Auditing of economic statements is often carried out by audit companies based on the engagement that request by the entity. The entity needs its financial statements audited annually someday based on the law or typically 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 costs since the professional payment like the audit fee is often high.
There are various customers of the audited report and financial statements. Those including staff, administration’s group, the board of directors, shareholders, prospects, suppliers, banks, creditors and government authority.
Audit of financial statements has numerous advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The complexity of enterprise and system could someday limited auditor from acquiring the completed view on entity critical inside controls. Auditors will not be able to perform the right risk assessment.
Management intention and override controls are typically couldn’t detect by auditors. For example, inner management is reliable only if folks working in the entity comply with and have the best to execute their roles. Nonetheless, if administration overrides the control, auditors is probably not able to detect the fraud risks or errors.
Materialsity primarily based is what auditor uses to carry out its review and sampling. Meaning some sensitive fraud risks with the insignificant amounts that probably out of auditor scope could not be detected by auditors.
Fraud detection just isn’t an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This generally totally different from the entity’s management expectations. Auditors should perform fraud risks evaluation, however the fraud risk detection and prevention shouldn’t be their primary responsibility in the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren’t any material 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 material errors or fraud, especially auditors who lead or carry out the critical risk areas wouldn’t have sufficient skin poor health and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have a variety of purchasers 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 enough expertise not only in auditing skills but in addition in the industry that they are auditing. Nonetheless, 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 period that they are auditing; however, the fraud would possibly happen in others interval outside the scope.
Independence and battle of curiosity of audit workforce members can increase the risks of poor audit quality and audit reports. If the battle of interest is not minimized to the acceptable level as required by ISA 500, then the audit report will not be delivered on the quality that it ought to be.
Advantages of auditing:
Quality of monetary data is essential for key stakeholders like investors, bankers, BoD, as well as the administration team. Audit of economic statements may ensure that the quality of monetary data that flows to those group of individuals are true and fair. And the key resolution that they make through the use of audited financial info can be in the best opinion.
Compliance with the law of country or territory that the entity is operating in could be very important. Have their financial statements audit yearly by certified auditors and then submit to relevance government body could assist the entity comply with statutory audit requirement. And avoid any penalty that would significantly affect the entity.
The auditor will help shareholders to assessment the monetary 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 economic statements may assist improve management’s integrity, particularly when the result of the audit proves that the monetary statements are true and honest view.
Auditors have experience in both inside control and financial reporting. Have an auditor audit on an entity’s financial data may assist the administration crew to access the expertise this hold by the audit firm.
Improve inside controls: auditors may assist to overview the accounting system, procedure, people, and process of the entity. It will help the entity to improve its key inside management that could decrease fraud risks and errors.
Protects Fraud and Error could management couldn’t detect.
Trust from different organizations: Creditors, banks, and government writerity.