1

Chapter-1 Nature, objective, and Scope of Audit

CHAPTER- 1: NATURE, OBJECTIVE

AND SCOPE OF AUDIT
MULTIPLE-CHOICE QUESTIONS
Case Based MCQ -1 (ICAI Study Mat Question)
Rohit, Gurpreet, Ali and Goreti are friends since their school days based in Mumbai. They
have cleared CA foundation exams in the same attempt and now plan to appear for CA
Intermediate exams. All of them are avid news listeners and regularly keep track of business
news even on social media.
They are trying to understand new subjects including auditing. Rohit, Gurpreet and Ali have
also started attending Live Coaching Classes (LCC) being conducted by Board of studies
of ICAI. Goreti has not been able to join Live Coaching Classes yet as she was away on a
holiday with her parents. However, she plans to catch it up with her friends very soon. Ali
had also joined the classes but he had skipped some lectures.
During one informal get together, their discussions centred around new subject of auditing.
They discussed many things regarding its nature, scope, benefits and other general
practical issues. Goreti was regular in keeping track of audited results of companies being
published in leading newspapers. Her view was that audited financial statements of
companies give 100% guarantee to different stake holders. It is the main reason behind
so much reliance upon auditing. But she could not understand why wrong doings in
financial matters are being discovered after many years have gone by.
Ali also concurred with her view and added that when financial statements are audited, each
and every transaction appearing in books of accounts is verified. However, he could not give
clarity to Goreti.
Gurpreet was of the opinion that audit was conducted on the basis of sample checking. He
was also of the view that audited financial statements are not a guarantee against probable
wrong doings in financial matters of the companies.
Not to be left behind, Rohit also jumped in the fray. He supported Gurpreet and also
added something of his own.

Based on the above, answer the followings questions

1. Gurpreet was of the view that audited financial statements are not a
guarantee against probable wrong doings in financial matters of
companies. What kind of assurance does audit of financial statements
provide?

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(a) It provides reasonable assurance meaning a moderate level of assurance.

(b) It provides reasonable assurance meaning a low level of assurance.
(c) It provides reasonable assurance meaning a high level of assurance.
(d) It provides reasonable assurance meaning an absolute level of assurance.
2. Rohit added that auditor can force an employee of the company to provide him
required information and documents. Can he do so?
(a) Yes, he can do so. It is necessary to obtain audit evidence.
(b) Yes, he can do so. There are express rights given to him in this respect.
(c) No, he cannot do so. He can only request for providing him with necessary
information and documents. But it cannot be forced by him.
(d) No, he cannot do so. He has no right of seeking information and documents.
Therefore, question of forcing does not arise.
3. Ali had listened in one of the classes that audit covers all aspects of an entity and
concluded that each and every transaction of entity is verified by auditor. Goreti also
seemed to be in agreement with him but she was of the view that besides this, it
also meant that audit should be so organized to cover all areas of an entity. Which
of following statements is appropriate in this regard?
(a) Only view of Ali is correct.
(b) Only view of Goreti is correct.
(c) Views of both Ali and Goreti are correct.
(d) Views of both Ali and Goreti are incorrect.
4. All of them also discussed about benefits of auditing. Which of the following is not a
likely benefit of auditing?
(a) Since auditing is connected to future events, audited information
can be easily relied upon by users.
(b) Errors or frauds may be discovered during audit.
(c) Government authorities can make use of audited accounts for
different purposes.
(d) It can help in bringing out deficiencies in maintenance of
financial records.
5. Goreti told her friends that she had read a news report about how a
company had misled its auditors by producing some fabricated
documents. Which of following statements seems to be appropriate in
this regard?
(a) It was wrong on the part of auditor to rely upon fabricated
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Chapter-1 Nature, objective, and Scope of Audit

documents. He must have discovered it as the same falls within the

scope of his duties.
(b) Although it was wrong on the part of auditor to rely upon
fabricated documents, he cannot do anything in the matter. He has
to report on the basis of documents provided to him. He has no
duty in this regard.
(c) Auditor has to conduct audit by exercising professional skill. But
he is not an expert in discovering genuineness of documents.
Hence, management consisting of dishonest persons may have led
him to rely upon fabricated documents deliberately.
(d) Management cannot mislead auditor due to high level of
knowledge and expertise possessed by him. The above is an outlier
case-one of the rare odd cases.

