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

Sundaram & Co., chartered accountants, audit Kaveri Textiles Ltd. During the audit the engagement partner explains to the board that the audit gives a high but not absolute level of assurance on the financial statements. Which of the following best explains why the auditor cannot give absolute assurance?

The auditor gives reasonable, not absolute, assurance because of inherent limitations in an audit: evidence is gathered by testing, internal controls have limits, and most evidence is persuasive rather than conclusive. These features, recognised in SA 200, make a guarantee of complete accuracy impossible.

  1. AAuditors are not required to exercise professional judgement
  2. BInherent limitations such as use of testing, limitations of internal control and evidence being persuasive rather than conclusiveCorrect
  3. CThe management is solely responsible for the financial statements, so audit evidence is not needed
  4. DAudit is performed only after the year-end, so all errors are undetectable

Explanation

SA 200 states that reasonable assurance, not absolute assurance, is obtained because of inherent limitations: testing and sampling, internal control limitations, and evidence that is persuasive rather than conclusive. Option 0 is wrong because professional judgement is central to an audit. Option 2 confuses responsibility with the reason for limits, and option 3 is factually untrue.

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