Auditing of economic statements is normally carried out by audit companies primarily 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 often required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce prices for the reason that professional charge like the audit charge is generally high.
There are numerous customers of the audited report and financial statements. These together with workers, management’s team, the board of directors, shareholders, prospects, suppliers, banks, creditors and government writerity.
Audit of financial statements has numerous advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The complexity of business and system might someday limited auditor from obtaining the finished view on entity critical inside controls. Auditors is probably not able to perform the right risk assessment.
Management intention and override controls are typically could not detect by auditors. For instance, inner management is reliable only if folks working in the entity comply with and have the proper to execute their roles. Nevertheless, if administration overrides the control, auditors might not be able to detect the fraud risks or errors.
Materiality primarily based is what auditor makes use of to perform 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 will not be an auditor’s responsibility. This is what stated within the audit engagement and audit standards. This typically different from the entity’s administration expectations. Auditors should carry out fraud risks evaluation, but the fraud risk detection and prevention just isn’t their primary responsibility within the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no material misstatements discovered if, after their testing, they found nothing materially misstated. However, the conclusion right here is based on their sampling. Audit sampling may not cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas would not have sufficient skill 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 readily available on 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 enough experience not only in auditing skills but in addition within the business that they’re auditing. However, 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 period that they’re auditing; nevertheless, the fraud might happen in others interval outside the scope.
Independence and battle of interest of audit workforce members can improve the risks of poor audit quality and audit reports. If the conflict of interest will not be minimized to the acceptable level as required by ISA 500, then the audit report is not going to be delivered on the quality that it should be.
Advantages of auditing:
Quality of financial data is essential for key stakeholders like traders, bankers, BoD, as well as the administration team. Audit of economic statements might ensure that the quality of economic information that flows to these group of people are true and fair. And the key decision that they make by using audited financial data might be in the very best opinion.
Compliance with the law of country or territory that the entity is operating in is very important. Have their financial statements audit yearly by qualified 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 evaluation the monetary statements on their behalf. This could reduce the shareholder’s double on the management team. Auditors have better skills than shareholders in this area.
The audit of monetary statements may assist improve administration’s integrity, especially when the result of the audit proves that the monetary statements are true and honest view.
Auditors have experience in both inner management and financial reporting. Have an auditor audit on an entity’s financial info could help the management team to access the expertise this hold by the audit firm.
Improve inner controls: auditors may help to review the accounting system, procedure, folks, and process of the entity. It is going to assist the entity to improve its key internal management that might decrease fraud risks and errors.
Protects Fraud and Error could administration couldn’t detect.
Trust from other organizations: Creditors, banks, and authorities writerity.