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Limitation and advantages of an audit of economic statements
Auditing of financial statements is generally performed by audit firms primarily based on the engagement that request by the entity. The entity wants its monetary statements audited annually someday based on the law or typically primarily based on their own requirements.
A big company is often required by law and small business with low turnover and staffs is normally exempted from the audit. This is to reduce prices since the professional payment like the audit price is often high.
There are a lot of customers of the audited report and monetary statements. These together with employees, administration’s crew, the board of directors, shareholders, clients, suppliers, banks, creditors and authorities creatority.
Audit of economic statements has a variety of advantages and limitation of auditing to the entity, here they're:
Limitation of auditing:
The complexity of business and system may someday limited auditor from obtaining the completed view on entity critical inner controls. Auditors will not be able to carry out the correct risk assessment.
Administration intention and override controls are sometimes could not detect by auditors. For instance, inside control is reliable only if individuals working in the entity comply with and have the fitting to execute their roles. Nonetheless, if management overrides the control, auditors is probably not able to detect the fraud risks or errors.
Materialsity based is what auditor makes use of to perform its review 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 shouldn't be an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This typically totally different from the entity’s management expectations. Auditors ought to perform fraud risks assessment, however the fraud risk detection and prevention is not their main 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. However, 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 do not have sufficient sksick and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have a lot of clients readily available at the similar time, and they 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 additionally in the industry that they are 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 period that they're auditing; nonetheless, the fraud would possibly happen in others interval outside the scope.
Independence and battle of interest of audit crew members can increase the risks of poor audit quality and audit reports. If the conflict of curiosity is just not minimized to the acceptable degree 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 monetary data is essential for key stakeholders like traders, bankers, BoD, as well as the administration team. Audit of economic statements may be sure that the quality of economic information that flows to those group of people are true and fair. And the key resolution that they make through the use of audited monetary data can be in one of the best opinion.
Compliance with the law of country or territory that the entity is operating in is very important. Have their financial statements audit annually by qualified auditors after which submit to relevance government body might help the entity comply with statutory audit requirement. And avoid any penalty that would significantly have an effect on the entity.
The auditor will assist shareholders to review the monetary statements on their behalf. This might reduce the shareholder’s double on the administration team. Auditors have better 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 monetary statements are true and truthful view.
Auditors have experience in both internal control and financial reporting. Have an auditor audit on an entity’s monetary info might assist the management crew to access the experience this hold by the audit firm.
Improve internal controls: auditors may help to evaluation the accounting system, procedure, people, and process of the entity. It would help the entity to improve its key internal management that might minimize fraud risks and errors.
Protects Fraud and Error may administration could not detect.
Trust from other organizations: Creditors, banks, and government writerity.