Auditing of monetary statements is normally carried out by audit firms based on the engagement that request by the entity. The entity needs its monetary statements audited yearly someday primarily based on the law or sometimes based mostly on their own requirements.
A big company is often required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce prices since the professional fee like the audit fee is generally high.
There are a lot of users of the audited report and monetary statements. These together with staff, management’s staff, the board of directors, shareholders, prospects, suppliers, banks, creditors and authorities authority.
Audit of financial statements has a number of advantages and limitation of auditing to the entity, here they are:
Limitation of auditing:
The complicatedity of business and system may someday limited auditor from obtaining the finished view on entity critical internal controls. Auditors will not be able to carry out the right risk assessment.
Administration intention and override controls are sometimes couldn’t detect by auditors. For example, inside management is reliable only if people working within the entity comply with and have the precise to execute their roles. Nonetheless, if administration overrides the control, auditors may not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor makes use of to carry out its overview and sampling. That means 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 in the audit engagement and audit standards. This sometimes different from the entity’s management expectations. Auditors ought to perform fraud risks evaluation, but the fraud risk detection and prevention shouldn’t be their major responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren’t any materials misstatements found if, after their testing, they found nothing materially misstated. Nevertheless, the conclusion right 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 shouldn’t have sufficient sksick and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have a variety of shoppers readily available 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 sufficient expertise not only in auditing skills but in addition within the business that they’re 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 financial statements over the period that they’re auditing; nonetheless, the fraud may occur in others period outside the scope.
Independence and battle of interest of audit group members can improve the risks of poor audit quality and audit reports. If the conflict of curiosity is not minimized to the settle forable degree 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 data is essential for key stakeholders like investors, bankers, BoD, as well as the management team. Audit of economic statements could be certain that the quality of economic info that flows to those group of people are true and fair. And the key resolution that they make by using audited financial info can be in the most effective 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 qualified auditors and then submit to relevance authorities body may help the entity comply with statutory audit requirement. And avoid any penalty that would significantly affect the entity.
The auditor will assist shareholders to review the financial statements on their behalf. This might reduce the shareholder’s double on the administration team. Auditors have higher skills than shareholders in this area.
The audit of financial statements could help improve administration’s integrity, especially when the results of the audit proves that the monetary statements are true and honest view.
Auditors have expertise in both inside management and monetary reporting. Have an auditor audit on an entity’s financial information may help the management team to access the experience this hold by the audit firm.
Improve inner controls: auditors might help to assessment the accounting system, procedure, people, and process of the entity. It’s going to help the entity to improve its key inside control that might reduce fraud risks and errors.
Protects Fraud and Error might administration could not detect.
Trust from different organizations: Creditors, banks, and government creatority.