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inherent limitation of audit. ?

Forums › ACCA Forums › ACCA AA Audit and Assurance Forums › inherent limitation of audit. ?

  • This topic has 3 replies, 4 voices, and was last updated 13 years ago by Anonymous.
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  • April 23, 2010 at 5:21 pm #43615
    me1245
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    • Topics: 1
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    what are the inherent limitation of audit ?
    is it link to not absolute assurance?

    regards

    March 30, 2012 at 3:11 am #59512
    Anonymous
    Inactive
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    • Replies: 1
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    An external audit is a type of assurance engagement that is conducted by an independent auditor to provide an independent opinion on a set of financial statement. The objective of an external audit of financial statement is to enable the auditor to express an opinion on whether the financial statements were prepared, in all material respect, in conformity with the applicable financial reporting framework such as the International Financial Reporting Standards (IFRS).

    There are two types of assurance in which the auditor can provide. These are reasonable assurance and limited assurance. Reasonable assurance is where high but not absolute level of assurance is given. Limited assurance is a lower level of assurance. It allows for lesser amount of testing and evaluation and results in a negative conclusion.

    When auditor perform an audit on the financial statements of a company, the auditor’s reports on the company financial statements is expressed in terms if truth and fairness. This is generally means that the financial statements are factual, free from bias and reflects the commercial substance of the business transactions. However, the opinion is not an opinion of absolute correctness. True means the information in the financial statements is factual and conforms to reality and the financial statements have been correctly extracted from the books and records. Fair means that the information in the financial statements is free from discrimination and bias and prepared in compliance with the applicable standards and rules (IFRS) and the accounts reflects the commercial substance of the company underlying transactions.

    The reasons why auditors are unable to provide total assurance is because the assurance given by auditors is governed by the fact that auditors use judgment in deciding what audit procedures to use and what conclusion to draw, and also because of the inherent limitations associated with the every audit work. The main inherent limitation of audit are, limitation of cost and use of sampling, limitation of time, reliance on experts work, the use of materiality concept, and last but not least the possibility of management fraud.
    Limitation of Cost: Limitations on the cost of an audit results in selective testing or sampling, of the accounting records and supporting data. For the fact that auditors cannot and do not attempt to check the entire transactions in the financial statements. Because, there is vast number of transactions in the financial statements of large companies, it would be impossible and extremely expensive to check all these transactions and there is no company prepared to pay for the auditors to do so.

    Limitations of Time: the auditor’s report on many public companies is usually issued three or five weeks after the balance sheet date. This time constraint may affect the amount of evidence that can be obtained concerning events and transactions posy the balance sheet date that may have an effect on the financial statements. Moreover, there is a relatively short time period available for resolving uncertainties existing at the statement date.

    Reliance on Experts Work: ISA 620 Using the Work of an Expert recognize that the auditor’s education and experience enable them to be knowledgeable about business matters in general, but they are not expected to have the expertise of person trained in the practice of another profession, auditors may need to obtain evidence in the form of reports, opinion, valuation or statement from an expert.

    Materiality Concept: Misstatements which are significant to the users may exist in the financial statements and auditors will plan their work on the basis, that is, with professional skepticism. The concept of significance to users is the concept of materiality. Materiality is an expression of the relative significance it importance of a particular matter in the content of the financial statements as a whole. A matter is material is its omission or misstatement would reasonably influence the economic decision of users taken in the basis of the financial statements. Materiality depends on the size or the item judged in the particular circumstances if its omission or misstatement.

    Management Fraud: Fraud schemes are created to intentionally exploit the accounting system and controls, and hence it is more difficult for an auditor to detect them. The auditors follow the audit rules in auditing the financial statements, but those rules are not always effective at detection a fraud that was intentionally disguised by a dishonest employees or manager. Managers can use what they know about the accounting process and the year-end audit to escape from fraud detection.

    As a conclusion, the auditor’s responsibility is to decide whether the financial statements show true and fair view to the users. The auditors are not responsible for establishing whether the financial statements are correct in every particular. This is because it can take a great deal of time and trouble to check the accuracy of even a very small transaction and the resulting benefit may not justify the effort. Also financial accounting inevitably involves a degree of estimation which means that the financial statements can never be completely precise. Therefore the statement that auditors can provide total assurance that the financial statements as whole are free from material misstatement is incorrect.

    March 30, 2012 at 7:11 am #59513
    Anonymous
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    • Replies: 31
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    Adding to the limitations omarh has listed.

    Limitations of accounts:
    There are certain limitations in accounts itself. Like the choice of measuring at fair value/cost, determination of useful life and accounting assumptions like accruals concept. Accounting standards dont give a prefect picture of the company’s financial position and performance and thus audit cannot assure perfect picture either.

    Limitations in the accounting and control system:
    The auditors rely on the accounting and control system of the client to determine sample size. The control system has its own limitations. It is not easy in practice to find out limitations in the control system. And thus dependence on internal control system is a limitation of audit.

    March 31, 2012 at 1:15 pm #59514
    Anonymous
    Inactive
    • Topics: 8
    • Replies: 199
    • ☆☆☆

    well what omrah wrote took me 30 mins to understand the actual meaning. Always remember in ACCA try to help marker, write Simpler, and Wise!

    dont write soooooooo much! write quality of words so that its easy for market to check and mark out your answers.

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