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Limitation and advantages of an audit of economic statements
Auditing of financial statements is normally carried out by audit companies primarily based on the engagement that request by the entity. The entity needs its financial statements audited annually sometime primarily based on the law or generally primarily based on their own requirements.
A big corporation is often required by law and small business with low turnover and staffs is generally exempted from the audit. This is to reduce costs since the professional fee like the audit charge is normally high.
There are a lot of customers of the audited report and financial statements. Those together with employees, management’s staff, the board of directors, shareholders, prospects, suppliers, banks, creditors and authorities writerity.
Audit of financial statements has a whole lot of advantages and limitation of auditing to the entity, here they're:
Limitation of auditing:
The complexity of business and system might someday limited auditor from obtaining the finished view on entity critical inside controls. Auditors may not be able to carry out the proper 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 comply with and have the best to execute their roles. However, if administration overrides the control, auditors might not be able to detect the fraud risks or errors.
Materialsity primarily based is what auditor uses 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 isn't an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This sometimes totally different from the entity’s administration expectations. Auditors should carry out fraud risks evaluation, but the fraud risk detection and prevention is not their main responsibility in the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are not any materials misstatements found if, after their testing, they found nothing materially misstated. However, the conclusion here relies on their sampling. Audit sampling won't cover the fabric errors or fraud, particularly auditors who lead or carry out the critical risk areas wouldn't have sufficient skin poor health and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have quite a lot of purchasers available on the identical 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 in addition within the industry that they're auditing. Nevertheless, 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 are auditing; nonetheless, the fraud would possibly occur in others period outside the scope.
Independence and battle of curiosity of audit workforce members can enhance the risks of poor audit quality and audit reports. If the battle of curiosity is just not minimized to the acceptable level as required by ISA 500, then the audit report won't be delivered on the quality that it should be.
Advantages of auditing:
Quality of financial data is essential for key stakeholders like traders, bankers, BoD, as well as the management team. Audit of financial statements might make sure that the quality of economic info that flows to these group of people are true and fair. And the key choice that they make by using audited financial data shall be in the very best opinion.
Compliance with the law of country or territory that the entity is working in could be very important. Have their monetary statements audit annually by qualified auditors after which submit to relevance government body might assist the entity comply with statutory audit requirement. And avoid 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 may reduce the shareholder’s double on the administration team. Auditors have higher skills than shareholders in this area.
The audit of monetary statements could assist improve administration’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 management and monetary reporting. Have an auditor audit on an entity’s financial info may assist the management crew to access the expertise this hold by the audit firm.
Improve internal controls: auditors could help to assessment the accounting system, procedure, people, and process of the entity. It is going to help the entity to improve its key internal control that could reduce fraud risks and errors.
Protects Fraud and Error might administration could not detect.
Trust from different organizations: Creditors, banks, and authorities creatority.
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