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

While auditing Kaveri Agro Ltd, CA Meenakshi plans her work so that the risk of expressing an inappropriate opinion on materially misstated financial statements is kept at an acceptably low level. She then explains to the client that an audit can still never give absolute assurance. Which statement correctly gives the reason under the Standards on Auditing?

An audit gives reasonable assurance, not absolute assurance, because of inherent limitations. These include testing on a sample basis, limitations of internal control, the use of judgement and the fact that most audit evidence is persuasive rather than conclusive. This applies to every audit regardless of listing.

  1. AAuditors are not required to test any transactions, so assurance is limited
  2. BInherent limitations such as sampling, judgement, limitations of internal control and persuasive rather than conclusive evidence mean the auditor obtains reasonable, not absolute, assuranceCorrect
  3. CAbsolute assurance is possible only for listed companies, and Kaveri is unlisted
  4. DAbsolute assurance is not given because the auditor is not responsible for detecting fraud at all

Explanation

SA 200 states that an audit provides reasonable assurance, a high but not absolute level, because of inherent limitations: use of testing, internal control limitations, and evidence being persuasive rather than conclusive. Option D is wrong because the auditor does have responsibilities regarding fraud under SA 240. Listing status is irrelevant.

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