Limitation and advantages of an audit of economic statements
Auditing of financial statements is generally carried out by audit corporations based mostly on the engagement that request by the entity. The entity needs its financial statements audited annually someday based on the law or sometimes primarily based on their own requirements.
A big corporation is often required by law and small business with low turnover and staffs is often exempted from the audit. This is to reduce prices because the professional price like the audit fee is normally high.
There are various users of the audited report and financial statements. Those including workers, management’s team, the board of directors, shareholders, customers, suppliers, banks, creditors and authorities authority.
Audit of financial statements has numerous advantages and limitation of auditing to the entity, here they're:
Limitation of auditing:
The complicatedity of enterprise and system may sometime limited auditor from obtaining the completed view on entity critical internal controls. Auditors may not be able to carry out the correct risk assessment.
Administration intention and override controls are typically could not detect by auditors. For example, inside management is reliable only if individuals working within the entity follow and have the fitting to execute their roles. However, if management overrides the control, auditors will not be able to detect the fraud risks or errors.
Materialsity primarily based is what auditor makes use of to carry out its overview and sampling. Which means some sensitive fraud risks with the insignificant amounts that probably out of auditor scope couldn't be detected by auditors.
Fraud detection isn't an auditor’s responsibility. This is what acknowledged within the audit engagement and audit standards. This sometimes different from the entity’s management expectations. Auditors should perform fraud risks evaluation, however the fraud risk detection and prevention just isn't their major responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no material misstatements discovered if, after their testing, they discovered nothing materially misstated. However, the conclusion right here relies on their sampling. Audit sampling may not cover the fabric errors or fraud, especially auditors who lead or perform the critical risk areas shouldn't have enough skill and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have a number of purchasers readily available at the identical time, and they couldn't manage their tasks that the quality that had set.
Auditor’s qualification is essential for the quality of the audit report. Some auditors have enough expertise not only in auditing skills but additionally in the industry that they are auditing. Nevertheless, a few of them don’t. Poor auditor’s qualifications will lead to poor quality of audit reports.
Scope of the audit is cover only the financial statements over the interval that they're auditing; nonetheless, the fraud would possibly occur in others period outside the scope.
Independence and conflict of curiosity of audit crew members can increase the risks of poor audit quality and audit reports. If the battle of curiosity isn't minimized to the settle forable level as required by ISA 500, then the audit report is not going to be delivered at the quality that it should be.
Advantages of auditing:
Quality of economic information is essential for key stakeholders like buyers, bankers, BoD, as well as the administration team. Audit of monetary statements might be certain that the quality of financial information that flows to these group of people are true and fair. And the key decision that they make by utilizing audited monetary information shall be in the very best opinion.
Compliance with the law of country or territory that the entity is operating in is very important. Have their monetary statements audit yearly by qualified auditors and then submit to relevance authorities body might help the entity comply with statutory audit requirement. And avoid any penalty that could significantly have an effect on the entity.
The auditor will assist shareholders to evaluation the financial statements on their behalf. This might reduce the shareholder’s double on the administration team. Auditors have higher skills than shareholders in this area.
The audit of monetary statements could help improve administration’s integrity, particularly when the result of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in both inside control and monetary reporting. Have an auditor audit on an entity’s financial information may help the management team to access the expertise this hold by the audit firm.
Improve internal controls: auditors may help to assessment the accounting system, procedure, individuals, and process of the entity. It would assist the entity to improve its key inner control that might reduce fraud risks and errors.
Protects Fraud and Error might management couldn't detect.
Trust from other organizations: Creditors, banks, and government writerity.
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