Auditing of financial statements is normally carried out by audit firms based mostly on the engagement that request by the entity. The entity needs its financial statements audited annually sometime primarily 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 prices since the professional charge like the audit fee is generally high.
There are a lot of users of the audited report and monetary statements. These including staff, administration’s staff, 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, right here they’re:
Limitation of auditing:
The advancedity of enterprise and system may someday limited auditor from acquiring the completed view on entity critical inside controls. Auditors will not be able to carry out the right risk assessment.
Administration intention and override controls are generally could not detect by auditors. For example, internal control is reliable only if people working within the entity observe and have the correct to execute their roles. Nonetheless, if administration overrides the management, auditors might not be able to detect the fraud risks or errors.
Materiality primarily based is what auditor makes use of to perform its overview and sampling. That means 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 completely different from the entity’s administration expectations. Auditors ought to carry out fraud risks evaluation, but the fraud risk detection and prevention isn’t their primary responsibility within the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no materials misstatements found if, after their testing, they discovered nothing materially misstated. However, the conclusion right here is based on their sampling. Audit sampling won’t cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas wouldn’t have sufficient skill and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have quite a lot of clients readily available at the identical time, and 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 sufficient experience not only in auditing skills but additionally within 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; nonetheless, the fraud may occur in others interval outside the scope.
Independence and battle of curiosity of audit workforce members can improve the risks of poor audit quality and audit reports. If the conflict of curiosity isn’t minimized to the acceptable degree 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 economic info is essential for key stakeholders like traders, bankers, BoD, as well because the administration team. Audit of financial statements may be certain that the quality of economic info that flows to those group of persons are true and fair. And the key resolution that they make by utilizing audited financial info shall 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 annually by qualified auditors after which submit to relevance government body might assist the entity comply with statutory audit requirement. And keep away from any penalty that would significantly affect the entity.
The auditor will assist shareholders to evaluate the financial 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 financial statements might assist improve management’s integrity, particularly when the results of the audit proves that the financial statements are true and truthful view.
Auditors have experience in each inner management and financial reporting. Have an auditor audit on an entity’s monetary information could help the management workforce to access the experience this hold by the audit firm.
Improve internal controls: auditors could assist to review the accounting system, procedure, folks, and process of the entity. It should assist the entity to improve its key inner control that might reduce fraud risks and errors.
Protects Fraud and Error may administration could not detect.
Trust from different organizations: Creditors, banks, and authorities creatority.