Page 18 - CA Inter Audit PARAM

CA Ravi Taori

Inherent limitations of Audit- Master Answer Old Course -- (P16M/M16R/N16R/N17R/N19R/
QNO Bhaskar CNO SA200.040 SM17/SM20/SM21/N20M/M20R/SM21
200.09 /N21R/N22R/N23M/N23R)
New Course—(M24M/M24E)
The process of auditing is such that it suffers from certain limitations, i.e., the limitation which cannot be
overcome irrespective of the nature and extent of audit procedures. Explain.
OR
What are the inherent limitations of audit?
OR
The process of auditing is such that it suffers from certain limitations Discuss.
OR
SMNO Ltd requested the auditor CA P to provide for absolute assurance in respect of its ten branches
scattered in Delhi and confirm that the financial statements are free from material misstatement due to
fraud or error. Advise.
OR
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with

examples.
OR
Doing a statutory audit is full of risk’. Narrate the factors which cause the risk.
OR
JK Ltd. was having a 'Pager' manufacturing plant and looking at the demand it was of the view that the
company will grow continuously in future. But, with the introduction of mobile phones in the market, the
plant was shut down completely. The shareholders of the company were of the view that auditor failed
to perform their duty and have not informed to them about the company's inability to continue its
business, otherwise they might not have suffered the loss. List down the factors giving rise to the inherent
limitations due to which auditor cannot provide a guarantee that the financial statements are free from
material misstatement due to fraud or error.

Answer The inherent limitations of an audit arise from:
➢ The Nature of Financial Reporting

Judgement Based:
The preparation of financial statements involves judgment by management in applying the
requirements of the entity’s applicable financial reporting framework to the facts and
circumstances of the entity.
(Useful life of Fixed Assets & Residual Value / Valuation of Investments in Artistic Items Like
Painting / Costing of Inventory – FIFO, Weighted Average, Standard Costing, Retail Costing)

Uncertainty / Subjectivity / Range of Interpretations: -
In addition, many financial statement items involve subjective decisions or assessments or
a degree of uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made. Consequently, some financial statement items are subject to
an inherent level of variability which cannot be eliminated by the application of additional
auditing procedures.
(Uncertainty -- Useful life of Fixed Assets & Residual Value Subjectivity -- Valuation of
Investments in Artistic Items Like Painting Range of Interpretations -- Costing of Inventory –
FIFO, Weighted Average, Standard Costing, Retail Costing)

Estimates are most affected because of above:
Auditor should check Reasonableness of Estimates & Qualitative Aspects of Accounting
Practices (Including Management Bias) For example, this is often the case with respect to
certain accounting estimates. Nevertheless, the SAs require the auditor to give specific
consideration to whether accounting estimates are reasonable in the context of the
applicable financial reporting framework and related disclosures, and to the qualitative
aspects of the entity’s accounting practices, including indicators of possible bias in
management’s judgments.

www.auditguru.in 1.11