Case Based MCQ-2 (ICAI Study Mat Question)

Me and You Private Limited has been newly incorporated. The plant of the company has
recently started production with the help of funds provided by a bank for purchase and
installation of machinery. Further, the company is also utilizing working capital credit
facilities from the same bank for meeting its day to day working capital requirements like
for purchase of raw materials, labour payment etc. However, just within six months of its
operations, the management feels that working capital funds are inadequate and situation
is creating liquidity issues in the company.
The management of the company has approached its bankers and requested for
enhancement in working capital credit facilities. The bank manager is insisting upon
financial statements of the company for half year along with report providing assurance in
this respect duly signed by Chartered Accountant as audit is far away. It also requires
projected financial statements for coming years along with a report from CA providing
assurance regarding these projections to consider request of management.
The management approaches CA P, who has qualified recently and started practising.
Reports providing assurance for half yearly results and projected financial statements
are sought from CA P. The Management provides necessary information and records to him
in this regard.
Assume, in above case, the company only provides trial balance, financial statements in
draft/preliminary form along with accompanying records for the relevant half year to CA
P and requests him to provide duly signed financial statements with a report for
mutually agreed professional fees.
Based on the above, answer the followings questions

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6. The management of company has engaged CA P to issue a duly signed

report for half year. Which of the following standards, if any, issued by
ICAI are relevant for CA P?
(a) Standards on Review Engagements
(b) Standards on Auditing
(c) Standards on Related Services

(d) There are no standards for issuing report in such situation.

7. Which of the following statements is MOST APRROPRIATE in given case
situation?
(a) CA P can assist management in preparation of financial
statements of the company. However, issue of a report in such a
case is outside the scope of work.
(b) CA P can assist management in preparation of financial
statements of the company and he can issue an audit report.
(c) CA P can assist management in preparation of financial
statements of the company and he can issue a compilation
report in this respect.

(d) The responsibility of preparation of financial statement is of

company’s management. CA P cannot assist management in
preparation of financial statements of the company. However, he
can issue a review report.
8. In the above said scenario for issuance of signed financial statements for
half year by CA P, as discussed in last para of Case Study, identify the
MOST APPROPRIATE statement: -
(a) Standard on Quality control (SQC 1) is not applicable as CA P
cannot issue audit report.
(b) Standard on Quality Control (SQC 1) is not applicable as CA P
cannot issue review report.
(c) Standard on Quality Control (SQC 1) is applicable in such
type of engagement.
(d) Standard on Quality Control (SQC 1) is not applicable as CA P is
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Chapter-1 Nature, objective, and Scope of Audit

barred from issuing any report in such type of engagement.

9. The banker of company has also requested for projected financial
statements for coming years along with a report from CA regarding these
projections to consider request of management. Which of the following
standards issued by ICAI are relevant for CA P in such a situation, if any?
(a) Standards on Review Engagements
(b) There are no standards for issuing such type of reports.
(c) Standards on Related Services
(d) Standards on Assurance Engagements
10. Suppose CA P also accepts work of issuing projected financial
statements with a report to be signed by him. The management has
projected turnover of Rs.100 core for the next year, Rs. 150 crore &
Rs.200 crore for following years respectively as compared to present
turnover of Rs. 25 crore in current half year. Identify the MOST
APPROPRIATE statement in this situation: -
(a) CA P has to satisfy himself regarding arithmetical accuracy of
projected data.
(b) CA P has to satisfy himself regarding reasonableness of
assumptions underlying projected turnover and its consistency
with actuals.

(c) CA P has to satisfy himself regarding arithmetical accuracy of data

along with its proper presentation to banker.
(d) CA P has to satisfy himself regarding reasonableness of
assumptions underlying projected turnover, its consistency with
actuals, disclosure and presentation.
11. Which of the following is not an advantage of audit?
(a) It provides high quality financial information.
(b) It acts as a moral check on employees.

(c) It enhances risk of management bias.

(d) It helps in safeguarding interests of shareholders.
12. Which of the following is NOT TRUE about an assurance engagement?
(a) It relates to providing assurance about historical financial
information only.

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(b) The practitioner obtains sufficient appropriate evidence.

