Limitations and Advantages of an Audit of Financial Statements


Auditing of financial statements is normally performed by audit firms based on the engagement request by the entity. The entity needs its financial statements audited annually sometimes based on the law or sometimes based on its requirements.

A big corporation is normally required by law and small business with low turnover and staff is normally 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. These include employees, the management’s team, the board of directors, shareholders, customers, suppliers, banks, creditors, and government authority.

Audit of financial statements has a lot of advantages and limitations auditing the entity, here they are:

Limitation of auditing:

  • The complexity of business and system could sometime limit auditors from obtaining the completed view of entity critical internal controls. Auditors may not be able to perform the correct risk assessment.
  • Management intention and override controls sometimes could not detect by auditors. For example, internal control is reliable only if people working in the entity follow and have the right to execute their roles. However, if management overrides the control, auditors may not be able to detect fraud risks or errors.
  • Materiality-based is what an auditor uses to perform its review and sampling. That means some sensitive fraud risks with insignificant amounts that are probably out of auditor scope could not be detected by auditors.
  • Fraud detection is not an auditor’s responsibility. This is what is stated in the audit engagement and audit standards. This is sometimes different from the entity’s management expectations. Auditors should perform fraud risks assessment, but fraud risk detection and prevention is not their primary responsibility in the audit engagement. Public and management think fraud detection is the auditor’s responsibility.
  • Auditors will conclude that there are no material misstatements found if, after their testing, they found nothing materially misstated. However, the conclusion here is based on their sampling. Audit sampling might not cover material errors or fraud, especially auditors who lead or perform the critical risk areas do not have enough skill and experience.
  • Time constraints can affect the quality of audit works and reports. This happens when auditors have a lot of clients on hand at the same time, and they 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 enough experience not only in auditing skills but also in the industry that they are auditing. However, some of them don’t. Poor auditor qualifications will lead to poor quality audit reports.
  • The scope of the audit is cover only the financial statements over the period that they are auditing; however, the fraud might happen in other periods outside the scope.
  • Independence and conflict of interest of audit team members can increase the risks of poor audit quality and audit reports. If the conflict of interest is not minimized to the acceptable level as required by ISA 500, then the audit report will not be delivered at the quality that it should be.
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Advantages of auditing:

  • Quality of financial information is essential for key stakeholders like investors, bankers, BoD, as well as the management team. An audit of financial statements could ensure that the quality of financial information that flows to these group of people are true and fair. And the key decision that they make by using audited financial information will be in the best opinion.
  • Compliance with the law of the country or territory that the entity is operating in is very important. Having their financial statements audited annually by qualified auditors and then submitted to relevant government bodies could help the entity comply with statutory audit requirements. And avoid any penalty that could significantly affect the entity.
  • The auditor will help shareholders to review the financial statements on their behalf. This could reduce the shareholders double on the management team. Auditors have better skills than shareholders in this area.
  • The audit of financial statements could help improve management’s integrity, especially when the result of the audit proves that the financial statements are true and fair view.
  • Auditors have expertise in both internal control and financial reporting. Having an auditor audit an entity’s financial information could help the management team to access the expertise held by the audit firm.
  • Improve internal controls: auditors could help to review the accounting system, procedure, people, and process of the entity. It will help the entity to improve its key internal control that could minimize fraud risks and errors.
  • Protects Fraud and errors could management could not detect.
  • Trust from other organizations: Creditors, banks, and government authority.
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