Auditing of financial statements is generally performed by audit companies based mostly on the engagement that request by the entity. The entity needs its monetary statements audited yearly someday based on the law or generally based mostly on their own requirements.
A big corporation is normally required by law and small enterprise with low turnover and staffs is normally exempted from the audit. This is to reduce costs since the professional charge like the audit charge is normally high.
There are various users of the audited report and monetary statements. Those together with staff, management’s group, the board of directors, shareholders, prospects, suppliers, banks, creditors and authorities writerity.
Audit of monetary statements has a number of advantages and limitation of auditing to the entity, right here they’re:
Limitation of auditing:
The complicatedity of business and system may someday limited auditor from obtaining the finished view on entity critical inner controls. Auditors will not be able to perform the correct risk assessment.
Management intention and override controls are typically could not detect by auditors. For example, inner management is reliable only if people working within the entity comply with and have the best to execute their roles. Nonetheless, if management overrides the management, auditors may not be able to detect the fraud risks or errors.
Materialsity based is what auditor makes use of to perform its overview 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 is not an auditor’s responsibility. This is what said in the audit engagement and audit standards. This typically different from the entity’s management expectations. Auditors should carry out fraud risks assessment, but the fraud risk detection and prevention shouldn’t be their major responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren’t any material misstatements discovered if, after their testing, they discovered nothing materially misstated. However, the conclusion right here is predicated on their sampling. Audit sampling might not cover the fabric errors or fraud, particularly auditors who lead or perform the critical risk areas do not need enough skailing and experience.
Time constraints can affect the quality of audit works and reports. This occurs when auditors have a number of shoppers readily available at the similar time, and they couldn’t 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 also within the trade that they are 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 period that they are auditing; however, the fraud might occur in others period outside the scope.
Independence and battle of interest of audit group members can enhance the risks of poor audit quality and audit reports. If the battle of curiosity shouldn’t be minimized to the settle forable level as required by ISA 500, then the audit report is not going to be delivered at the quality that it should be.
Advantages of auditing:
Quality of financial data is essential for key stakeholders like investors, bankers, BoD, as well because the administration team. Audit of financial statements may be certain that the quality of financial data that flows to these group of people are true and fair. And the key choice that they make by using audited monetary information will probably be in the most effective opinion.
Compliance with the law of country or territory that the entity is operating in could be very important. Have their monetary statements audit yearly by certified auditors after which submit to relevance authorities body may 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 assist shareholders to review 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 assist improve management’s integrity, especially when the result of the audit proves that the financial statements are true and honest view.
Auditors have experience in both inside control and financial reporting. Have an auditor audit on an entity’s monetary information may assist the management workforce to access the experience this hold by the audit firm.
Improve internal controls: auditors could help to overview the accounting system, procedure, folks, and process of the entity. It would assist the entity to improve its key internal management that might decrease fraud risks and errors.
Protects Fraud and Error may management couldn’t detect.
Trust from different organizations: Creditors, banks, and government creatority.