Auditing of financial statements is generally performed by audit corporations based on the engagement that request by the entity. The entity wants its financial statements audited annually someday based mostly on the law or generally primarily based on their own requirements.
A big company is generally required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce costs since the professional price like the audit fee is often high.
There are many users of the audited report and monetary statements. Those including staff, management’s group, the board of directors, shareholders, prospects, suppliers, banks, creditors and government creatority.
Audit of financial statements has a variety of advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The complexity of enterprise and system might someday limited auditor from acquiring the completed view on entity critical inside controls. Auditors is probably not able to perform the proper risk assessment.
Administration intention and override controls are generally could not detect by auditors. For instance, inner management is reliable only if folks working in the entity follow and have the fitting to execute their roles. However, if management overrides the management, auditors may not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor makes use of to carry out its overview and sampling. That means some sensitive fraud risks with the insignificant amounts that probably out of auditor scope couldn’t be detected by auditors.
Fraud detection is not an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This sometimes completely different from the entity’s administration expectations. Auditors ought to perform fraud risks evaluation, but the fraud risk detection and prevention is not their primary 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. However, the conclusion right here is based on their sampling. Audit sampling might not cover the fabric errors or fraud, particularly auditors who lead or perform the critical risk areas should not have enough skill and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have numerous purchasers on hand on the same time, they usually could not 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 within the trade that they are auditing. Nevertheless, 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; however, the fraud might occur in others interval outside the scope.
Independence and battle of interest of audit team members can enhance the risks of poor audit quality and audit reports. If the conflict of interest is just not 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 financial data is essential for key stakeholders like investors, bankers, BoD, as well as the administration team. Audit of economic statements may make sure that the quality of economic data that flows to those group of persons are true and fair. And the key decision that they make by utilizing audited monetary data shall be in the most effective opinion.
Compliance with the law of country or territory that the entity is working in could be very important. Have their monetary statements audit yearly by certified auditors after which submit to relevance authorities body may assist 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 evaluation the financial statements on their behalf. This could reduce the shareholder’s double on the administration team. Auditors have higher skills than shareholders in this area.
The audit of financial statements could help improve management’s integrity, particularly when the results of the audit proves that the financial statements are true and fair view.
Auditors have experience in each inner control and financial reporting. Have an auditor audit on an entity’s financial data could assist the administration group to access the expertise this hold by the audit firm.
Improve inside controls: auditors might assist to evaluate the accounting system, procedure, folks, and process of the entity. It’ll assist the entity to improve its key internal management that could minimize fraud risks and errors.
Protects Fraud and Error may administration couldn’t detect.
Trust from other organizations: Creditors, banks, and government creatority.