Auditing of financial statements is normally carried out by audit firms based mostly on the engagement that request by the entity. The entity wants its monetary statements audited yearly someday primarily based on the law or typically primarily based on their own requirements.
A big company is generally 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 payment like the audit payment is normally high.
There are many customers of the audited report and monetary statements. These including employees, administration’s workforce, the board of directors, shareholders, prospects, suppliers, banks, creditors and government creatority.
Audit of monetary statements has quite a lot 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 internal 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 instance, inner control is reliable only if folks working in the entity comply with and have the best to execute their roles. Nonetheless, if administration overrides the control, auditors may not be able to detect the fraud risks or errors.
Materiality primarily based is what auditor uses to perform its review and sampling. That means some sensitive fraud risks with the insignificant quantities that probably out of auditor scope couldn't be detected by auditors.
Fraud detection isn't an auditor’s responsibility. This is what acknowledged in the audit engagement and audit standards. This typically different from the entity’s administration expectations. Auditors ought to perform fraud risks assessment, but the fraud risk detection and prevention is just not their major responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
Auditors will conclude that there are no materials misstatements found if, after their testing, they discovered nothing materially misstated. Nevertheless, the conclusion right here is predicated on their sampling. Audit sampling might not cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas would not have sufficient sksick and experience.
Time constraints can have an effect on the quality of audit works and reports. This occurs when auditors have a variety of shoppers available on the similar time, and so 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 sufficient expertise not only in auditing skills but additionally in 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 interval that they're auditing; nonetheless, the fraud might happen in others interval outside the scope.
Independence and battle of curiosity of audit team members can improve the risks of poor audit quality and audit reports. If the battle of interest shouldn't be minimized to the settle forable stage as required by ISA 500, then the audit report
will not be delivered at the quality that it should be.
Advantages of auditing:
Quality of monetary info is essential for key stakeholders like traders, bankers, BoD, as well as the management team. Audit of financial statements could be sure that the quality of monetary information that flows to those group of people are true and fair. And the key decision that they make by utilizing audited financial data might be in the perfect opinion.
Compliance with the law of country or territory that the entity is working in may be very important. Have their financial statements audit yearly by qualified auditors after which 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 help shareholders to overview the financial 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 administration’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 financial info may assist the administration team to access the expertise this hold by the audit firm.
Improve internal controls: auditors could assist to overview the accounting system, procedure, folks, and process of the entity. It should help the entity to improve its key inside management that would decrease fraud risks and errors.
Protects Fraud and Error could management could not detect.
Trust from different organizations: Creditors, banks, and authorities creatority.