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Limitation and advantages of an audit of monetary statements
Auditing of financial statements is generally carried out by audit firms 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 typically primarily based on their own requirements.
A big corporation is normally required by law and small enterprise with low turnover and staffs is generally exempted from the audit. This is to reduce costs since the professional fee like the audit fee is normally high.
There are many users of the audited report and financial statements. Those together with workers, administration’s staff, the board of directors, shareholders, prospects, suppliers, banks, creditors and government creatority.
Audit of monetary statements has a whole lot of advantages and limitation of auditing to the entity, right here they're:
Limitation of auditing:
The complexity of enterprise and system could sometime limited auditor from obtaining the completed view on entity critical inside controls. Auditors may not be able to perform the proper risk assessment.
Management intention and override controls are sometimes could not detect by auditors. For example, internal management is reliable only if individuals working within the entity observe and have the correct to execute their roles. Nevertheless, if management overrides the management, auditors will not be able to detect the fraud risks or errors.
Materialsity based mostly is what auditor uses to perform its evaluation 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 is not an auditor’s responsibility. This is what said within the audit engagement and audit standards. This sometimes totally different from the entity’s management expectations. Auditors should perform fraud risks evaluation, however the fraud risk detection and prevention shouldn't be their main 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 found if, after their testing, they found nothing materially misstated. However, the conclusion right here relies on their sampling. Audit sampling might not cover the fabric errors or fraud, particularly auditors who lead or carry out the critical risk areas shouldn't have sufficient skill and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have quite a lot of purchasers readily available at the identical time, they usually could not manage their tasks that the quality that had set.
Auditor’s qualification is essential for the quality of the audit report. Some auditors have sufficient experience not only in auditing skills but additionally in the industry that they're 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 period that they're auditing; nevertheless, the fraud may happen in others period outside the scope.
Independence and conflict of curiosity of audit workforce members can improve the risks of poor audit quality and audit reports. If the battle of interest will not 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 ought to be.
Advantages of auditing:
Quality of economic information is essential for key stakeholders like buyers, bankers, BoD, as well because the administration team. Audit of monetary statements might be certain that the quality of monetary data that flows to those group of persons are true and fair. And the key determination that they make through the use of audited financial data will probably be in one of the 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 certified auditors and then submit to relevance government body may assist the entity comply with statutory audit requirement. And keep away from any penalty that would significantly affect the entity.
The auditor will assist shareholders to review the monetary statements on their behalf. This might reduce the shareholder’s double on the management team. Auditors have higher skills than shareholders in this area.
The audit of monetary statements could help improve management’s integrity, especially when the results of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in both internal management and financial reporting. Have an auditor audit on an entity’s monetary data could assist the management team to access the experience this hold by the audit firm.
Improve inner controls: auditors may assist to review the accounting system, procedure, people, and process of the entity. It would help the entity to improve its key inner control that could reduce fraud risks and errors.
Protects Fraud and Error could administration could not detect.
Trust from different organizations: Creditors, banks, and government creatority.
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