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Limitation and advantages of an audit of financial statements
Auditing of monetary statements is generally carried out by audit firms based on the engagement that request by the entity. The entity needs its financial statements audited annually sometime primarily based on the law or typically based on their own requirements.
A big company is generally required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce prices for the reason that professional payment like the audit fee is often high.
There are a lot of customers of the audited report and monetary statements. These including workers, management’s team, the board of directors, shareholders, prospects, suppliers, banks, creditors and government writerity.
Audit of financial statements has numerous advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The complexity of enterprise and system could sometime limited auditor from acquiring the completed view on entity critical internal controls. Auditors will not be able to carry out the correct risk assessment.
Management intention and override controls are generally could not detect by auditors. For instance, internal management is reliable only if individuals working in the entity follow and have the fitting to execute their roles. Nonetheless, if administration overrides the control, auditors may not be able to detect the fraud risks or errors.
Materiality based is what auditor makes use of to perform its overview and sampling. That means some sensitive fraud risks with the insignificant amounts 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 within the audit engagement and audit standards. This typically completely different from the entity’s management expectations. Auditors ought to carry out fraud risks evaluation, but the fraud risk detection and prevention isn't their main responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren't any materials misstatements found if, after their testing, they discovered nothing materially misstated. Nonetheless, the conclusion right here is based on their sampling. Audit sampling might not cover the fabric errors or fraud, particularly auditors who lead or carry out the critical risk areas shouldn't have enough skin poor health and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have lots of shoppers available at the identical time, and they couldn't handle their tasks that the quality that had set.
Auditor’s qualification is essential for the quality of the audit report. Some auditors have enough experience not only in auditing skills but additionally in the trade that they're 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 period that they are auditing; nevertheless, the fraud might happen in others period outside the scope.
Independence and battle of interest of audit staff members can improve the risks of poor audit quality and audit reports. If the conflict of interest shouldn't be minimized to the acceptable stage as required by ISA 500, then the audit report is not going to be delivered on the quality that it ought to be.
Advantages of auditing:
Quality of economic data is essential for key stakeholders like investors, bankers, BoD, as well because the administration team. Audit of economic statements might be certain that the quality of economic information that flows to these group of people are true and fair. And the key decision that they make by using audited financial data will be in the best opinion.
Compliance with the law of country or territory that the entity is working in may be very important. Have their monetary statements audit yearly by certified auditors and then submit to relevance government body could help the entity comply with statutory audit requirement. And keep away from any penalty that could significantly have an effect on the entity.
The auditor will assist shareholders to evaluation the monetary statements on their behalf. This might reduce the shareholder’s double on the management team. Auditors have better skills than shareholders in this area.
The audit of economic statements might help improve management’s integrity, particularly when the result of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in each inside management and monetary reporting. Have an auditor audit on an entity’s monetary data might help the management crew to access the experience this hold by the audit firm.
Improve inner controls: auditors might help to evaluate the accounting system, procedure, folks, and process of the entity. It should help the entity to improve its key inside control that could decrease fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from different organizations: Creditors, banks, and government writerity.
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