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Limitation and advantages of an audit of monetary statements
Auditing of monetary statements is generally carried out by audit firms primarily based on the engagement that request by the entity. The entity wants its monetary statements audited annually sometime based on the law or typically based on their own requirements.
A big company is generally required by law and small enterprise with low turnover and staffs is often exempted from the audit. This is to reduce costs because the professional payment like the audit payment is normally high.
There are various customers of the audited report and financial statements. These together with staff, administration’s group, the board of directors, shareholders, clients, suppliers, banks, creditors and authorities creatority.
Audit of financial statements has quite a lot of advantages and limitation of auditing to the entity, here they're:
Limitation of auditing:
The advancedity of enterprise and system may someday limited auditor from obtaining the completed view on entity critical internal controls. Auditors may not be able to carry out the right risk assessment.
Management intention and override controls are sometimes could not detect by auditors. For example, inside management is reliable only if people working in the entity observe and have the proper to execute their roles. Nevertheless, if administration overrides the control, auditors might not be able to detect the fraud risks or errors.
Materiality based mostly is what auditor makes use of to carry out its evaluation 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 just isn't 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 evaluation, but the fraud risk detection and prevention just isn't their major responsibility in the audit engagement. Public and administration think fraud detection is the auditor’s responsibility.
Auditors will conclude that there aren't any material misstatements found if, after their testing, they discovered nothing materially misstated. Nevertheless, the conclusion right here is predicated on their sampling. Audit sampling won't cover the material errors or fraud, particularly auditors who lead or perform the critical risk areas would not have sufficient skunwell and experience.
Time constraints can have an effect on the quality of audit works and reports. This happens when auditors have a whole lot of clients available at the same 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 expertise not only in auditing skills but in addition in the business that they're auditing. However, 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; however, the fraud may occur in others period outside the scope.
Independence and conflict of curiosity of audit team members can improve the risks of poor audit quality and audit reports. If the battle of interest is not minimized to the settle forable level as required by ISA 500, then the audit report is not going to be delivered on the quality that it ought to be.
Advantages of auditing:
Quality of economic data is essential for key stakeholders like traders, bankers, BoD, as well because the management team. Audit of financial statements may be certain that the quality of financial information that flows to those group of persons are true and fair. And the key choice that they make by using audited monetary data can 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 financial statements audit yearly 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 have an effect on the entity.
The auditor will help shareholders to review the financial statements on their behalf. This could reduce the shareholder’s double on the management team. Auditors have higher skills than shareholders in this area.
The audit of financial statements could assist improve administration’s integrity, particularly when the result of the audit proves that the monetary statements are true and truthful view.
Auditors have expertise in both inner management and financial reporting. Have an auditor audit on an entity’s monetary data could help the management workforce to access the expertise this hold by the audit firm.
Improve internal controls: auditors may assist to evaluate the accounting system, procedure, people, and process of the entity. It can assist the entity to improve its key inside management that might reduce fraud risks and errors.
Protects Fraud and Error may administration could not detect.
Trust from different organizations: Creditors, banks, and authorities creatority.
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