Auditing of economic statements is normally performed by audit firms primarily based on the engagement that request by the entity. The entity needs its monetary statements audited annually someday primarily based on the law or generally primarily based on their own requirements.
A big company is normally required by law and small business with low turnover and staffs is often exempted from the audit. This is to reduce prices because the professional fee like the audit payment is often high.
There are many users of the audited report and financial statements. Those including staff, management’s group, the board of directors, shareholders, clients, suppliers, banks, creditors and authorities authority.
Audit of financial 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 might sometime limited auditor from obtaining the completed view on entity critical inner controls. Auditors may not be able to perform 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 in the entity follow and have the fitting to execute their roles. Nonetheless, if administration overrides the management, auditors is probably not able to detect the fraud risks or errors.
Materialsity primarily based is what auditor uses to perform its evaluate and sampling. Which 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 acknowledged within the audit engagement and audit standards. This sometimes different from the entity’s management expectations. Auditors ought to carry out fraud risks evaluation, but the fraud risk detection and prevention will not be their major 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 found if, after their testing, they found nothing materially misstated. Nonetheless, the conclusion right here is predicated on their sampling. Audit sampling might not cover the fabric errors or fraud, especially auditors who lead or carry out the critical risk areas wouldn’t have sufficient skill and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have a lot of purchasers on hand on the same time, and so they couldn’t 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 experience not only in auditing skills but also within the business that they are 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 are auditing; nonetheless, the fraud would possibly occur in others interval outside the scope.
Independence and conflict of curiosity of audit group members can increase the risks of poor audit quality and audit reports. If the conflict of interest isn’t minimized to the acceptable level as required by ISA 500, then the audit report is not going to be delivered at the quality that it ought to be.
Advantages of auditing:
Quality of economic information is essential for key stakeholders like traders, bankers, BoD, as well because the administration team. Audit of monetary statements could ensure that the quality of financial data that flows to those group of people are true and fair. And the key resolution that they make by utilizing audited monetary data shall be in the very best opinion.
Compliance with the law of country or territory that the entity is operating in could be very important. Have their monetary statements audit yearly 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 help shareholders to review the financial statements on their behalf. This could reduce the shareholder’s double on the administration team. Auditors have better skills than shareholders in this area.
The audit of monetary statements might help improve administration’s integrity, especially when the results of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in both inner control and financial reporting. Have an auditor audit on an entity’s monetary information could help the management crew to access the experience this hold by the audit firm.
Improve inner 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 inner management that would minimize fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from different organizations: Creditors, banks, and authorities creatority.