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

Sundaram & Co., Chartered Accountants, are auditing Vihaan Textiles Ltd. During planning, the engagement partner says that the audit will give the shareholders a guarantee that no fraud exists in the financial statements. Which statement correctly describes the position under the Standards on Auditing?

An audit provides reasonable assurance, which is a high but not absolute level of assurance. Inherent limitations such as testing on a sample basis, use of judgment and possible collusion prevent the auditor from guaranteeing that no fraud or error exists in the financial statements.

  1. AThe audit gives reasonable assurance, which is a high but not absolute level of assurance, because of inherent limitations of an auditCorrect
  2. BThe audit gives absolute assurance, because the auditor examines every transaction of the year
  3. CThe audit gives limited assurance, which is the same level as a review engagement
  4. DThe audit gives no assurance, because the financial statements are the responsibility of management

Explanation

SA 200 says the auditor obtains reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is high but not absolute because of inherent limitations such as sampling, judgment and possible collusion. Absolute assurance is therefore wrong, and limited assurance is the lower level given in review engagements.

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