Auditing of economic statements is often carried out by audit companies based mostly on the engagement that request by the entity. The entity wants its monetary statements audited yearly someday based on the law or generally based mostly on their own requirements.
A big corporation is generally required by law and small business with low turnover and staffs is often exempted from the audit. This is to reduce prices since the professional fee like the audit charge is normally high.
There are many users of the audited report and monetary statements. These together with staff, management’s team, the board of directors, shareholders, customers, suppliers, banks, creditors and government authority.
Audit of financial statements has quite a lot of advantages and limitation of auditing to the entity, right here they’re:
Limitation of auditing:
The complicatedity of business and system may someday limited auditor from acquiring the finished view on entity critical inside controls. Auditors might not be able to carry out the proper risk assessment.
Administration intention and override controls are sometimes could not detect by auditors. For instance, inside control is reliable only if folks working within the entity follow and have the precise to execute their roles. Nevertheless, if management overrides the control, auditors will not be able to detect the fraud risks or errors.
Materiality based is what auditor uses to perform its review and sampling. Meaning some sensitive fraud risks with the insignificant amounts that probably out of auditor scope couldn’t be detected by auditors.
Fraud detection isn’t an auditor’s responsibility. This is what acknowledged within the audit engagement and audit standards. This generally different from the entity’s management expectations. Auditors ought to perform fraud risks evaluation, however 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 aren’t any material 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, especially auditors who lead or perform the critical risk areas shouldn’t have enough skin poor health and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have a number of purchasers available at the same 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 experience not only in auditing skills but in addition in the industry that they are 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 financial statements over the period that they are auditing; nevertheless, the fraud may happen in others period outside the scope.
Independence and battle of interest of audit staff members can enhance the risks of poor audit quality and audit reports. If the battle of interest is just not minimized to the settle forable degree as required by ISA 500, then the audit report will not be delivered on the quality that it should be.
Advantages of auditing:
Quality of financial information is essential for key stakeholders like buyers, bankers, BoD, as well because the management team. Audit of economic statements could be certain that the quality of monetary info that flows to these group of people are true and fair. And the key determination that they make by utilizing audited monetary info might be in one of the best opinion.
Compliance with the law of country or territory that the entity is working in is very important. Have their monetary statements audit yearly by certified auditors and then submit to relevance authorities body could assist the entity comply with statutory audit requirement. And keep away from any penalty that might significantly have an effect on the entity.
The auditor will help shareholders to evaluation the financial 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 financial statements could assist improve management’s integrity, especially when the results of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in each internal control and financial reporting. Have an auditor audit on an entity’s financial data could help the management team to access the expertise this hold by the audit firm.
Improve inside controls: auditors could assist to assessment the accounting system, procedure, folks, and process of the entity. It will help the entity to improve its key internal control that might decrease fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from different organizations: Creditors, banks, and authorities authority.