INHERENT LIMITATIONS OF AUDIT
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 not expected to, and cannot, reduce audit risk to zero because of inherent limitations of audit.
Inherent limitations to an audit:
(i) The Nature of Financial Reporting
(ii) The Nature of Audit Procedures
Timeliness of Financial Reporting and the Balance between Benefit and Cost:
ABSOLUTE ASSURANCE THAT THE F.S ARE FREE FROM MM DUE TO FRAUD OR ERROR = AUDIT RISK = ZERO
The Nature of Financial Reporting:
• Judgments
• Applicable FRF
• Facts and circumstances
• F.S items requires subjective decisions / assessments
• Degree of uncertainty
• Range of acceptable interpretations/ judgments.
The Nature of Audit Procedures:
Practical and legal limitations on the auditor’s ability to obtain audit evidence.
Non-cooperation Fraud No specific legal powers of search etc.
There is the possibility that management or others may not provide, intentionally or unintentionally, the complete information that is relevant to the preparation and presentation of the financial statements or that has been requested by the auditor. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation.
Understanding that audit is distinct from investigation.
INVESTIGATION AUDIT
Critical examination of the accounts with a special purpose Is 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.
If fraud/ other deviation is suspected and it is specifically called upon to check the accounts whether fraud really exists, it takes character of investigation. Audit is never started with a pre-conceived notion about state of affairs; about wrong-doing; about some wrong having been committed.
The auditor seeks to report what he finds in normal course of examination of accounts. However, it is quite possible that sometimes investigation results from the prima facie findings of the auditor. It may happen that auditor has given some findings of serious concern. Such findings may prompt for calling an investigation.
Timeliness of Financial Reporting and the Balance between Benefit and Cost:
The matter of
(i) difficulty,
(ii) time, or
(iii) cost involved
is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost.
Other assertions / subject matters that acts as the Limitations of an Audit:
Fraud, particularly fraud involving senior management or collusion. The existence and completeness of related party relationships and transactions.
The occurrence of non-compliance with laws and regulations. Future events or conditions that may cause an entity to cease to continue as a going concern.
24 сен 2024
