Auditing of financial statements is normally carried out by audit corporations based mostly on the engagement that request by the entity. The entity wants its financial statements audited annually someday 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 often exempted from the audit. This is to reduce prices because the professional charge like the audit payment is often high.
There are lots of customers of the audited report and financial statements. These including employees, administration’s group, the board of directors, shareholders, customers, suppliers, banks, creditors and government creatority.
Audit of monetary statements has quite a lot of advantages and limitation of auditing to the entity, here they are:
Limitation of auditing:
The complexity of business and system may sometime limited auditor from acquiring the finished view on entity critical inner controls. Auditors may not be able to perform the proper risk assessment.
Management intention and override controls are typically could not detect by auditors. For instance, internal management is reliable only if individuals working in the entity follow and have the precise to execute their roles. However, if administration overrides the control, auditors is probably not able to detect the fraud risks or errors.
Materialsity based mostly is what auditor makes use of to perform its assessment 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 will not be an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This generally completely different from the entity’s management expectations. Auditors ought to perform fraud risks evaluation, but the fraud risk detection and prevention just isn’t their primary responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any material misstatements discovered if, after their testing, they found nothing materially misstated. Nonetheless, the conclusion here relies on their sampling. Audit sampling might not cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas do not need sufficient sksick and experience.
Time constraints can affect the quality of audit works and reports. This happens when auditors have numerous purchasers on hand at the similar 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 experience not only in auditing skills but in addition in the trade that they are auditing. However, 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; however, the fraud would possibly occur in others interval outside the scope.
Independence and conflict of curiosity of audit team members can enhance the risks of poor audit quality and audit reports. If the conflict of curiosity will not be minimized to the acceptable degree 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 data is essential for key stakeholders like traders, bankers, BoD, as well because the administration team. Audit of economic statements may make sure that the quality of financial information that flows to those group of people are true and fair. And the key choice that they make by utilizing audited monetary information can be in the best opinion.
Compliance with the law of country or territory that the entity is operating in is very important. Have their monetary statements audit yearly by certified auditors and then submit to relevance authorities body might assist 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 assist shareholders to evaluation the financial 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 monetary statements may assist improve management’s integrity, especially when the result of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in each inner control and monetary reporting. Have an auditor audit on an entity’s financial information might help the administration crew to access the experience this hold by the audit firm.
Improve inner controls: auditors might help to assessment the accounting system, procedure, folks, and process of the entity. It would assist the entity to improve its key inside control that might reduce fraud risks and errors.
Protects Fraud and Error could management couldn’t detect.
Trust from different organizations: Creditors, banks, and government authority.