Financial statement auditing is usually done by audit firms depending on the entity's request for an engagement. The entity must have its financial statements audited annually, either by law or by its regulations.
A large organization is usually required by law, while small businesses with low turnover and staff are generally exempt. This is to save money because professional fees, such as audit fees, are usually quite pricey.
A large number of people use the audited report and financial statements. Employees, managers, directors, shareholders, consumers, suppliers, banks, creditors, and government entities are affected.
Limitation of Auditing
The following are some of the limitations of financial statement auditing for the entity:
1. Due to the complexity of the business and system, auditors may not always be able to gain a complete picture of its critical internal controls. It is possible that auditors won't be able to do the proper risk assessment.
2. Auditors are sometimes unable to discern management intent and override controls. Internal control, for example, is only reliable if the entity's employees obey the rules and have the authority to carry out their responsibilities. Auditors may not be able to uncover fraud risks or errors if management overrides the control.
3. The auditor conducts its review and sample based on materiality. That means that some sensitive fraud risks involving modest sums could go undetected by auditors since they are likely outside their scope.
4. Fraud detection is not the role of an auditor. The audit engagement and audit standards both state this. It can differ from what the entity's management expects. Auditors should identify fraud risks, but it is not their primary role in the audit engagement to discover and prevent fraud. The public and management believe that fraud detection is the job of the auditor.
5. If auditors find no substantial misstatements after testing, they will conclude no material misstatements. The result reached here, however, is based on their sampling. Audit sampling may not catch significant errors or fraud, mainly if the auditors in charge of or performing the critical risk areas lack the necessary ability and experience.
6. Time constraints can harm the quality of audit work and reports. It occurs when auditors have a large number of clients on their hands simultaneously and are unable to handle their responsibilities to the quality standards that have been established.
7. The qualification of the auditor is critical to the quality of the audit report. Some auditors have sufficient experience in both auditing skills and the industry they are auditing. A few of them, however, do not. Insufficient auditor qualifications will result in poor audit report quality.
8. The audit scope is limited to the financial statements for the period being audited; nevertheless, fraud may occur during other periods not covered by the area.
9. Audit team members' independence and conflicts of interest might raise the risk of lousy audit quality and audit reports. The audit report will not be given at its rate if the conflict of interest is not mitigated to an acceptable degree as required by ISA 500.