The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements…

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: - (i) The Nature of Financial Reporting: The preparation of financial statements involves judgment 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 material misstatements due to frauds or errors. (ii) The Nature of Audit Procedures: There are practical and legal limitations on the auditor's ability to obtain audit evidence such as: Possibility that management or others may not provide, intentionally or unintentionally, the complete information relevant for preparation and presentation of FS.Fraud may involve sophisticated and carefully organised schemes. (iii) Not in the nature of Investigation: An audit is not an official investigation into alleged wrongdoing. Hence, auditor cannot obtain absolute assurance that financial statements are free from material misstatements due to frauds or errors. (iv) 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 to be struck between the reliability of information and its cost. (v) Future events: Future events or conditions may affect an entity adversely. Adverse events may seriously affect ability of an entity to continue its business.