Auditing of financial statements is generally performed by audit firms based mostly on the engagement that request by the entity. The entity needs its financial statements audited yearly someday primarily based on the law or typically based on their own requirements.
A big corporation is normally required by law and small enterprise with low turnover and staffs is often exempted from the audit. This is to reduce prices for the reason that professional price like the audit charge is generally high.
There are numerous customers of the audited report and monetary statements. Those including workers, management’s staff, the board of directors, shareholders, prospects, suppliers, banks, creditors and government writerity.
Audit of economic statements has lots 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 completed view on entity critical internal controls. Auditors might not be able to perform the right risk assessment.
Administration intention and override controls are generally could not detect by auditors. For instance, inside control is reliable only if people working within the entity follow and have the suitable to execute their roles. Nonetheless, if administration overrides the control, auditors will not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor uses to perform its evaluate and sampling. That means some sensitive fraud risks with the insignificant quantities that probably out of auditor scope could not be detected by auditors.
Fraud detection isn’t an auditor’s responsibility. This is what stated within the audit engagement and audit standards. This typically totally different from the entity’s administration expectations. Auditors should carry out fraud risks evaluation, but the fraud risk detection and prevention isn’t their major responsibility within the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any materials misstatements found if, after their testing, they discovered nothing materially misstated. Nonetheless, the conclusion here is based on their sampling. Audit sampling might not cover the fabric errors or fraud, especially auditors who lead or perform the critical risk areas wouldn’t have sufficient skin poor health and experience.
Time constraints can affect the quality of audit works and reports. This happens when auditors have a variety of shoppers on hand on the same 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 sufficient expertise not only in auditing skills but additionally within the business 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’re auditing; however, the fraud might happen in others period outside the scope.
Independence and conflict of interest of audit group 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 won’t be delivered on the quality that it ought to be.
Advantages of auditing:
Quality of economic information is essential for key stakeholders like buyers, bankers, BoD, as well as the management team. Audit of financial statements may make sure that the quality of monetary information that flows to those group of persons are true and fair. And the key resolution that they make through the use of audited financial information will probably be in one of the best opinion.
Compliance with the law of country or territory that the entity is operating in is very important. Have their monetary statements audit yearly by certified auditors after which submit to relevance authorities body could assist the entity comply with statutory audit requirement. And keep away from any penalty that would significantly affect the entity.
The auditor will help shareholders to evaluation the monetary statements on their behalf. This may reduce the shareholder’s double on the administration team. Auditors have higher skills than shareholders in this area.
The audit of economic statements may help improve management’s integrity, particularly when the result of the audit proves that the financial statements are true and fair view.
Auditors have expertise in each inner management and financial reporting. Have an auditor audit on an entity’s financial information might assist the management workforce to access the experience this hold by the audit firm.
Improve internal controls: auditors could help to assessment the accounting system, procedure, folks, and process of the entity. It can help the entity to improve its key inside control that might decrease fraud risks and errors.
Protects Fraud and Error might management couldn’t detect.
Trust from different organizations: Creditors, banks, and government creatority.