Auditing of financial statements is normally carried out by audit firms based mostly on the engagement that request by the entity. The entity wants its monetary statements audited yearly sometime primarily based on the law or generally based mostly on their own requirements.
A big corporation is normally required by law and small business with low turnover and staffs is normally exempted from the audit. This is to reduce prices because the professional payment like the audit price is normally high.
There are various users of the audited report and monetary statements. Those together with staff, management’s staff, the board of directors, shareholders, clients, suppliers, banks, creditors and government creatority.
Audit of monetary statements has lots of advantages and limitation of auditing to the entity, here they’re:
Limitation of auditing:
The advancedity of enterprise and system might sometime limited auditor from acquiring the finished view on entity critical internal controls. Auditors will not be able to carry out the proper risk assessment.
Management intention and override controls are generally could not detect by auditors. For example, internal control is reliable only if individuals working in the entity comply with and have the correct to execute their roles. Nonetheless, if management overrides the management, auditors is probably not able to detect the fraud risks or errors.
Materialsity based is what auditor makes use of to carry out 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 is just not an auditor’s responsibility. This is what stated within the audit engagement and audit standards. This sometimes completely different from the entity’s administration expectations. Auditors ought to perform fraud risks evaluation, but the fraud risk detection and prevention just isn’t their primary responsibility in the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no material misstatements discovered if, after their testing, they found nothing materially misstated. Nevertheless, the conclusion here relies on their sampling. Audit sampling might not cover the material errors or fraud, especially auditors who lead or perform the critical risk areas would not have enough skunwell and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have a lot of shoppers on hand on the identical time, they usually 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 also within the industry that they’re auditing. Nevertheless, 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 period that they’re auditing; nevertheless, the fraud would possibly occur in others interval outside the scope.
Independence and conflict of interest of audit staff members can increase 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 will not be delivered on the quality that it ought to be.
Advantages of auditing:
Quality of monetary information is essential for key stakeholders like traders, bankers, BoD, as well as the administration team. Audit of economic statements might be sure that the quality of economic 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 information will probably be in the most effective opinion.
Compliance with the law of country or territory that the entity is working in may be very important. Have their monetary statements audit yearly by qualified auditors and then submit to relevance authorities body could help the entity comply with statutory audit requirement. And keep away from any penalty that might significantly affect the entity.
The auditor will assist shareholders to assessment the monetary statements on their behalf. This might reduce the shareholder’s double on the management team. Auditors have higher skills than shareholders in this area.
The audit of monetary statements could assist improve management’s integrity, particularly when the results of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in each inside control and financial reporting. Have an auditor audit on an entity’s financial info might assist the administration crew to access the expertise this hold by the audit firm.
Improve internal controls: auditors might help to review the accounting system, procedure, people, and process of the entity. It’s going to assist the entity to improve its key internal control that would reduce fraud risks and errors.
Protects Fraud and Error may administration could not detect.
Trust from other organizations: Creditors, banks, and authorities authority.