Auditing of financial statements is often carried out by audit companies based on the engagement that request by the entity. The entity needs its financial statements audited yearly sometime primarily based on the law or typically primarily based on their own requirements.
A big corporation is normally required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce prices because the professional price like the audit fee is normally high.
There are many users of the audited report and financial statements. Those including staff, administration’s group, the board of directors, shareholders, prospects, suppliers, banks, creditors and authorities writerity.
Audit of monetary 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 someday limited auditor from acquiring the completed view on entity critical inner controls. Auditors may not be able to perform the right risk assessment.
Management intention and override controls are sometimes couldn’t detect by auditors. For example, inner control is reliable only if folks working within the entity comply with and have the precise to execute their roles. However, if administration overrides the control, auditors may 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. Meaning 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 said in the audit engagement and audit standards. This typically totally different from the entity’s management expectations. Auditors ought to perform fraud risks assessment, however the fraud risk detection and prevention is not their main responsibility in the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any materials misstatements found if, after their testing, they discovered nothing materially misstated. However, the conclusion right here is predicated on their sampling. Audit sampling may not cover the fabric errors or fraud, especially auditors who lead or carry out the critical risk areas do not need sufficient skunwell and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have plenty of purchasers on hand on the identical 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 expertise not only in auditing skills but also within the industry that they’re 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 period that they’re auditing; however, the fraud may occur in others period outside the scope.
Independence and battle of interest of audit staff members can increase the risks of poor audit quality and audit reports. If the battle of curiosity isn’t minimized to the acceptable stage as required by ISA 500, then the audit report will not be delivered at the quality that it ought to be.
Advantages of auditing:
Quality of financial data is essential for key stakeholders like investors, bankers, BoD, as well because the management team. Audit of financial statements could be sure that the quality of economic data that flows to those group of people are true and fair. And the key resolution that they make by using audited financial data might be in one of the best 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 certified auditors and then submit to relevance authorities body could assist the entity comply with statutory audit requirement. And keep away from any penalty that could significantly have an effect on the entity.
The auditor will assist shareholders to assessment the financial 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 financial statements may assist improve management’s integrity, especially when the result of the audit proves that the financial statements are true and honest view.
Auditors have expertise in both inner management and monetary reporting. Have an auditor audit on an entity’s monetary info may help the management team to access the experience this hold by the audit firm.
Improve internal controls: auditors may help to overview the accounting system, procedure, people, and process of the entity. It’s going to assist the entity to improve its key inside management that might minimize fraud risks and errors.
Protects Fraud and Error might management couldn’t detect.
Trust from different organizations: Creditors, banks, and authorities authority.