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

While auditing Kaveri Agro Ltd., CA Rohan notices that the financial statements are free of misstatements in every area he tested, but he tested only a sample of transactions chosen on a basis that reflected risk. A client director asks whether the audit therefore gives a guarantee that no misstatement exists. What is the correct response in line with SA 200?

The auditor obtains reasonable assurance, which is a high but not absolute level of assurance. Inherent limitations such as sampling, judgement, internal control limits and persuasive rather than conclusive evidence mean the audit cannot guarantee that no misstatement exists. Limited assurance belongs to review engagements, not audits.

  1. AYes, because testing on a risk basis eliminates audit risk
  2. BYes, because the auditor's opinion certifies the accuracy of every figure
  3. CNo, the audit gives reasonable assurance, which is a high but not absolute level of assurance, due to inherent limitationsCorrect
  4. DNo, the audit gives limited assurance, similar to a review engagement

Explanation

SA 200 states that an audit provides reasonable assurance, a high level but not absolute, because of inherent limitations such as sampling, judgement, and the persuasive rather than conclusive nature of evidence. Limited assurance applies to review engagements, so the last option is wrong.

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