Limitation and advantages of an audit of economic statements
Auditing of monetary statements is generally performed by audit corporations based mostly on the engagement that request by the entity. The entity needs its monetary statements audited yearly sometime based on the law or typically based mostly on their own requirements.
A big company is often required by law and small business with low turnover and staffs is generally exempted from the audit. This is to reduce costs because the professional fee like the audit price is generally high.
There are various customers of the audited report and financial statements. Those together with staff, management’s group, the board of directors, shareholders, customers, suppliers, banks, creditors and government creatority.
Audit of economic statements has lots of advantages and limitation of auditing to the entity, here they're:
Limitation of auditing:
The complicatedity of business and system might someday limited auditor from obtaining the finished view on entity critical internal controls. Auditors might not be able to carry out the correct risk assessment.
Management intention and override controls are generally couldn't detect by auditors. For instance, inside management is reliable only if folks working in the entity follow and have the fitting to execute their roles. Nevertheless, if administration overrides the management, auditors is probably not able to detect the fraud risks or errors.
Materiality primarily based is what auditor uses to perform its overview and sampling. That means some sensitive fraud risks with the insignificant amounts that probably out of auditor scope could not be detected by auditors.
Fraud detection just isn't an auditor’s responsibility. This is what stated within the audit engagement and audit standards. This typically totally different from the entity’s management expectations. Auditors ought to perform fraud risks assessment, but the fraud risk detection and prevention shouldn't be their primary 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 found nothing materially misstated. Nonetheless, the conclusion here is predicated on their sampling. Audit sampling may not cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas don't have sufficient sksick and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have loads of clients on hand on the similar time, they usually could not 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 also in the trade that they're auditing. However, 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 period that they're auditing; however, the fraud may happen in others period outside the scope.
Independence and conflict of curiosity of audit team members can increase the risks of poor audit quality and audit reports. If the battle of curiosity just isn't minimized to the acceptable degree 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 financial info is essential for key stakeholders like investors, bankers, BoD, as well because the management team. Audit of economic statements could make sure that the quality of economic info that flows to those group of persons are true and fair. And the key choice that they make by using audited financial information shall be in one of the best opinion.
Compliance with the law of country or territory that the entity is working in is very important. Have their monetary statements audit yearly by certified auditors after which submit to relevance government body could help the entity comply with statutory audit requirement. And avoid any penalty that would significantly have an effect on the entity.
The auditor will help shareholders to overview the financial statements on their behalf. This may reduce the shareholder’s double on the management team. Auditors have higher skills than shareholders in this area.
The audit of monetary statements may assist improve management’s integrity, especially when the results of the audit proves that the financial statements are true and honest view.
Auditors have experience in both internal management and monetary reporting. Have an auditor audit on an entity’s monetary information might assist the management crew to access the experience this hold by the audit firm.
Improve internal controls: auditors could help to assessment the accounting system, procedure, folks, and process of the entity. It'll assist the entity to improve its key inner management that would minimize fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from other organizations: Creditors, banks, and government authority.