Auditing of financial statements is generally 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 typically primarily based on their own requirements.
A big company is normally 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 payment is often high.
There are lots of customers of the audited report and monetary statements. Those together with workers, management’s team, the board of directors, shareholders, prospects, suppliers, banks, creditors and authorities creatority.
Audit of monetary statements has loads of advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The complicatedity of enterprise and system may sometime limited auditor from obtaining the finished view on entity critical internal controls. Auditors might not be able to carry out the right risk assessment.
Administration intention and override controls are typically could not detect by auditors. For example, internal management is reliable only if people working in the entity observe and have the suitable to execute their roles. Nonetheless, if management overrides the control, auditors may not be able to detect the fraud risks or errors.
Materialsity based 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 is just not an auditor’s responsibility. This is what said within the audit engagement and audit standards. This sometimes completely different from the entity’s management expectations. Auditors should perform fraud risks assessment, but the fraud risk detection and prevention isn’t their major responsibility within the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no materials misstatements discovered if, after their testing, they found nothing materially misstated. Nevertheless, the conclusion right here is based on their sampling. Audit sampling may not cover the fabric errors or fraud, particularly auditors who lead or carry out the critical risk areas would not have enough skailing and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have loads of clients readily available at the identical time, and they could not 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 additionally in the industry that they are auditing. Nevertheless, 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 financial statements over the interval that they’re auditing; nonetheless, the fraud might happen in others period outside the scope.
Independence and battle of curiosity of audit team members can increase the risks of poor audit quality and audit reports. If the conflict of curiosity just isn’t minimized to the settle forable stage as required by ISA 500, then the audit report is not going to be delivered at the quality that it should be.
Advantages of auditing:
Quality of economic information is essential for key stakeholders like investors, bankers, BoD, as well as the administration team. Audit of monetary statements could ensure that the quality of economic data that flows to these group of individuals are true and fair. And the key resolution that they make by using audited monetary data will likely be in the most effective opinion.
Compliance with the law of country or territory that the entity is working in could be very important. Have their financial statements audit annually by certified auditors and then submit to relevance government body could assist the entity comply with statutory audit requirement. And avoid any penalty that might significantly affect the entity.
The auditor will help shareholders to assessment the financial statements on their behalf. This may reduce the shareholder’s double on the management team. Auditors have higher skills than shareholders in this area.
The audit of financial statements may help improve management’s integrity, particularly when the result of the audit proves that the monetary statements are true and fair view.
Auditors have experience in each internal management and financial reporting. Have an auditor audit on an entity’s financial data might help the management crew to access the expertise this hold by the audit firm.
Improve inner controls: auditors may assist to review the accounting system, procedure, people, and process of the entity. It’s going to assist the entity to improve its key inside control that might decrease fraud risks and errors.
Protects Fraud and Error may management couldn’t detect.
Trust from different organizations: Creditors, banks, and authorities creatority.