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Limitation and advantages of an audit of monetary statements
Auditing of economic statements is normally performed by audit firms primarily based on the engagement that request by the entity. The entity wants its financial statements audited annually sometime primarily based on the law or sometimes based on their own requirements.
A big company is often required by law and small business with low turnover and staffs is often exempted from the audit. This is to reduce costs for the reason that professional payment like the audit price is often high.
There are numerous customers of the audited report and monetary statements. Those including workers, administration’s team, the board of directors, shareholders, prospects, suppliers, banks, creditors and government creatority.
Audit of monetary statements has lots of advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The complexity of enterprise and system may someday limited auditor from obtaining the completed view on entity critical inner controls. Auditors is probably not able to perform the correct risk assessment.
Management intention and override controls are generally couldn't detect by auditors. For example, inner management is reliable only if people working in the entity observe and have the right to execute their roles. Nonetheless, if management overrides the management, auditors will not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor uses to perform its evaluate and sampling. That means some sensitive fraud risks with the insignificant quantities that probably out of auditor scope could not 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 sometimes different from the entity’s administration expectations. Auditors ought to perform fraud risks assessment, however 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 aren't any materials misstatements found if, after their testing, they found nothing materially misstated. However, the conclusion here is based on their sampling. Audit sampling won't cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas shouldn't have enough skunwell and experience.
Time constraints can affect the quality of audit works and reports. This happens when auditors have lots of clients available at the identical time, and they 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 sufficient experience not only in auditing skills but additionally in the trade that they're auditing. Nevertheless, 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 interval that they're auditing; nevertheless, the fraud may occur in others interval outside the scope.
Independence and conflict of curiosity of audit workforce members can improve the risks of poor audit quality and audit reports. If the battle of interest isn't 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 information is essential for key stakeholders like traders, bankers, BoD, as well as the administration team. Audit of financial statements could be certain that the quality of monetary info that flows to those group of persons are true and fair. And the key determination 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 working in may be very important. Have their financial statements audit yearly by certified auditors after which submit to relevance government body may assist the entity comply with statutory audit requirement. And keep away from any penalty that could significantly affect the entity.
The auditor will help shareholders to overview the monetary statements on their behalf. This could reduce the shareholder’s double on the administration team. Auditors have higher skills than shareholders in this area.
The audit of financial statements could assist improve administration’s integrity, particularly when the results of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in both internal control and financial reporting. Have an auditor audit on an entity’s monetary data might assist the management crew to access the expertise this hold by the audit firm.
Improve internal controls: auditors could assist to evaluate the accounting system, procedure, people, and process of the entity. It's going to help the entity to improve its key inside control that would reduce fraud risks and errors.
Protects Fraud and Error might administration could not detect.
Trust from other organizations: Creditors, banks, and authorities authority.
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