Auditing of economic statements is generally performed by audit companies based on the engagement that request by the entity. The entity needs its financial statements audited annually someday primarily based on the law or typically based on their own requirements.
A big corporation is often required by law and small enterprise with low turnover and staffs is normally exempted from the audit. This is to reduce costs since the professional charge like the audit fee is generally high.
There are various users of the audited report and financial statements. Those together with workers, administration’s workforce, the board of directors, shareholders, customers, suppliers, banks, creditors and authorities writerity.
Audit of monetary statements has a variety of advantages and limitation of auditing to the entity, here they’re:
Limitation of auditing:
The complicatedity of enterprise and system may someday limited auditor from obtaining the finished view on entity critical internal controls. Auditors may not be able to carry out the proper risk assessment.
Administration intention and override controls are generally couldn’t detect by auditors. For example, inside management is reliable only if people working in the entity follow and have the precise to execute their roles. Nevertheless, if management overrides the control, auditors is probably not able to detect the fraud risks or errors.
Materialsity based is what auditor uses to perform its evaluation and sampling. Which means 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 said in the audit engagement and audit standards. This sometimes totally different from the entity’s administration expectations. Auditors should carry out fraud risks assessment, however the fraud risk detection and prevention will not be their main responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren’t any materials misstatements found if, after their testing, they discovered nothing materially misstated. However, the conclusion here relies on their sampling. Audit sampling may not cover the fabric errors or fraud, particularly auditors who lead or carry out the critical risk areas don’t have enough skill and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have a variety of clients readily available at the identical 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 enough expertise not only in auditing skills but additionally within the trade that they’re 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 are auditing; nevertheless, the fraud would possibly happen in others period outside the scope.
Independence and battle of interest of audit team members can improve the risks of poor audit quality and audit reports. If the battle of interest is just not minimized to the acceptable 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 data is essential for key stakeholders like buyers, bankers, BoD, as well because the management team. Audit of financial statements could be sure that the quality of monetary info that flows to these group of individuals are true and fair. And the key determination that they make through the use of audited monetary data shall be in one of the best opinion.
Compliance with the law of country or territory that the entity is working in may be very important. Have their monetary statements audit yearly by certified auditors and then submit to relevance government body could help the entity comply with statutory audit requirement. And avoid any penalty that might significantly have an effect on the entity.
The auditor will assist shareholders to assessment the monetary statements on their behalf. This might reduce the shareholder’s double on the administration team. Auditors have better skills than shareholders in this area.
The audit of financial statements could assist improve management’s integrity, particularly when the results of the audit proves that the financial statements are true and fair view.
Auditors have expertise in each inside management and financial reporting. Have an auditor audit on an entity’s monetary information might help the management crew to access the expertise this hold by the audit firm.
Improve internal controls: auditors may assist to evaluation the accounting system, procedure, people, and process of the entity. It is going to help the entity to improve its key internal management that would reduce fraud risks and errors.
Protects Fraud and Error may management couldn’t detect.
Trust from other organizations: Creditors, banks, and government authority.