Page 466 - CA Final PARAM Digital Book.

Part 1- CA Inter Based SA's

SA 200

QNO Reasonable Assurance New Course-(M22M)
0.300 TITANIUM CNO - SA200.020
Yupee (P) Ltd. got incorporated on 15th May 2021 and Mr. Harsh, the director of Yupee (P) Ltd. proposed
to Kamal & Co. on 24th May 2021, for being appointed as its statutory auditor. Mr. Kamal, the sole
proprietor of Kamal & Co., after checking the compliance with all the statutory requirements, accepted
the said offer and issued an audit engagement letter vide email to Yupee (P) Ltd. Mr. Harsh found all terms
of audit engagement to be proper but in the paragraph relating to auditor’s responsibly in the engagement
letter, as produced below:-
“We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the Institute of

Chartered Accountants of India (ICAI). Those Standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.” Certain queries raised in his mind that what does reasonable
assurance meant? Which Standard on Auditing requires the auditor to obtain such reasonable assurance?
Is it possible to give absolute assurance on such financial statements?
Assuming that you are Mr. Kamal, the newly appointed statutory auditor of Yupee (P) Ltd. Please address
to the queries of Mr. Harsh as stated above.
Answer As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the auditor is required:-
“To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework.”
Reasonable assurance is a high level of assurance and is less than absolute assurance. It is obtained
when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk
that the auditor expresses an inappropriate opinion when the financial statements are materially
misstated) to an acceptably low level.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud or
error. This is because there are inherent limitations of an audit, which result in most of the audit
evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive
rather than conclusive. The inherent limitations of an audit arise from:
(i) The nature of financial reporting;
(ii) The nature of audit procedures; and
(iii) The need for the audit to be conducted within a reasonable period of time and at a reasonable
cost.

QNO Potential Effect of Inherent Limitations of Audit New Course-(M21E)
0.500 TITANIUM CNO - SA200.050
M/s SG & Co. Chartered Accountants were appointed as Statutory Auditors of XYZ Limited for the F.Y 2020-
2021. The Company implemented internal control for prevention and early detection of any fraudulent
activity. Auditors carried out test of controls and found out no major observations. After the completion
of audit, audit report was submitted by the auditors and audited results were issued. Fraud pertaining to
the area of inventory came to light subsequently for the period covered by audit and auditors were
asked to make submission as to why audit failed to identify such fraud. Auditors submitted that because
of inherent of limitations of audit, it is not possible to get persuasive evidence of certain matters like fraud.

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