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Limitation and advantages of an audit of economic statements
Auditing of financial statements is often performed by audit corporations based on the engagement that request by the entity. The entity wants its financial statements audited annually sometime based mostly on the law or typically primarily based on their own requirements.
A big corporation is often required by law and small enterprise with low turnover and staffs is normally exempted from the audit. This is to reduce costs for the reason that professional charge like the audit price is normally high.
There are a lot of users of the audited report and financial statements. These together with employees, management’s crew, the board of directors, shareholders, customers, suppliers, banks, creditors and government writerity.
Audit of financial statements has a variety of advantages and limitation of auditing to the entity, right here they're:
Limitation of auditing:
The complexity of business and system may sometime limited auditor from obtaining the completed view on entity critical inside 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 control is reliable only if individuals working in the entity comply with and have the suitable to execute their roles. However, if administration overrides the management, auditors may not be able to detect the fraud risks or errors.
Materialsity based mostly is what auditor makes use of to carry out its evaluation 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 will not be an auditor’s responsibility. This is what said in the audit engagement and audit standards. This generally different from the entity’s management expectations. Auditors should perform fraud risks evaluation, but the fraud risk detection and prevention just isn't their main responsibility in the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren't any material misstatements found if, after their testing, they discovered nothing materially misstated. Nonetheless, the conclusion here is predicated on their sampling. Audit sampling won't cover the material errors or fraud, especially auditors who lead or carry out the critical risk areas don't have sufficient skin poor health and experience.
Time constraints can affect the quality of audit works and reports. This happens when auditors have a whole lot of shoppers available at 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 enough expertise not only in auditing skills but also within the industry that they are auditing. Nonetheless, 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 are auditing; nonetheless, the fraud may occur in others period outside the scope.
Independence and battle of interest of audit workforce members can enhance the risks of poor audit quality and audit reports. If the conflict of curiosity is just 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 should be.
Advantages of auditing:
Quality of financial data is essential for key stakeholders like buyers, bankers, BoD, as well because the administration team. Audit of monetary statements could make sure that the quality of monetary info that flows to these group of individuals are true and fair. And the key choice that they make through the use of audited monetary data will likely be in the perfect opinion.
Compliance with the law of country or territory that the entity is operating in is very important. Have their financial statements audit annually 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 could significantly have an effect on the entity.
The auditor will assist shareholders to evaluate the financial 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 economic statements may help improve management’s integrity, especially when the results of the audit proves that the financial statements are true and truthful view.
Auditors have expertise in each inner management and financial reporting. Have an auditor audit on an entity’s monetary data could help the management group to access the experience this hold by the audit firm.
Improve internal controls: auditors might assist to review the accounting system, procedure, people, and process of the entity. It can help the entity to improve its key inside control that might minimize fraud risks and errors.
Protects Fraud and Error might management could not detect.
Trust from different organizations: Creditors, banks, and government creatority.
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