AU-C Section 200.19 (Part 3 of 3): Inherent Limitations of an Audit

AU-C Section 200.19 says:

"To obtain reasonable assurance, the auditor should obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion." 

In performing the audit, we can never gain absolute assurance that the financial statements as a whole are free from material misstatement; and that is because there are inherent limitations of an audit.  These inherent limitations stem from:

• the nature of financial reporting: many facets of the financial reporting framework require judgments and subjective decisions; therefore, some financial statement items contain inherent variability that can't be eliminated by performing more audit procedures (e.g., accounting estimates depending on future events). 
• the nature of audit procedures: there are several practical and legal limitations to performing the audit:
• management might not provide all information that is relevant to the preparation and fair presentation of the financial statements; as such, the auditor can't be certain of the completeness of information provided to him.
• fraud may be sophisticated and concealed; as such, the auditor's procedures may be ineffective in detecting intentional misstatements supported by falsified documents or information.  
• the audit is not a legal investigation; as such, he does not have the authority to search the entity.
• the cost/benefit balance of the audit: the audit opinion and financial statements need to be issued within a reasonable period of time after the entity's fiscal year, thereby being relevant to the financial statement users.  However, this turnaround might not be enough time for the auditor to exhaustively test every assumption of fraud or error until proved otherwise.  As such, the auditor must strike a balance between the reliability of information and its cost; this can be achieved through proper planning .

As such, the auditor should:

• plan the audit so that it will be performed in an effective manner;
• direct audit effort to areas most expected to contain risks of material misstatement, whether due to fraud or error,with correspondingly less effort directed at other areas; and 
• use testing and other means of examining populations for misstatements.

Other areas that are susceptible to the inherent limitations of the audit:

• Fraud (see AU-C Section 240)
• Related party relationships (see AU-C Section 550)
• Noncompliance with laws and regulations (see AU-C Section 250)
• Going concern (see AU-C Section 570)

These inherent limitations are not an excuse for the auditor to be satisfied with less persuasive audit evidence.  He still needs to obtain sufficient appropriate audit evidence that supports the auditor's opinion.  

https://www.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/au-c-00200.pdf