Auditing of financial statements is normally carried out by audit companies based mostly on the engagement that request by the entity. The entity wants its monetary statements audited annually sometime primarily based on the law or generally based mostly on their own requirements.
A big corporation is normally 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 often high.
There are many customers of the audited report and financial statements. These including staff, administration’s staff, the board of directors, shareholders, clients, suppliers, banks, creditors and government writerity.
Audit of financial statements has a whole lot of advantages and limitation of auditing to the entity, right here they’re:
Limitation of auditing:
The advancedity of enterprise and system may sometime limited auditor from acquiring the completed view on entity critical internal controls. Auditors might not be able to carry out the proper risk assessment.
Management intention and override controls are sometimes couldn’t detect by auditors. For example, inner management is reliable only if individuals working in the entity observe and have the suitable to execute their roles. Nevertheless, if management overrides the management, auditors might not be able to detect the fraud risks or errors.
Materiality primarily based is what auditor uses to perform its overview and sampling. Meaning some sensitive fraud risks with the insignificant amounts that probably out of auditor scope couldn’t be detected by auditors.
Fraud detection will not be an auditor’s responsibility. This is what stated within the audit engagement and audit standards. This sometimes different from the entity’s management expectations. Auditors should carry out fraud risks assessment, but the fraud risk detection and prevention will not be their major responsibility within 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. Nevertheless, the conclusion here relies on their sampling. Audit sampling may not cover the fabric errors or fraud, particularly 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 happens when auditors have quite a lot of shoppers on hand at the identical time, and 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 sufficient expertise not only in auditing skills but also 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 monetary statements over the interval that they are auditing; nevertheless, the fraud might occur in others period outside the scope.
Independence and battle of interest of audit staff members can enhance the risks of poor audit quality and audit reports. If the battle of interest just isn’t minimized to the acceptable degree as required by ISA 500, then the audit report won’t be delivered on the quality that it should be.
Advantages of auditing:
Quality of economic data is essential for key stakeholders like buyers, bankers, BoD, as well as the administration team. Audit of monetary statements could ensure that the quality of economic info that flows to these group of people are true and fair. And the key decision that they make by using audited monetary information will likely be in the very best opinion.
Compliance with the law of country or territory that the entity is operating in may be very important. Have their financial statements audit annually by certified auditors and then submit to relevance government body might 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 assessment the financial statements on their behalf. This may reduce the shareholder’s double on the administration team. Auditors have better skills than shareholders in this area.
The audit of monetary statements could help improve management’s integrity, especially when the result of the audit proves that the monetary statements are true and truthful view.
Auditors have experience in each internal management and financial reporting. Have an auditor audit on an entity’s financial info might help the administration team to access the experience this hold by the audit firm.
Improve inside controls: auditors might help to review the accounting system, procedure, folks, and process of the entity. It will help the entity to improve its key inner management that could decrease fraud risks and errors.
Protects Fraud and Error might administration couldn’t detect.
Trust from different organizations: Creditors, banks, and authorities authority.