Auditing of economic statements is normally carried out by audit corporations primarily based on the engagement that request by the entity. The entity wants its financial statements audited annually someday based on the law or generally primarily based on their own requirements.
A big company is normally required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce prices for the reason that professional payment like the audit charge is normally high.
There are lots of users of the audited report and financial statements. Those together with staff, management’s crew, the board of directors, shareholders, clients, suppliers, banks, creditors and authorities authority.
Audit of monetary statements has loads of advantages and limitation of auditing to the entity, right here they’re:
Limitation of auditing:
The complicatedity of enterprise and system may someday limited auditor from obtaining the completed view on entity critical internal controls. Auditors may not be able to perform the correct risk assessment.
Administration intention and override controls are sometimes could not detect by auditors. For example, inner control is reliable only if individuals working within the entity observe and have the precise to execute their roles. Nonetheless, if administration overrides the management, auditors might not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor makes use of to perform its evaluate and sampling. That means some sensitive fraud risks with the insignificant quantities that probably out of auditor scope could not be detected by auditors.
Fraud detection isn’t an auditor’s responsibility. This is what stated in the audit engagement and audit standards. This typically different from the entity’s administration expectations. Auditors should perform fraud risks evaluation, but the fraud risk detection and prevention shouldn’t be their primary responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no materials misstatements discovered if, after their testing, they found nothing materially misstated. Nonetheless, the conclusion right here is predicated on their sampling. Audit sampling won’t cover the material errors or fraud, especially auditors who lead or carry out the critical risk areas shouldn’t have sufficient sksick and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have plenty of clients available on the identical 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 enough expertise not only in auditing skills but in addition in the trade that they’re 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 monetary statements over the interval that they are auditing; however, the fraud might occur in others period outside the scope.
Independence and conflict of curiosity of audit staff members can increase the risks of poor audit quality and audit reports. If the battle of curiosity just isn’t minimized to the settle forable level 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 monetary info is essential for key stakeholders like investors, bankers, BoD, as well because the administration team. Audit of financial statements might be certain that the quality of monetary info that flows to these group of persons are true and fair. And the key choice that they make by utilizing audited financial information can be in the perfect opinion.
Compliance with the law of country or territory that the entity is operating in may be very important. Have their monetary statements audit yearly by certified auditors and then submit to relevance authorities body could help the entity comply with statutory audit requirement. And keep away from any penalty that would significantly affect the entity.
The auditor will help shareholders to evaluate the monetary 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 economic statements could help improve administration’s integrity, particularly when the result of the audit proves that the monetary statements are true and honest view.
Auditors have expertise in both internal control and financial reporting. Have an auditor audit on an entity’s monetary data could assist the management team to access the expertise this hold by the audit firm.
Improve inner controls: auditors could help to evaluate the accounting system, procedure, individuals, and process of the entity. It would help the entity to improve its key internal management that might reduce fraud risks and errors.
Protects Fraud and Error may administration could not detect.
Trust from different organizations: Creditors, banks, and government creatority.