Auditing of economic statements is normally carried out by audit firms primarily based on the engagement that request by the entity. The entity needs its monetary statements audited annually someday based on the law or generally based mostly 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 since the professional fee like the audit payment is generally high.
There are numerous users of the audited report and monetary statements. Those including staff, administration’s workforce, the board of directors, shareholders, clients, suppliers, banks, creditors and authorities writerity.
Audit of economic statements has a number of advantages and limitation of auditing to the entity, here they’re:
Limitation of auditing:
The advancedity of business and system could sometime limited auditor from obtaining the completed view on entity critical inside controls. Auditors might not be able to perform the correct risk assessment.
Administration intention and override controls are generally could not detect by auditors. For instance, internal management is reliable only if folks working within the entity follow and have the correct to execute their roles. However, if management 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 perform its assessment and sampling. Which means some sensitive fraud risks with the insignificant quantities that probably out of auditor scope couldn’t be detected by auditors.
Fraud detection just isn’t an auditor’s responsibility. This is what acknowledged within the audit engagement and audit standards. This typically completely different from the entity’s management expectations. Auditors ought to perform fraud risks assessment, but the fraud risk detection and prevention will not be their major responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any material misstatements discovered if, after their testing, they found nothing materially misstated. However, the conclusion here relies on their sampling. Audit sampling might not cover the fabric errors or fraud, particularly auditors who lead or perform the critical risk areas shouldn’t have sufficient skill and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have a whole lot of purchasers readily available at the similar time, and so they could not 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 experience not only in auditing skills but also within the trade that they are 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 financial statements over the period that they are auditing; nonetheless, the fraud would possibly happen in others period outside the scope.
Independence and conflict of interest of audit crew members can improve the risks of poor audit quality and audit reports. If the battle of curiosity will not be minimized to the acceptable stage as required by ISA 500, then the audit report will not be delivered at the quality that it should be.
Advantages of auditing:
Quality of monetary data is essential for key stakeholders like buyers, bankers, BoD, as well as the administration team. Audit of economic statements might make sure that the quality of monetary data that flows to these group of individuals are true and fair. And the key determination that they make through the use of audited financial data might be in the perfect opinion.
Compliance with the law of country or territory that the entity is working in could be very important. Have their financial statements audit yearly by certified auditors and then submit to relevance authorities body may help 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 evaluation the monetary statements on their behalf. This might reduce the shareholder’s double on the management team. Auditors have better skills than shareholders in this area.
The audit of economic statements might assist improve administration’s integrity, especially when the results of the audit proves that the financial statements are true and fair view.
Auditors have experience in both internal management and financial reporting. Have an auditor audit on an entity’s monetary information may help the administration group to access the experience this hold by the audit firm.
Improve inner controls: auditors may help to evaluate the accounting system, procedure, people, and process of the entity. It should help the entity to improve its key inner control that might reduce fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from different organizations: Creditors, banks, and government writerity.