Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

“An audit suffers from certain inherent limitations”. Explain.

What are the general limitations of audit?

While conducting an audit, the auditor follows procedures designed to satisfy himself that the financial statements reflect a true and fair view of the financial position and operating results of the enterprise. The

process of auditing, however, is such that it suffers from certain inherent limitations, i.e., the limitation which cannot be overcome irrespective of the nature and extent of audit procedures.

The limitations are generally due to:

a. Test Checking (Sampling)
Auditor selects samples of transactions to check. Due to the time constraints, auditor cannot check each and every transaction in detail thereleaving a possibility that unchecked items may contain misstatements.

b. Exercise of Judgment
Auditor‟s work involves exercise of judgment in deciding the extent of audit procedures and in assessing the reasonableness of the judgment and estimates made the management in preparing the financial statements.

c. Nature of Audit Evidence
The audit evidence obtained an auditor is generally persuasive in nature rather than conclusive in nature due to which an auditor can draw reasonable conclusions only. Because of these factors, the auditor can only express an opinion. There is also likelihood that some material misstatements of the financial information resulting from fraud or error, if either exists, may not be detected.

d. dependency on existence of an effective Internal Control System
The entire audit process is generally dependent upon the existence of an effective system of internal control. There will always be some risk of an internal control system failing to operate as designed. Internal control system also suffers from certain inherent limitations since any system of internal control is ineffective against fraud involving collusion among employees or fraud committed management. Certain levels of management may be in a position to override controls; for example, directing subordi- nates to record transactions incorrectly or to conceal them, or suppressing information relating to transactions. Such inherent limitations of internal control system also contribute to inherent limitations of an audit.
Therefore, it is quite apparent from above that an audit suffers from certain inherent limitations.

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