(c) There is some information to be examined by practitioner.
(d) A written assurance report in appropriate form is issued by practitioner.
13. Which of the following is TRUE about Engagement Standards?
(a) Engagement standards ensure proper rights to practitioners in
course of performance of their duties.
(b) Engagement standards ensure preparation and presentation of
financial statements in a standardized manner.
(c) Engagement standards ensure uniformity by practitioners in
course of performance of their duties.
(d) Engagement standards ensure savings in resources of clients.
14. Consider following statements in relation to “Limited assurance engagement”:-
Statement I - It involves obtaining sufficient appropriate evidence to
draw reasonable conclusions.
Statement II - Review of interim financial information of a company
is an example of limited assurance engagement.
(a) Statement I is correct. Statement II is incorrect.
(b) Both Statements I and II are correct.
(c) Both Statements I and II are incorrect.
(d) Statement I is incorrect. Statement II is correct.
15. Which of the following is TRUE about Standards on auditing?
(a) These deal mainly with voluntary responsibilities of auditors.
(b) These deal mainly with mandatory responsibilities of auditors.
(c) Their sole purpose is to help government authorities in
augmenting revenues.
(d) These deal mainly in carrying out audit according to legal provisions.
16. Financial Statements are usually referred as:
(a) Special Purpose Financial Statements
(b) General Purpose Financial Statements
(c) Specific Statements
(d) Annual Report
17. Financial Statements includes:
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Chapter-1 Nature, objective, and Scope of Audit

(a) Profit and Loss Account,

(b) Balance Sheet including Notes on Accounts
(c) Cash Flow Statement
(d) All of the above
18. Financial Statements are to be prepared by the:
(a) Management
(b) Shareholders
(c) Accountants
(d) None of the above
19. Financial Statements are used:
(a) Shareholders
(b) Creditors
(c) Government
(d) All of the above
20. The word "Auditing" has been derived from Latin word "audiere" which means
(a) To Hear
(b) To Verify
(c) To Examine
(d) To Identify
21. The persons with responsibility for overseeing the strategic direction of
the entity andobligations related to the accountability of the entity are :
(a) management
(b) Those charged with governance
(c) audit committee
(d) board of directors

22. As per SA-200 “Overall Objectives of the Independent Auditor”, in

conducting an auditof financial statements, the overall objectives of the
auditor are:
(a) To obtain reasonable assurance
(b) To report on the financial statements

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(c) Both (a)and (b) above

(d) to obtain absolute assurance.
23. An employee of Fruits and Vegetables Limited was of the opinion that auditor of a
company is required to express an opinion. On which one of the following the auditor
of a company is required to express an opinion:
(a) Only Balance Sheet of the Company.
(b) Financial Statements of the Company.
(c) Only Profit and Loss Account of the Company.
(d) Only Cash Flow Statement of the Company.
24. The auditor of Delicious Sweets Limited was of the opinion that objective
of audit of financial statements of a company is to provide reasonable
assurance that financial statements of that company are free from
misstatements. Which type of misstatements are mentioned by auditor
of Delicious Sweets Limited:
(a) Simple.
(b) Material.
(c) Easy.
(d) Competent
25. As explained in SA 200, “Overall Objectives of the Independent Auditor
and the Conductof an Audit in Accordance with Standards on Auditing”,
i s 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.
(a) absolute assurance
(b) limited assurance
(c) reasonable assurance
(d) reasonable or absolute assurance

Case Based MCQ-3 (ICAI Study Booklet Question)

Mr Laxman is appointed as statutory auditor of Best Limited for the Financial Year ended
31st March, 2022. During the course of audit, it was found that few doubtful transactions
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Chapter-1 Nature, objective, and Scope of Audit

had been committed by finance manager who retired in March, 2022. The fraud was
going on since last 4-5 years and the total amount misappropriated is approximately
Rs.75 lacs. Balance sheet of Best Ltd. reflected a cash balance of Rs. 7 crores. The company
has taken a loan of Rs. 2 crores from the bank despite of the huge cash balance with the
company. Also, Companies Act bestows some duties on auditors to report matters to
Central Government in case of fraud. On the basis of above facts answer below questions
in relation to Mr Laxman’s role and duties while conducting statutory audit of Best
Limited.

