Auditing of monetary statements is normally carried out by audit corporations 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 sometimes based mostly on their own requirements.
A big corporation is often required by law and small enterprise with low turnover and staffs is normally exempted from the audit. This is to reduce costs for the reason that professional payment like the audit payment is generally high.
There are various users of the audited report and financial statements. These together with workers, administration’s team, the board of directors, shareholders, customers, suppliers, banks, creditors and authorities authority.
Audit of economic statements has quite a lot of advantages and limitation of auditing to the entity, here they’re:
Limitation of auditing:
The complexity of business and system might sometime limited auditor from acquiring the finished view on entity critical inner 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, inside management is reliable only if individuals working in the entity observe and have the best to execute their roles. Nevertheless, if administration overrides the management, auditors may not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor uses to carry out its overview 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 within the audit engagement and audit standards. This sometimes completely different from the entity’s administration expectations. Auditors ought to carry out fraud risks assessment, but the fraud risk detection and prevention is just not 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 found if, after their testing, they discovered nothing materially misstated. Nonetheless, the conclusion here relies on their sampling. Audit sampling might not cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas wouldn’t have enough skill and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have lots of purchasers available at the same time, and so 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 enough expertise not only in auditing skills but in addition in the industry 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 interval that they’re auditing; nevertheless, the fraud might occur in others period outside the scope.
Independence and conflict of interest of audit team members can increase the risks of poor audit quality and audit reports. If the conflict of interest shouldn’t be minimized to the settle forable stage as required by ISA 500, then the audit report won’t be delivered at the quality that it ought to be.
Advantages of auditing:
Quality of monetary info is essential for key stakeholders like traders, bankers, BoD, as well because the administration team. Audit of economic statements could be certain that the quality of monetary information that flows to these group of individuals are true and fair. And the key decision that they make by using audited monetary info will probably be in the 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 and then submit to relevance government body may assist the entity comply with statutory audit requirement. And avoid any penalty that would significantly affect the entity.
The auditor will assist shareholders to review 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 economic statements might help improve administration’s integrity, particularly when the results of the audit proves that the financial statements are true and fair view.
Auditors have expertise in both inner control and financial reporting. Have an auditor audit on an entity’s financial data may help the management team to access the expertise this hold by the audit firm.
Improve inner controls: auditors could assist to review the accounting system, procedure, folks, and process of the entity. It’s going to assist the entity to improve its key internal control that could reduce fraud risks and errors.
Protects Fraud and Error might administration could not detect.
Trust from different organizations: Creditors, banks, and government authority.