SA 200 – Overall Objectives of the Independent Auditor and Conduct of an Audit in accordance with SA

Question 1

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 (!CAI). 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 1

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:
• The nature of financial reporting;
• The nature of audit procedures; and
• The need for the audit to be conducted within a reasonable period of time and at a reasonable
cost.