Limitation and advantages of an audit of monetary statements
Auditing of financial statements is normally carried out by audit corporations based mostly on the engagement that request by the entity. The entity wants its financial statements audited yearly someday primarily based on the law or typically based mostly on their own requirements.
A big corporation is often required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce costs for the reason that professional fee like the audit charge is often high.
There are lots of customers of the audited report and financial statements. These together with staff, administration’s crew, the board of directors, shareholders, prospects, suppliers, banks, creditors and authorities writerity.
Audit of financial statements has a number of advantages and limitation of auditing to the entity, here they are:
Limitation of auditing:
The advancedity of business and system could someday limited auditor from obtaining the completed view on entity critical inner controls. Auditors is probably not able to carry out the right risk assessment.
Management intention and override controls are generally could not detect by auditors. For instance, inner management is reliable only if people working within the entity observe and have the suitable to execute their roles. Nonetheless, if management overrides the management, auditors is probably not able to detect the fraud risks or errors.
Materialsity primarily based is what auditor uses to perform its evaluate and sampling. Meaning some sensitive fraud risks with the insignificant quantities that probably out of auditor scope couldn't be detected by auditors.
Fraud detection is not an auditor’s responsibility. This is what stated in the audit engagement and audit standards. This typically different from the entity’s management expectations. Auditors ought to carry out fraud risks assessment, however the fraud risk detection and prevention is just not their major responsibility within the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any materials misstatements found if, after their testing, they discovered nothing materially misstated. Nevertheless, the conclusion here is predicated on their sampling. Audit sampling may not cover the fabric errors or fraud, particularly auditors who lead or carry out the critical risk areas do not need sufficient skill and experience.
Time constraints can affect the quality of audit works and reports. This happens when auditors have plenty of shoppers available at the same time, they usually 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 sufficient expertise not only in auditing skills but in addition within the industry 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 interval that they're auditing; nonetheless, the fraud might happen in others interval outside the scope.
Independence and battle of interest of audit staff members can enhance the risks of poor audit quality and audit reports. If the battle of interest isn't minimized to the settle forable degree as required by ISA 500, then the audit report will not be delivered on the quality that it should be.
Advantages of auditing:
Quality of economic information is essential for key stakeholders like investors, bankers, BoD, as well as the management team. Audit of financial statements may make sure that the quality of financial information that flows to those group of people are true and fair. And the key determination that they make by using audited financial data will likely be in the 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 could 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 review the monetary statements on their behalf. This could reduce the shareholder’s double on the management team. Auditors have higher skills than shareholders in this area.
The audit of economic statements might assist improve administration’s integrity, particularly when the result of the audit proves that the financial statements are true and fair view.
Auditors have experience in each inside control and financial reporting. Have an auditor audit on an entity’s financial data could assist the administration crew to access the experience this hold by the audit firm.
Improve inside controls: auditors may assist to assessment the accounting system, procedure, people, and process of the entity. It's going to help the entity to improve its key inner control that could decrease fraud risks and errors.
Protects Fraud and Error could administration could not detect.
Trust from different organizations: Creditors, banks, and government writerity.
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