Auditing of financial statements is normally performed by audit firms based on the engagement that request by the entity. The entity wants its monetary statements audited yearly someday based on the law or generally primarily based on their own requirements.
A big company is generally required by law and small business with low turnover and staffs is generally exempted from the audit. This is to reduce costs since the professional fee like the audit charge is often high.
There are lots of customers of the audited report and financial statements. Those including workers, administration’s workforce, the board of directors, shareholders, prospects, suppliers, banks, creditors and government creatority.
Audit of financial statements has a variety of advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The advancedity of business and system may sometime limited auditor from obtaining the finished view on entity critical inner controls. Auditors is probably not able to perform the correct risk assessment.
Management intention and override controls are typically couldn’t detect by auditors. For instance, inside control is reliable only if individuals working within the entity follow and have the appropriate to execute their roles. However, if administration overrides the management, auditors may not be able to detect the fraud risks or errors.
Materiality based is what auditor uses to carry out its overview and sampling. Meaning some sensitive fraud risks with the insignificant quantities that probably out of auditor scope couldn’t be detected by auditors.
Fraud detection shouldn’t be an auditor’s responsibility. This is what acknowledged within the audit engagement and audit standards. This generally totally different from the entity’s management 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 management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren’t any materials misstatements discovered if, after their testing, they discovered nothing materially misstated. Nonetheless, the conclusion right here is predicated on their sampling. Audit sampling may not cover the material errors or fraud, especially auditors who lead or carry out the critical risk areas do not have sufficient sksick and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have loads of purchasers on hand on the identical time, and so 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 also in the business that they’re auditing. Nonetheless, 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 monetary statements over the interval that they’re auditing; nevertheless, the fraud might happen in others period outside the scope.
Independence and conflict of interest of audit staff members can enhance the risks of poor audit quality and audit reports. If the battle of curiosity will not be minimized to the acceptable stage 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 financial data is essential for key stakeholders like traders, bankers, BoD, as well because the management team. Audit of economic statements could ensure that the quality of economic info that flows to those group of people are true and fair. And the key choice that they make by utilizing audited monetary info shall be in one of 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 annually by certified auditors after which submit to relevance government body could help the entity comply with statutory audit requirement. And keep away from any penalty that might significantly have an effect on 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 economic statements may assist improve management’s integrity, especially when the results of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in each inner control and monetary reporting. Have an auditor audit on an entity’s financial data may help the administration team to access the experience this hold by the audit firm.
Improve inner controls: auditors may help to evaluate the accounting system, procedure, people, and process of the entity. It’s going to help the entity to improve its key internal management that would reduce fraud risks and errors.
Protects Fraud and Error might administration could not detect.
Trust from other organizations: Creditors, banks, and authorities creatority.