There are some specific economic benefits that accrue from audits. Some most important advantages and disadvantages of auditing are the following:
Advantages of auditing
- Access to Capital Market: Public limited companies must satisfy audit requirements under the Securities and Exchange Commission in order to register securities and have them traded in the securities markets. Without audits, companies would be denied access to these capital markets.
- Lower Cost of Capital: Because of the reduced information risk associated with audited financial statements, creditors may offer lower interest rates, and investors may be willing to accept a lower rate of return on their investment.
- Deterrent to Inefficiency and Fraud: When employees know that an independent audit is to be made, they take care to make fewer errors in performing the accounting function and are less likely to misappropriate company assets.
- Control and Operational Improvements: The independent auditor can often make suggestions to improve controls and achieve greater operating efficiencies within the client’s organization.
Limitations/Disadvantages of Auditing
The main issue for accountants is there are some certain limitations to assurance services and for that reason, there is always a risk involved that the wrong conclusion will be drawn. Assurance can never be absolute. Assurance providers will never give a certification of absolute correctness due to the limitations set out below:
1. Testing is used – the auditors do not oversee the process of building financial statements from start to finish.
2. The accounting systems on which assurance providers may place a degree of reliance also have inherent limitations.
3. Most audit evidence is persuasive rather than conclusive.
4. Assurance providers may sometimes not test the entire item in every subject matter.
5. The client’s staff members may collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose.
6. Assurance provision can be subjective and professional judgments have to be made. For example, about what aspects of the subject matter are the most important, how much evidence to obtain, etc.
7. Assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means.
8. Some items in the subject matter may be estimates and are therefore uncertain. It is impossible to conclude absolutely that judgmental estimates are correct.
9. The nature of the assurance report might itself be limiting, as every judgment and conclusion the assurance provider has drawn cannot be included in it.
10. It does not take into account the productivity and the skills of the employees of the business.
11. For smaller companies, hiring a firm to carry out an audit can be costly.
12. Investment may be discouraged by bad auditing.
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