Sunrise Foundation, a registered charitable trust engaged in providing free healthcare services in rural areas, appointed A & Co., Chartered…

CA Intermediate · Auditing and Ethics · MTP · September 2026
Sunrise Foundation, a registered charitable trust engaged in providing free healthcare services in rural areas, appointed A & Co., Chartered Accountants, to audit its financial statements for the year ended 31st March, 2026. During the preliminary discussions, the Managing Trustee informed the Engagement Partner that one of the partners of the audit firm was his real brother. He further stated that since the Foundation was a charitable organisation and did not earn any profits, the question of auditor's independence was not very important. He also remarked that audit was generally meant for companies and other profit-making organisations, whereas a charitable trust should not require the same level of audit. The Engagement Partner explained that the principles governing an audit remain the same irrespective of the nature, size or legal form of the entity. With reference to above facts, explain the meaning of auditing and give an incisive analysis of the principles emerging from its definition in the given situation.

Suggested Answer and Working Notes:

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”. An incisive analysis of above meaning of auditing brings out following points clearly: - (i) Audit is an independent examination of financial information. (ii) Independence, here, implies that the judgement of a person is not subordinate to the wishes or direction of another person who might have engaged him. The auditor should be independent of entity whose financial statements are subject to audit so that he can form an opinion without being affected by any influence. Independence increases auditor's ability to act objectively without creeping in of biases. The entity whose financial information is examined need not necessarily be profit oriented like in case of a business. It can be a non-profit organization like an NGO or a charitable trust. Audit can be undertaken in respect of any organization be it a small, medium or large. (iii) The purpose of audit is to express an opinion on the financial statements. From the facts of the case, it can be concluded that the Managing Trustee's views are not correct. Audit is an independent examination of the financial information of any entity, whether profit-oriented or not and irrespective of its size or legal form. Therefore, Sunrise Foundation is equally subject to the fundamental principles of auditing, and the auditor's independence must be maintained to enable the expression of an independent opinion on its financial statements.

Topics: Ethics and Terms of Audit Engagements

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