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

Sundaram & Co., Chartered Accountants, audit the financial statements of Kaveri Textiles Ltd. During the audit, the partner explains to the board that the audit gives a high but not absolute level of assurance on the financial statements. Which limitation of audit is most directly the reason absolute assurance cannot be given?

Absolute assurance is impossible because audits are done on a test basis and most audit evidence is persuasive rather than conclusive. These inherent limitations, along with internal control limits and judgement, mean the auditor can give only reasonable assurance, not a guarantee of correctness.

  1. AThe auditor is appointed by the shareholders and not by the management
  2. BAudit is performed on a test basis and much audit evidence is persuasive rather than conclusiveCorrect
  3. CThe auditor's report is issued only after the annual general meeting
  4. DThe auditor must follow the Standards on Auditing

Explanation

Inherent limitations such as testing on a sample basis, limits of internal control, and the fact that most evidence is persuasive rather than conclusive mean only reasonable assurance is possible. Appointment by shareholders and following SAs do not limit assurance; they support independence and quality.

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