26. Mr Laxman shall obtain that the financial statements are free from fraud and
misstatement.
(a) Absolute assurance
(b) Reasonable assurance
(c) Management’s assurance
(d) Chief Financial Officer assurance
27. Owing to the limitations of an audit, there is risk
that some material misstatements of the financial statements will not be detected,
even though the audit is properly planned and performed in accordance with the SAs.
(a) Inherent, unavoidable
(b) Inherit, complete
(c) Management, unavoidable
(d) Regulatory, control

Answer of the above questions

1.(c) 2.(c) 3.(d) 4.(a) 5.(c) 6.(c) 7.(c) 8.(c) 9.(d) 10.(d)

11.(c) 12.(a) 13.(c) 14.(d) 15.(b) 16.(b) 17.(d) 18.(a) 19.(d) 20.(a)

21.(b) 22.(c) 23.(b) 24.(b) 25.(c) 26.(b) 27.(a)

CORRECT INCORRECT
Q1. The basic objective of audit does not change with reference to nature, size or
form of an entity.
Ans 1. Correct

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An audit is an independent examination of financial information of any entity, whether profit

oriented or not, and irrespective of its size or legal form, when such an examination is conducted
with a view to expressing an opinion thereon. It is clear that the basic objective of auditing, i.e.,
expression of opinion on financial statements does not change with reference to nature, size or
form of an entity.

Q2. The purpose of an audit is to enhance the degree of confidence of intended users in
the financial statements.
Ans 2. Correct
As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the purpose of an audit is to enhance the degree of
confidence of intended users in the financial statements. This is achieved by the expression of
an opinion by the auditor on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework.

Q3. 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.
Ans 3. Correct
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 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.

Q4. One of the responsibilities of an auditor, is to ensure that entries in the books of account
are adequately supported by sufficient and appropriate evidence.
Ans 4. Correct
An auditor should ensure financial statements would not mislead anybody by ensuring that
entries in the books of account are adequately supported by sufficient and appropriate evidence.

Q5. Audit of financial statements is not based on historical financial information, contrary to
the statement suggesting that it is logical for the audit to be grounded in historical financial
data?
Ans.5 Incorrect
Financial statements are prepared on the basis of historical financial information, it is logical that audit
of financial statements is also based upon such historical financial information. Therefore, audit of
financial statements is based upon historical financial information.

Q6. Audit is universally and legally mandatory for all entities, including non-corporate entities,
contrary to the statement suggesting that some entities, like companies, may be required to
undergo audits under law, while others, especially non-corporate entities, may be subject to
compulsory audits under tax laws?
Ans.6 Incorrect
It is not necessary that audit is always legally mandatory. There are entities like companies who are
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Chapter-1 Nature, objective, and Scope of Audit

compulsorily required to get their accounts audited under law. Even non-corporate entities may be
compulsorily requiring audit of their accounts under tax laws.
Audit is not always mandatory. Many entities may get their accounts audited voluntarily because of
benefits from the process of audit. Many such concerns have their internal rules requiring audit
due to advantages flowing from an audit.

Q7. Audit is a limited assurance engagement. It provides absolute assurance. However, review
is a reasonable assurance engagement.
Ans.7 Incorrect
Audit is a reasonable assurance engagement. It provides reasonable assurance. However, review is a
limited assurance engagement. It provides lower level of assurance than audit. Review involves
fewer procedures and gathers sufficient appropriate evidence on the basis of which limited
conclusions can be drawn up.

Q8. Standards on Assurance engagements (SAEs) apply in agreed upon procedures to

information, compilation engagements and other related service engagements.
Ans.8 Incorrect
Standards on Assurance engagements (SAEs) which apply in assurance engagements other than
audits and review of historical financial information.
Standards on Related Services (SRSs) which apply in agreed upon procedures to information,
compilation engagements and other related service engagements.

Q9. SA 200 have been issued to establish standards and provide guidance regarding a firm’s
responsibilities for its system of quality control for the conduct of audit and review of historical
financial information and for other assurance and related service engagements.
Ans 9. Incorrect
SQC 1 has been issued to establish standards and provide guidance regarding a firm’s
responsibilities for its system of quality control for the conduct of audit and review of historical
financial information and for other assurance and related service engagements.

Q10. As per SA 200 the auditor can reduce audit risk to zero.
Ans 10. Incorrect
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 there are inherent limitations of an audit. The inherent limitations of an audit
arise from:
The Nature of Financial Reporting: The preparation of financial statements involves judgment by
management.
The Nature of Audit Procedures: There are practical and legal limitations on the
auditor’s ability to obtain audit evidence
Not in the nature of Investigation: An audit is not an official investigation into
alleged wrongdoing.
Timeliness of financial reporting and decrease in relevance of information over time:
Relevance of information, and thereby its value, tends to diminish over time, and there is a balance

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to be struck between the reliability of information and its cost.

