AAS-4, or the Auditing and Assurance Standard 4, outlines the fundamental principles and procedures that auditors must adhere to during an audit. It also highlights certain limitations that auditors face in their pursuit of providing a reliable and independent opinion on the financial statements of an entity.

Among the options provided, the correct answer is (a) Objectivity of auditor’s judgment. This response will explain in detail why this answer is correct and subsequently discuss why the other options are not limitations of audit as per AAS-4.

Explanation of Correct Answer:

(a) Objectivity of Auditor’s Judgment:

The objectivity of an auditor’s judgment is a critical aspect of a successful audit. It refers to the auditor’s ability to make assessments and draw conclusions without being influenced by personal biases, conflicts of interest, or external pressures. AAS-4 recognizes that achieving complete objectivity can be challenging due to the inherent human element in the auditing process.

Auditors may inadvertently allow their personal opinions or relationships with the auditee to influence their judgment. This limitation is acknowledged by AAS-4, and auditors are encouraged to employ methods and procedures to minimize this bias. Therefore, (a) is the correct answer because it aligns with the acknowledged limitation of audit objectivity.

Explanation of Incorrect Answers:

b) Selective Testing:

Selective testing refers to the process of sampling a portion of the population for examination rather than examining the entire set. While it is true that auditors may use sampling techniques to gather evidence, AAS-4 does not consider this a limitation.

Instead, it emphasizes that the auditor must apply sufficient and appropriate audit procedures to obtain reasonable assurance about whether the financial statements are free from material misstatements.

AAS-4 recognizes that auditors often use selective testing as a practical approach to assess a large volume of transactions. However, it does not classify selective testing as a limitation. Instead, it emphasizes the importance of professional judgment in determining the appropriate sample size and selection criteria. Selective testing is considered a technique to gather sufficient and appropriate audit evidence.

c) Persuasiveness of Evidence:

The persuasiveness of evidence is a critical concept in auditing. It pertains to the quality and relevance of the evidence gathered during the audit process. While the quality and relevance of evidence are crucial in forming an opinion on financial statements, AAS-4 emphasizes the need for auditors to obtain sufficient and appropriate evidence.

The persuasiveness of evidence is not classified as a limitation, but rather as a criterion for evaluating the sufficiency and appropriateness of the audit evidence gathered. It guides auditors in ensuring that the evidence collected is reliable and relevant to support their conclusions.

d) Limitations of Internal Control System:

AAS-4 acknowledges that there may be limitations in the effectiveness of an entity’s internal control system. However, this is not considered a limitation of the audit process itself. Instead, AAS-4 emphasizes that the auditor should understand the internal control system to assess the risk of material misstatement.

This understanding guides the auditor in determining the nature, timing, and extent of audit procedures. While the limitations of an internal control system are recognized, they are not categorized as a limitation of the audit process according to AAS-4.

In conclusion, AAS-4 provides a comprehensive framework for auditors to conduct their work. Among the options provided, the correct answer is (a) Objectivity of auditor’s judgment. This limitation is acknowledged by AAS-4, as it recognizes the challenge of maintaining complete objectivity in the audit process.

The other options – (b) Selective Testing, (c) Persuasiveness of Evidence, and (d) Limitations of Internal Control System – are not considered limitations of audit according to AAS-4. Instead, they are integral aspects that auditors must consider in their pursuit of providing a reliable and independent opinion on the financial statements of an entity.