Auditing of monetary statements is often performed by audit companies primarily based on the engagement that request by the entity. The entity needs its financial statements audited annually someday primarily based on the law or sometimes primarily based on their own requirements.
A big company is often required by law and small business with low turnover and staffs is normally exempted from the audit. This is to reduce prices because the professional fee like the audit price is normally high.
There are many users of the audited report and financial statements. Those including staff, management’s team, the board of directors, shareholders, clients, suppliers, banks, creditors and government authority.
Audit of financial statements has a lot of advantages and limitation of auditing to the entity, here they are:
Limitation of auditing:
The complexity of business and system might someday limited auditor from acquiring the finished view on entity critical inside controls. Auditors may not be able to carry out the proper risk assessment.
Management intention and override controls are generally could not detect by auditors. For example, inner management is reliable only if folks working within the entity comply with and have the proper to execute their roles. However, if administration overrides the control, auditors may not be able to detect the fraud risks or errors.
Materiality based is what auditor uses to carry out its evaluation and sampling. Meaning some sensitive fraud risks with the insignificant quantities that probably out of auditor scope could not be detected by auditors.
Fraud detection just isn’t an auditor’s responsibility. This is what said in the audit engagement and audit standards. This typically different from the entity’s management expectations. Auditors ought to carry out fraud risks evaluation, however the fraud risk detection and prevention is just 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 found nothing materially misstated. Nevertheless, the conclusion right here is predicated on their sampling. Audit sampling won’t cover the fabric errors or fraud, particularly auditors who lead or perform the critical risk areas shouldn’t have sufficient skin poor health and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have quite a lot of shoppers available on the similar time, they usually 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 additionally in the industry that they are auditing. Nonetheless, 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 are auditing; however, the fraud may occur in others period outside the scope.
Independence and conflict of interest of audit team members can increase the risks of poor audit quality and audit reports. If the battle of curiosity will not be minimized to the acceptable degree as required by ISA 500, then the audit report will not be delivered at the quality that it should be.
Advantages of auditing:
Quality of financial data is essential for key stakeholders like investors, bankers, BoD, as well because the administration team. Audit of economic statements may make sure that the quality of economic information that flows to those group of persons are true and fair. And the key determination that they make by using audited financial information shall be in the most effective opinion.
Compliance with the law of country or territory that the entity is working in may be very important. Have their monetary statements audit annually by certified auditors and then submit to relevance government body might assist the entity comply with statutory audit requirement. And avoid any penalty that could significantly have an effect on the entity.
The auditor will assist shareholders to review the financial 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 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 monetary information could help the administration workforce to access the experience this hold by the audit firm.
Improve internal controls: auditors might assist to overview the accounting system, procedure, individuals, and process of the entity. It would help the entity to improve its key inside control that could reduce fraud risks and errors.
Protects Fraud and Error may management couldn’t detect.
Trust from different organizations: Creditors, banks, and authorities authority.