Auditing of financial statements is generally performed by audit corporations primarily based on the engagement that request by the entity. The entity wants its monetary statements audited yearly sometime based on the law or sometimes primarily based 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 for the reason that professional payment like the audit payment is generally high.
There are many customers of the audited report and monetary statements. These including workers, administration’s crew, the board of directors, shareholders, customers, suppliers, banks, creditors and government writerity.
Audit of economic statements has a lot of advantages and limitation of auditing to the entity, here they are:
Limitation of auditing:
The advancedity of enterprise and system could sometime limited auditor from acquiring the finished view on entity critical inner controls. Auditors will not be able to perform the proper risk assessment.
Management intention and override controls are generally could not detect by auditors. For example, inside control is reliable only if individuals working in the entity comply with and have the correct to execute their roles. However, if management overrides the management, auditors is probably not able to detect the fraud risks or errors.
Materialsity based mostly is what auditor makes use of to carry out its evaluation and sampling. Which means some sensitive fraud risks with the insignificant amounts that probably out of auditor scope could not be detected by auditors.
Fraud detection just isn’t an auditor’s responsibility. This is what stated in the audit engagement and audit standards. This typically different from the entity’s management expectations. Auditors ought to perform fraud risks evaluation, however the fraud risk detection and prevention is just 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 no materials misstatements discovered if, after their testing, they found nothing materially misstated. Nevertheless, the conclusion here is based on their sampling. Audit sampling won’t cover the fabric errors or fraud, especially auditors who lead or perform the critical risk areas would not have enough skailing and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have a variety of shoppers on hand on the same time, they usually 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 also in the industry that they’re auditing. However, 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 period that they’re auditing; nevertheless, the fraud would possibly happen in others period outside the scope.
Independence and battle of interest of audit staff members can improve the risks of poor audit quality and audit reports. If the battle of curiosity is not minimized to the acceptable level 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 economic data is essential for key stakeholders like traders, bankers, BoD, as well because the administration team. Audit of economic statements could ensure that the quality of monetary data that flows to these group of people are true and fair. And the key decision that they make through the use of audited financial data will be in the most effective opinion.
Compliance with the law of country or territory that the entity is working in may be very important. Have their monetary statements audit annually by qualified auditors after which submit to relevance government body could assist the entity comply with statutory audit requirement. And keep away from any penalty that could significantly have an effect on the entity.
The auditor will help shareholders to assessment 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 monetary statements may help improve management’s integrity, especially when the result of the audit proves that the monetary statements are true and honest view.
Auditors have experience in both inside control and financial reporting. Have an auditor audit on an entity’s financial info could help the administration group to access the experience this hold by the audit firm.
Improve inner controls: auditors may help to evaluation the accounting system, procedure, individuals, and process of the entity. It will assist the entity to improve its key internal control that would reduce fraud risks and errors.
Protects Fraud and Error could management could not detect.
Trust from different organizations: Creditors, banks, and authorities authority.