Limitation and advantages of an audit of monetary statements
Auditing of monetary statements is normally carried out by audit firms based mostly on the engagement that request by the entity. The entity wants its financial statements audited yearly sometime primarily based on the law or generally based mostly on their own requirements.
A big company is normally 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 fee like the audit payment is generally high.
There are many users of the audited report and financial statements. These including employees, management’s crew, the board of directors, shareholders, clients, suppliers, banks, creditors and authorities authority.
Audit of financial statements has quite a lot of advantages and limitation of auditing to the entity, here they are:
Limitation of auditing:
The complicatedity of business and system could sometime limited auditor from acquiring the finished view on entity critical internal controls. Auditors will not be able to perform the proper risk assessment.
Administration intention and override controls are sometimes could not detect by auditors. For instance, inside management is reliable only if people working within the entity follow and have the appropriate to execute their roles. However, if management overrides the management, auditors might not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor uses to perform its overview and sampling. Meaning some sensitive fraud risks with the insignificant amounts that probably out of auditor scope could not be detected by auditors.
Fraud detection is not an auditor’s responsibility. This is what stated within the audit engagement and audit standards. This sometimes totally different from the entity’s administration expectations. Auditors should carry out fraud risks assessment, but the fraud risk detection and prevention will not be their main responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no materials misstatements found if, after their testing, they found nothing materially misstated. However, 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 do not have sufficient skunwell and experience.
Time constraints can affect the quality of audit works and reports. This happens when auditors have loads of clients available on the similar time, and so 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 expertise not only in auditing skills but also within the business that they are auditing. However, 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're auditing; nonetheless, the fraud may happen in others interval outside the scope.
Independence and battle of interest of audit team members can improve the risks of poor audit quality and audit reports. If the conflict of interest just isn't minimized to the acceptable degree 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 financial information is essential for key stakeholders like buyers, bankers, BoD, as well as the administration team. Audit of financial statements could ensure that the quality of monetary info that flows to these group of persons are true and fair. And the key resolution that they make through the use of audited monetary data shall be in one of 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 qualified auditors after which submit to relevance authorities body may help the entity comply with statutory audit requirement. And avoid 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 higher skills than shareholders in this area.
The audit of monetary statements might help improve management’s integrity, especially when the result of the audit proves that the financial statements are true and fair view.
Auditors have experience in each internal control and monetary reporting. Have an auditor audit on an entity’s monetary info may help the administration staff to access the experience this hold by the audit firm.
Improve inside controls: auditors may assist to evaluation the accounting system, procedure, people, and process of the entity. It would assist the entity to improve its key inner management that could minimize fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from other organizations: Creditors, banks, and government creatority.
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