Auditing of financial statements is often carried out by audit firms primarily based on the engagement that request by the entity. The entity needs its financial statements audited yearly sometime based on the law or typically based mostly on their own requirements.
A big company is normally required by law and small business with low turnover and staffs is generally exempted from the audit. This is to reduce prices because the professional price like the audit payment is normally high.
There are various customers of the audited report and monetary statements. Those together with staff, administration’s group, the board of directors, shareholders, clients, suppliers, banks, creditors and authorities creatority.
Audit of financial statements has a whole lot of advantages and limitation of auditing to the entity, here they are:
Limitation of auditing:
The complexity of business and system might sometime limited auditor from obtaining the finished view on entity critical inside controls. Auditors might not be able to perform the right risk assessment.
Management intention and override controls are generally could not detect by auditors. For example, inner management is reliable only if individuals working within the entity comply with and have the right to execute their roles. Nonetheless, if management overrides the management, auditors may not be able to detect the fraud risks or errors.
Materiality based is what auditor makes use of to carry out its overview and sampling. That means some sensitive fraud risks with the insignificant quantities 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 completely different from the entity’s administration expectations. Auditors ought to perform fraud risks evaluation, however the fraud risk detection and prevention will not be their major responsibility within the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no material misstatements discovered if, after their testing, they discovered nothing materially misstated. Nevertheless, the conclusion right 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 don’t have enough sksick and experience.
Time constraints can affect the quality of audit works and reports. This happens when auditors have a number of shoppers available at the identical time, and so 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 sufficient expertise not only in auditing skills but in addition within the trade that they’re 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 financial statements over the period that they’re auditing; however, the fraud would possibly occur in others period outside the scope.
Independence and conflict of curiosity of audit workforce members can enhance the risks of poor audit quality and audit reports. If the battle of curiosity is not minimized to the settle forable stage 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 management team. Audit of financial statements could make sure that the quality of monetary data that flows to those group of individuals are true and fair. And the key decision that they make by utilizing audited monetary info shall be in the very best opinion.
Compliance with the law of country or territory that the entity is operating in may be very important. Have their monetary statements audit annually by qualified auditors and then submit to relevance government body might assist the entity comply with statutory audit requirement. And keep away from any penalty that could significantly affect the entity.
The auditor will assist shareholders to review the financial statements on their behalf. This may reduce the shareholder’s double on the administration team. Auditors have better skills than shareholders in this area.
The audit of financial statements might assist improve administration’s integrity, particularly when the result of the audit proves that the monetary statements are true and honest view.
Auditors have experience in both inside control and monetary reporting. Have an auditor audit on an entity’s financial info might help the management workforce to access the experience this hold by the audit firm.
Improve inner controls: auditors may assist to assessment the accounting system, procedure, folks, and process of the entity. It is going to assist the entity to improve its key internal management that could reduce fraud risks and errors.
Protects Fraud and Error could management could not detect.
Trust from different organizations: Creditors, banks, and government authority.