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

While auditing Kaveri Agro Ltd, CA Meera finds that the audit evidence obtained is persuasive in indicating the financial statements are free of material misstatement, but she knows some residual risk remains. A director asks whether the audit gives a guarantee of accuracy. What is the most appropriate response?

An audit provides reasonable assurance, which is a high level but not a guarantee. Inherent limitations such as sampling, judgement, control limitations and the persuasive nature of evidence mean that some risk of undetected material misstatement always remains.

  1. AYes, an audit that follows SAs gives absolute assurance that the statements are accurate to the last rupee
  2. BNo, an audit gives only reasonable assurance, which is high but not absolute, due to inherent limitations such as sampling, judgement and possible collusionCorrect
  3. CNo, an audit gives limited assurance, as in a review engagement of interim results
  4. DYes, but only if the auditor has tested every transaction of the year

Explanation

SA 200 states that the auditor obtains reasonable assurance, a high level but not absolute, because of inherent limitations such as testing, judgement, internal control limits and persuasive rather than conclusive evidence. Option C confuses the audit with a review engagement, which gives limited assurance. Options A and D wrongly claim absolute assurance.

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