Scope of Audit – What It Includes and What It Does Not Include

The term scope refers to the range or reach of an audit. It defines the boundaries within which the auditor performs the examination of financial statements. The main purpose of an audit is to determine whether the financial statements of an entity present a true and fair view of its financial position and performance in accordance with an applicable financial reporting framework.

The audit aims to enhance the degree of confidence among users of financial statements such as shareholders, employees, customers, government, and regulatory authorities. The expression of an auditor’s opinion provides credibility to the financial statements prepared by management.

The applicable financial reporting framework refers to the set of principles or rules adopted for the preparation and presentation of financial statements, which are acceptable considering the nature of the entity and the objective of the statements.
For companies in India, this framework is prescribed under Schedule III of the Companies Act, 2013.

Scope of Audit – What It Includes

The scope of audit of financial statements generally covers the following major areas:

1. Coverage of All Aspects of the Entity

Audit procedures are designed to ensure that all aspects of the entity relevant to the financial statements are adequately covered. The auditor examines the accounting records, internal controls, and supporting documentation to ensure that the financial statements reflect a complete picture of the entity’s financial activities during the period under audit.

2. Reliability and Sufficiency of Financial Information

The auditor is required to be reasonably satisfied that the financial information contained in the books of account and supporting records—such as bills, vouchers, and documents—forms a reliable and sufficient basis for the preparation of financial statements.

Reliability refers to the dependability of the information used in the preparation of accounts, while sufficiency relates to the adequacy of evidence obtained. To assess these aspects, the auditor performs a study and evaluation of the accounting systems and internal controls, supported by tests, enquiries, and analytical procedures.

3. Proper Disclosure of Financial Information

The auditor also evaluates whether the financial information has been properly disclosed in the financial statements in accordance with statutory and regulatory requirements. This involves ensuring that transactions and events are correctly summarised, classified, and presented.

The management is responsible for selecting and applying appropriate accounting policies for preparing financial statements. The auditor reviews these choices to ensure that:

• The policies have been consistently applied on a period-to-period basis.
• The selection and application of accounting policies are appropriate for the entity’s circumstances.

Examples include choosing suitable methods for depreciation on fixed assets or valuation of inventories.

Financial statements are prepared based on historical financial information, which records past transactions and events. Accordingly, the audit of financial statements is also conducted on this historical basis.

4. Expression of an Opinion on Financial Statements

The ultimate objective of the auditor’s work is to express an opinion on whether the financial statements provide a true and fair view of the financial position and performance of the entity. The opinion is based on evidence obtained during the audit and the auditor’s professional judgment.

Scope of Audit – What It Does Not Include

While the audit encompasses examination and evaluation of financial statements, it does not extend to certain areas that fall outside the auditor’s competence or responsibility. These limitations are essential to define the boundary of an auditor’s role.

1. Duties Outside the Auditor’s Competence

An auditor is not expected to perform functions requiring specialised technical knowledge beyond accounting and auditing.
For example, determining the physical condition or remaining life of machinery, or assessing the stability of civil structures, requires the expertise of engineers, not auditors. Such technical assessments are outside the scope of an audit.

2. Authentication of Documents

An auditor is not a document authentication expert. Hence, verifying the genuineness of documents is beyond the auditor’s professional competence. The auditor relies on the authenticity of documents produced by management and does not conduct forensic or technical validation of their originality.

3. Audit is Not an Official Investigation

An audit should not be confused with an official investigation into wrongdoing or fraud. An auditor has no legal powers to compel evidence, summon witnesses, or conduct searches. The primary objective of an audit is to obtain reasonable assurance that the financial statements are free from material misstatements due to fraud or error—not to detect or prove fraud.

4. Audit vs Investigation

An investigation is a specialised examination conducted for a specific purpose, often when fraud or irregularity is suspected. It involves detailed scrutiny of particular transactions or areas of concern and may require special legal authorisation.

An audit, on the other hand, is broader and more general in nature. Its objective is to evaluate whether the overall financial statements present a true and fair view.
In short:

• Audit provides reasonable assurance.
• Investigation provides conclusive evidence for specific issues.

Thus, the scope of audit is broad and general, while the scope of investigation is narrow and purpose-specific.

Overview of the Scope of Audit

Key Takeaways

• The scope of audit defines the extent of work and procedures required to form an audit opinion.
• It includes evaluation of completeness, reliability, sufficiency, and disclosure of financial information.
• The auditor’s work is limited by competence and does not involve technical assessments or forensic investigation.
• Audit differs from investigation — the former aims to provide reasonable assurance, while the latter seeks to establish factual evidence for a specific purpose.
• Financial statements, and consequently audits, are based on historical financial information.