Auditing of economic statements is normally carried out by audit firms primarily based on the engagement that request by the entity. The entity wants its monetary statements audited yearly sometime based on the law or typically based mostly on their own requirements.
A big corporation is often required by law and small enterprise with low turnover and staffs is often exempted from the audit. This is to reduce prices since the professional price like the audit price is normally high.
There are a lot of users of the audited report and monetary statements. These including workers, management’s group, the board of directors, shareholders, customers, suppliers, banks, creditors and government authority.
Audit of financial statements has a number of advantages and limitation of auditing to the entity, here they’re:
Limitation of auditing:
The advancedity of business and system could someday limited auditor from acquiring the finished view on entity critical internal controls. Auditors is probably not able to carry out the correct risk assessment.
Management intention and override controls are generally couldn’t detect by auditors. For instance, inner control is reliable only if people working within the entity follow and have the precise to execute their roles. Nevertheless, if administration overrides the management, auditors might not be able to detect the fraud risks or errors.
Materialsity based is what auditor uses to perform its overview and sampling. That means some sensitive fraud risks with the insignificant quantities that probably out of auditor scope couldn’t be detected by auditors.
Fraud detection is just not an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This generally completely different from the entity’s administration expectations. Auditors ought to perform fraud risks assessment, however the fraud risk detection and prevention is not their main responsibility in the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren’t any material misstatements discovered if, after their testing, they discovered nothing materially misstated. However, the conclusion here relies on their sampling. Audit sampling might not cover the material errors or fraud, particularly auditors who lead or carry out the critical risk areas don’t have sufficient skunwell and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have a lot of clients on hand on the similar time, and so they could not 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 expertise not only in auditing skills but additionally within the business that they are auditing. However, 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; nevertheless, the fraud might happen in others period outside the scope.
Independence and conflict of curiosity of audit workforce members can increase the risks of poor audit quality and audit reports. If the conflict of interest will not be minimized to the settle forable level as required by ISA 500, then the audit report will not be delivered at the quality that it ought to be.
Advantages of auditing:
Quality of financial information is essential for key stakeholders like traders, bankers, BoD, as well as the administration team. Audit of monetary statements could be sure that the quality of economic information that flows to these group of individuals are true and fair. And the key decision that they make through the use of audited monetary info shall be in the best opinion.
Compliance with the law of country or territory that the entity is operating in may be very important. Have their monetary statements audit annually by certified auditors and then submit to relevance government body may help the entity comply with statutory audit requirement. And keep away from any penalty that would significantly affect the entity.
The auditor will assist shareholders to overview the financial statements on their behalf. This could reduce the shareholder’s double on the administration team. Auditors have better skills than shareholders in this area.
The audit of financial statements might help improve administration’s integrity, especially when the results of the audit proves that the financial 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 administration team to access the expertise this hold by the audit firm.
Improve internal controls: auditors may assist to overview the accounting system, procedure, folks, and process of the entity. It’ll assist the entity to improve its key inside control that would reduce fraud risks and errors.
Protects Fraud and Error might management couldn’t detect.
Trust from other organizations: Creditors, banks, and authorities creatority.