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Limitation and advantages of an audit of financial statements
Auditing of economic statements is normally performed by audit corporations primarily based on the engagement that request by the entity. The entity needs its monetary statements audited yearly sometime primarily based on the law or typically based mostly on their own requirements.
A big company is generally required by law and small enterprise with low turnover and staffs is often exempted from the audit. This is to reduce prices for the reason that professional price like the audit fee is normally high.
There are a lot of customers of the audited report and financial statements. Those including staff, administration’s group, the board of directors, shareholders, prospects, suppliers, banks, creditors and authorities writerity.
Audit of monetary statements has a whole lot of advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The complexity of business and system might sometime limited auditor from acquiring the finished view on entity critical internal controls. Auditors might not be able to perform the proper risk assessment.
Management intention and override controls are typically could not detect by auditors. For example, inner control is reliable only if individuals working within the entity follow and have the appropriate to execute their roles. Nevertheless, if management overrides the control, auditors might not be able to detect the fraud risks or errors.
Materialsity primarily based is what auditor uses to carry out its assessment and sampling. That means some sensitive fraud risks with the insignificant quantities that probably out of auditor scope couldn't be detected by auditors.
Fraud detection just isn't an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This generally different from the entity’s administration expectations. Auditors should carry out fraud risks evaluation, but the fraud risk detection and prevention will not be their main responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any material misstatements found if, after their testing, they discovered nothing materially misstated. However, the conclusion right here is based on their sampling. Audit sampling might not cover the fabric errors or fraud, especially auditors who lead or perform the critical risk areas would not have sufficient skin poor health and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have loads of shoppers readily available on the similar time, they usually 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 sufficient expertise not only in auditing skills but also within the trade that they are auditing. Nonetheless, some of them don’t. Poor auditor’s qualifications will lead to poor quality of audit reports.
Scope of the audit is cover only the monetary statements over the period that they are auditing; nonetheless, the fraud may occur in others period outside the scope.
Independence and conflict of curiosity of audit workforce members can enhance the risks of poor audit quality and audit reports. If the battle of curiosity just isn't minimized to the settle forable level as required by ISA 500, then the audit report is not going to be delivered on the quality that it should be.
Advantages of auditing:
Quality of monetary data is essential for key stakeholders like investors, bankers, BoD, as well because the administration team. Audit of financial statements may be certain that the quality of economic data that flows to those group of individuals are true and fair. And the key decision that they make by using audited monetary info shall be in the best opinion.
Compliance with the law of country or territory that the entity is working in is very important. Have their financial statements audit annually by certified auditors and then submit to relevance government body might assist the entity comply with statutory audit requirement. And keep away from any penalty that could significantly affect the entity.
The auditor will assist shareholders to review the monetary statements on their behalf. This might reduce the shareholder’s double on the administration team. Auditors have better skills than shareholders in this area.
The audit of financial statements could help improve management’s integrity, especially when the results of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in both inside management and financial reporting. Have an auditor audit on an entity’s financial information might help the management group to access the experience this hold by the audit firm.
Improve inside controls: auditors might assist to assessment the accounting system, procedure, folks, and process of the entity. It is going to help the entity to improve its key inner control that would reduce fraud risks and errors.
Protects Fraud and Error might administration could not detect.
Trust from different organizations: Creditors, banks, and government authority.
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