Objectives of Audit

Auditing is an independent examination of financial statements to express an opinion on whether they present a true and fair view of the entity’s financial performance and position. The primary objectives of an audit are framed in accordance with Standard on Auditing (SA) 200 – “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing.”

The objectives guide auditors in carrying out their duties and in ensuring that financial statements are reliable, consistent, and free from material misstatement.

Main Objectives of Audit

According to SA 200, the objectives of an auditor are:

1. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
2. To report on the financial statements, and to communicate as required by the Standards on Auditing, in accordance with the auditor’s findings.

These two broad objectives ensure that users of financial statements—such as investors, creditors, and regulators—can rely on the information presented.

Reasonable Assurance vs Absolute Assurance

The term reasonable assurance is a key concept in auditing and must be distinguished from absolute assurance.

• Absolute assurance would mean a complete guarantee that financial statements are entirely free from misstatement. Such a level of certainty is not achievable in practice, because an audit involves sampling, judgment, and inherent limitations.
• Reasonable assurance refers to a high but not absolute level of confidence that the financial statements are free from material misstatement, whether caused by fraud or error.

Therefore, the auditor’s goal is to achieve reasonable, not absolute, assurance. This balance allows an auditor to express an opinion based on sufficient and appropriate audit evidence while acknowledging that some level of risk always remains.

Nature of Audit Work

The audit of financial statements is conducted by a professional auditor who possesses adequate competence, skill, and integrity. The auditor applies auditing procedures as prescribed under the Standards on Auditing (SAs) and collects audit evidence to draw conclusions.

The process involves:

• Applying professional scepticism and judgment.
• Evaluating the internal controls and accounting systems.
• Assessing risks of material misstatement.
• Performing audit tests and analytical procedures.
• Drawing conclusions based on evidence obtained.

This leads to the auditor forming an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Detailed Analysis of Objectives

Obtaining Reasonable Assurance

The auditor’s primary objective is to obtain reasonable assurance that the financial statements are free from material misstatement. Misstatements may occur due to:

• Fraud, involving intentional manipulation or omission of information.
• Error, arising from unintentional mistakes in accounting or reporting.

Reasonable assurance enables the auditor to form a professional opinion on the reliability of the financial statements as a whole.

Expression of Opinion

Once sufficient and appropriate audit evidence is obtained, the auditor forms an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (for example, Indian Accounting Standards).

The opinion provides users of the financial statements with confidence in the credibility and fairness of the information presented.

Reporting on the Financial Statements

After forming the opinion, the auditor reports on the financial statements. The report communicates the auditor’s findings clearly and objectively. It includes:

• The auditor’s opinion.
• Basis for the opinion.
• Key audit matters (if applicable).
• Responsibilities of management and auditor.

The reporting format is governed by Standards on Auditing, ensuring consistency and transparency across all audit engagements.

Communication in Accordance with Standards on Auditing

In addition to reporting, auditors are required to communicate certain matters to those charged with governance and, in some cases, to regulatory authorities. Such communication includes significant audit findings, internal control weaknesses, and instances of non-compliance with laws and regulations.

This communication ensures that responsible authorities are informed of critical audit matters that may impact decision-making.

Key Points Regarding Reasonable Assurance

1. Level of Assurance
   Reasonable assurance represents a high level of confidence, but it is not an absolute guarantee. It recognises the inherent limitations of audit procedures such as sampling, human judgment, and the possibility of collusion or management override of controls.
2. Causes of Misstatement
   Misstatements may result from fraud or error. The auditor’s role is to detect and assess their impact on the financial statements as a whole.
3. Audit Evidence and Evaluation
   The auditor gathers sufficient and appropriate audit evidence through procedures such as inspection, observation, inquiry, and analytical review. On the basis of this evidence, the auditor concludes whether the financial statements are reliable.
4. Final Reporting
   The auditor expresses an opinion and issues a written report, as required by the Standards on Auditing. The opinion communicates whether the financial statements are prepared in accordance with the applicable financial reporting framework.

Overview of the Objectives of Audit

Conclusion

The objectives of audit revolve around achieving reasonable assurance, forming a professional opinion, and reporting findings in accordance with Standards on Auditing. The concept of reasonable assurance acknowledges that while an audit provides a high level of confidence, it does not guarantee absolute accuracy.

By adhering to these objectives, auditors contribute significantly to the credibility and reliability of financial reporting, thereby strengthening trust among stakeholders and supporting sound financial decision-making.