Future events: Future events or conditions may affect an entity adversely. Adverse events may
seriously affect ability of an entity to continue its Business.

Q11. Preparation and presentation of financial statements of an entity is responsibility of

auditor of entity and to expresses an opinion on financial statements by means of written
audit report.
Ans11. Incorrect
Preparation and presentation of financial statements of an entity is responsibility of management of
entity. The auditor expresses an opinion on financial statements by means of written audit
report.

DESCRIPTIVE QUESTIONS
Q.1 “An audit is independent examination of financial information of any entity, whether profit
oriented or not, and irrespective of its size or legal form, when such an examination is conducted
with a view to expressing an opinion thereon.”
Ans1. An Audit is independent examination of Financial Information of any entity, whether profit oriented
or not, and irrespective of its size or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.
This definition has the following implications:
(a) Audit is independent examination.
(b) Examination is of financial information when the objective is to express an opinion.
(c) Requirement of audit applies in case of every entity, whether profit oriented or not (Commercial entities
or NGOs), whatever is the business size of entity (Small Size entity or large size entity), whatever is the legal
form of the entity (proprietor, partnership or company).
Q.2 The person conducting audit should take care to ensure that financial statements would not
mislead anybody. Explain stating clearly the meaning of Auditing.
Ans 2. Auditor engaged to perform the task of performing audit need to ensure the following:

• The accounts have been drawn up with reference to entries in the books of account
• The entries in the books of account are adequately supported by sufficient and
appropriate evidence
• None of the entries in the books of account has been omitted in the process of
compilation
• The information conveyed by the statements is clear and unambiguous
• The financial statement amounts are properly classified, described and disclosed in
conformity with accounting standards and
• The statement of accounts presents a true and fair picture of the operational
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Chapter-1 Nature, objective, and Scope of Audit

results and of the assets and liabilities

Q.3. : RAG is proprietorship firm engaged in the manufacturing of textile and handloom products.
It sells its finished products both in the domestic as well as in the international market. The
company is making total turnover of ₹ 30 crores. It has also availed cash credit limit of ₹ 5
crores from Canara Bank. In the year 2021-22, proprietor of the firm is worried about the
financial position of the company and is under the impression that since he is out of India,
therefore firm might run into losses. He approaches a CA about advantages of getting his
accounts audited throughout the year so that he may not suffer due to accounting weaknesses.
Advise regarding advantages of getting accounts audited.
Ans.3 Benefits of the Audit are

• Audited accounts provide high quality information. It gives confidence to users that
information on which they are relying is qualitative and it is the outcome of an exercise
carried out by following Auditing Standards recognized globally
• In case of companies, shareholders may or may not be involved in daily affairs of the
company. The financial statements are prepared by management consisting of directors.
As shareholders are owners of the company, they need an independent mechanism so that
financial information is qualitative and reliable. Hence, their interest is safeguarded by
an audit.
• An audit acts as a moral check on employees from committing frauds for the fear of being
discovered by audit.
• Audited financial statements are helpful to government authorities for determining
tax liabilities.
• Audited financial statements can be relied upon by lenders, bankers for making their credit
decisions i.e. whether to lend or not to lend to a particular entity.
• An audit may also detect fraud or error or both.
• An audit reviews existence and operations of various controls operating in any entity.
Hence, it is useful at pointing out deficiencies.

Q.4.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 tofraud or error. This is because there are inherent limitations of an audit. Explain.
Ans.4. The process of audit suffers from certain inbuilt limitations due to which an auditor cannot
obtain an absolute assurance that financial statements are free from misstatement due to fraud or
error.
These fundamental limitations arise due to the following factors: -
1. Nature of financial reporting : Preparation of financial statements involves making many judgments
by management. These judgments may involve subjective decisions or a degree of uncertainty.
Therefore, auditor may not be able to obtain absolute assurance that financial statements are free from

