  3. CAgree, but only if the auditor checks every transaction of the year
  4. DDecline, because an audit provides no assurance at all and only compiles the statements

Explanation

SA 200 states that the auditor obtains reasonable assurance, a high but not absolute level, that the financial statements as a whole are free from material misstatement. Inherent limitations such as sampling, judgement and internal control limits prevent absolute assurance. Option C is wrong because even checking every transaction would not remove limitations like collusion or management override.

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