## Inherent Limitations of Audit
These limitations explain why audit provides only reasonable assurance, not absolute assurance.
---
### Category 1: Nature of Financial Reporting
#### (A) Judgements in FS Preparation
- FS preparation involves many management judgments
- These may involve subjective decisions or uncertainty (e.g., estimates, provisions)
- Auditor cannot verify the exact correctness of subjective judgments — only their reasonableness
- Therefore, absolute assurance that FS are free from material misstatement is not possible
#### (B) Limitations of Internal Controls
- IC may not have operated to produce reliable financial information due to their own limitations
- Specific risk: Collusion between two persons can override even well-designed internal controls
- No IC system can be designed to prevent collusion entirely
---
### Category 2: Nature of Audit Procedures
| Limitation | Explanation |
|---|---|
| Sampling | Auditor does NOT test all transactions — opinion is based on sample testing (practical limitation) |
| Incomplete information | Management may not provide all requested information |
| No compulsion mechanism | Auditor cannot legally force management to provide information |
| Consequence of withheld info | If required information is not provided, auditor must consider impact on opinion |
---
### Summary: Why Only Reasonable Assurance?
```
Inherent Limitations
├── Financial Reporting Nature
│ ├── Management judgments (subjective/uncertain)
│ └── IC limitations (including collusion)
└── Audit Procedure Nature
├── Sampling (not 100% testing)
├── Management may withhold info
└── No legal power to compel
```
> These limitations are inherent — they exist regardless of how well the auditor performs. They are NOT a reflection of audit quality.