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material misstatements due to frauds or errors. One of the premises for conducting an audit is that
management acknowledges its responsibility of preparation of financial statements in accordance with
applicable financial reporting framework and for devising suitable internal controls. However, such
controls may not have operated to produce reliable financial information due to their own limitations.
Management of a company has devised a control that all purchase bills should reflect stamp and
signatures of an authorised person in “Goods Receiving Section” of the company stating the date and
time of receiving goods in premises. It is an example of internal control devised by the company to
ensure that only those purchase bills are produced for payment for which goods have been actually
received.
2. Nature of Audit Procedures : The auditor carries out his work by obtaining audit evidence through
performance of audit procedures. However, there are practical and legal limitations on ability of
auditor to obtain audit evidence. Management may not provide complete information as requested by
auditor. There is no way by which auditor can force management to provide complete information as
may be requested by auditor. In case he is not provided with required information, he can only report.
It is an example of legal limitation on auditor’s ability to obtain audit evidence. The management may
consist of dishonest and unscrupulous people and may be, itself, involved in fraud. It may be engaged
in concealing fraud by designing sophisticated and carefully organized schemes which may be hard to
detect by the auditor. It may produce fabricated documents before auditor to lead him to believe that
audit evidence is valid. However, in reality, such documents could be fake or non-genuine. An auditor
is not an expert in authentication of documents. Therefore, he may be led to accept invalid audit
evidence on the basis of unauthentic documents. It is quite possible that entity may have entered into
some transactions with related parties. Such transactions may be only paper transactions and may not
have actually occurred. The auditor may not be aware of such related party relationships or audit
procedures may not be able to detect probable wrong doings in such transactions.
3. Not in nature of investigation : Audit is not an official investigation. Hence, auditor cannot obtain
absolute assurance that financial statements are free from material misstatements due to frauds or
errors.
4. Timeliness of financial reporting and decrease in relevance of information over time : The
relevance of information decreases over time and auditor cannot verify each and every matter.
Therefore, a balance has to be struck between reliability of information and cost of obtaining it.
5. Future Events : Future events or conditions may affect an entity adversely. Adverse events may
seriously affect ability of an entity to continue its business. The business may cease to exist in future
due to change in market conditions, emergence of new business models or products or due to onset of
some adverse events.

Q.5. DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments for the
financial year 2022-23. After the completion of the audit, there were found material misstatements
due to fraud in the financial statements which were not noticed and reported by the auditor.
Management alleges that it is failure on the part of auditor. Comment.
Ans.5 : Refer Answer 4 above

Q.6. Standards on Auditing (SAs) apply in “audit of historical financial information” whereas
Standards on Review Engagements (SREs) apply in “review of historical financial information.”
Explain in detail giving examples.
Ans.6.
Standard on Auditing (SAs) :
✓ Standards on Auditing apply in the context of an audit of financial statements by an
independent auditor. Standards on Auditing apply in audit of historical information
✓ These establish high quality benchmarks and are followed by auditors in conducting audit
of financial statements.
✓ Standards on Auditing have been issued on wide spectrum of issues in the field of auditing
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Chapter-1 Nature, objective, and Scope of Audit

ranging from overall objectives of independent auditor, audit documentation, planning an

audit of financial statements, identifying and assessing risk of material misstatement, audit
sampling, audit evidence and forming an opinion and reporting on financial statements.
✓ These cover all significant aspects of audit of financial statements.
✓ Examples of Standards on Auditing are:
• SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in
accordance with Standards on Auditing
• SA 230 Audit Documentation

Standard on Review Engagements (SREs)

✓ Standards on review engagements apply in the context of review of financial statements.
✓ Review is a limited assurance engagement and it provides assurance which is lower than
that provided by audit.
✓ It is due to the fact that review involves fewer procedures as compared to audit.
✓ Since a review also provides assurance to users, it also involves obtaining sufficient
appropriate evidence.
✓ Examples of Standards on Review engagements are :
▪ SRE 2400 (Revised) Engagements to Review Historical Financial Statements
▪ SRE 2410 Review of Interim Financial Information Performed by the Independent
Auditor of the Entity

Q.7. CA N is the auditor of SR Ltd. The auditor expressed his opinion on the financial statements
without ascertaining as to whether the financial statements as a whole were free from material
misstatements or not. In your opinion, whether CA N has complied with objectives of audit
considering the applicability of relevant SA?
Ans.7. In conducting audit of financial statements, objectives of auditor in accordance with SA
200 “Overall Objectives of the Independent auditor and the conduct of an audit in accordance
with Standards on Auditing” are :-
(a) 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; and
(b) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.
Accordingly the CA N has not complied with objectives of the SA 200 “Overall Objectives of the
Independent auditor and the conduct of an audit in accordance with Standards on Auditing”

Compiled by CA Deepika Rathi www.ultimateca.com Auditing & Ethics