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Limitation and advantages of an audit of financial statements
Auditing of monetary statements is normally carried out by audit firms primarily based on the engagement that request by the entity. The entity wants its monetary statements audited annually someday primarily based on the law or typically based on their own requirements.
A big corporation is generally required by law and small enterprise with low turnover and staffs is normally exempted from the audit. This is to reduce prices since the professional fee like the audit fee is generally high.
There are lots of customers of the audited report and financial statements. These including employees, management’s crew, the board of directors, shareholders, clients, suppliers, banks, creditors and government writerity.
Audit of monetary statements has a variety of advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The advancedity of business and system could sometime limited auditor from obtaining the completed view on entity critical inside controls. Auditors will not be able to perform the correct risk assessment.
Administration intention and override controls are generally could not detect by auditors. For instance, inner management is reliable only if individuals working within the entity follow and have the suitable to execute their roles. Nonetheless, if administration overrides the control, auditors may not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor makes use of to perform its evaluate 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 just isn't an auditor’s responsibility. This is what said within the audit engagement and audit standards. This typically completely different from the entity’s administration expectations. Auditors should carry out fraud risks evaluation, but the fraud risk detection and prevention is not their major responsibility within the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no materials misstatements discovered if, after their testing, they found nothing materially misstated. However, the conclusion right here is based on their sampling. Audit sampling may not cover the fabric errors or fraud, particularly auditors who lead or carry out the critical risk areas would not have enough skunwell and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have lots of purchasers on hand at the similar time, and so 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 sufficient experience not only in auditing skills but additionally in the business that they're 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 financial statements over the period that they are auditing; nonetheless, the fraud would possibly happen in others period outside the scope.
Independence and battle of curiosity of audit staff members can improve the risks of poor audit quality and audit reports. If the battle of interest is not minimized to the settle forable stage as required by ISA 500, then the audit report won't be delivered on the quality that it ought to be.
Advantages of auditing:
Quality of economic info is essential for key stakeholders like investors, bankers, BoD, as well as the management team. Audit of financial statements could be sure that the quality of monetary data that flows to these group of persons are true and fair. And the key resolution that they make through the use of audited monetary information will be in the very best opinion.
Compliance with the law of country or territory that the entity is operating in could be very important. Have their monetary statements audit yearly by certified auditors and then submit to relevance government body may assist the entity comply with statutory audit requirement. And keep away from any penalty that might significantly have an effect on the entity.
The auditor will help shareholders to assessment the monetary 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 economic statements might help improve management’s integrity, particularly when the result of the audit proves that the financial statements are true and honest view.
Auditors have expertise in both inner management and financial reporting. Have an auditor audit on an entity’s monetary data may assist the management crew to access the expertise this hold by the audit firm.
Improve internal controls: auditors could assist to assessment the accounting system, procedure, folks, and process of the entity. It's going to help the entity to improve its key inner management that could decrease fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from other organizations: Creditors, banks, and authorities writerity.
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