Auditing of economic statements is normally performed by audit corporations primarily based on the engagement that request by the entity. The entity wants its financial statements audited annually sometime primarily based on the law or sometimes based mostly on their own requirements.
A big corporation is normally required by law and small enterprise with low turnover and staffs is normally exempted from the audit. This is to reduce prices for the reason that professional price like the audit fee is generally high.
There are lots of customers of the audited report and financial statements. These together with employees, administration’s group, the board of directors, shareholders, prospects, suppliers, banks, creditors and government authority.
Audit of financial statements has numerous advantages and limitation of auditing to the entity, right here they are:
Limitation of auditing:
The advancedity of enterprise and system may sometime limited auditor from acquiring the finished view on entity critical internal controls. Auditors will not be able to carry out the correct risk assessment.
Management intention and override controls are typically couldn’t detect by auditors. For instance, inside management is reliable only if individuals working within the entity observe and have the precise to execute their roles. Nevertheless, if administration overrides the management, auditors is probably not able to detect the fraud risks or errors.
Materialsity based is what auditor makes use of to perform its assessment 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 acknowledged within the audit engagement and audit standards. This sometimes totally 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 primary responsibility within the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any material misstatements discovered if, after their testing, they discovered nothing materially misstated. Nevertheless, the conclusion here is based on their sampling. Audit sampling might not cover the material errors or fraud, particularly auditors who lead or carry out the critical risk areas shouldn’t have enough skunwell and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have loads of shoppers readily available at the same 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 sufficient experience 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 interval that they are auditing; nevertheless, the fraud may happen in others interval outside the scope.
Independence and battle of curiosity of audit group members can improve the risks of poor audit quality and audit reports. If the battle of curiosity shouldn’t be minimized to the settle forable level as required by ISA 500, then the audit report is not going to be delivered on the quality that it should be.
Advantages of auditing:
Quality of monetary information is essential for key stakeholders like investors, bankers, BoD, as well as the management team. Audit of economic statements could be certain that the quality of financial info that flows to those group of people are true and fair. And the key resolution that they make through the use of audited financial info will likely be in one of the best opinion.
Compliance with the law of country or territory that the entity is operating in could be very important. Have their financial statements audit yearly by qualified auditors after which submit to relevance government body might help 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 evaluate the monetary statements on their behalf. This might 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 result of the audit proves that the monetary statements are true and honest view.
Auditors have expertise in both inside control and financial reporting. Have an auditor audit on an entity’s monetary data may help the management group to access the experience this hold by the audit firm.
Improve inner controls: auditors could assist to review the accounting system, procedure, people, and process of the entity. It will assist the entity to improve its key inside control that might decrease fraud risks and errors.
Protects Fraud and Error may management could not detect.
Trust from other organizations: Creditors, banks, and authorities authority.