In this tutorial, we will learn about the disadvantages or demerits of auditing has to depend upon books of accounts and other records presented before him. He never thinks of the intentions of those who have prepared them.
The auditor has to depend upon the book of accounts and other records presented before him. He never thinks of the intentions of those who have prepared them. If these intentions are malaise and there is manipulation in the accounts, the auditor will not be able to bring them to light. He has also to depend upon experts’ opinions as he is not an expert in all fields like technical, legal, or others. It isn’t easy to find the accounts as complete and genuine everywhere. Some other limitations of an audit are as follows:
Higher Cost Burden:
- Due to the higher cost burden, the auditor limits his scope of work to selective testing and sampling; thus, in-depth checking of the book of accounts is not possible.
Based On Test Checks:
An auditing exercise is based on test checking. Inferring a result based on test check always need to be true.
Based On Information Provided By The Management
The audit opinion is based on the management’s information. Hence outsiders cannot entirely rely on the auditor’s report.
Based On Estimates:
In an inherent part of the accounting process, and no one, including auditors, can foresee the outcomes of uncertainties. Estimates range from the allowance for doubtful accounts and an inventory obsolescence reserve to impairment tests of fixed assets and goodwill. An audit cannot add exactness and certainty to financial statements when these factors do not exist.
Inconclusiveness Of Evidences:
The evidence obtained by an auditor is persuasive rather than conclusive. For example, an architect’s certificate of valuation for a newly constructed building of a client may not be convincing evidence of the correct value of a building.
Generally, an auditor needs to release the report up to a specified timeline. Sometimes this timeline becomes a constraint for an auditor in carrying out the auditing exercises. Moreover, there is a relatively short time available for resolving uncertainties existing at the financial statement date.
The problems are being complicated day-by-day unless an auditor is familiar with the recent changes; he cannot perform his functions with ability and prudence. Hence, capable persons are needed in every country to complete the audit work so that the business may be directed appropriately and administered. It will depend upon the cooperation, especially between the businessman, the government, and the person conducting an audit.
|Meaning||An audit is an independent examination of financial information of an entity when such an examination is conducted with a view to express an opinion thereon.||Investigation implies the systematic, critical, and special examination of the records of a business for a specific purpose.|
|Mandatory nature||Mandatory for companies, for others it is voluntary||Voluntary|
|Conducted by||A Chartered Accountant within the meaning of the Chartered Accountant Act 1949||Any person who may not be a Chartered Accountant|
|Appointment agency||Owners or shareholders of the enterprise||Owners or management or even third parties may appoint the investigator|
|Evidence||Much of audit evidence is persuasive rather than conclusive||Seeks conclusive or corroborative evidence|
|Form of reporting||The matters to be covered in the audit report are sometimes prescribed by law.||There is no statutory form of the investigation report.|
|Pre-conceptions||An audit is not based on suspicion unless circumstances exist to arouse suspicion.||Its essence lies going into the matter with some pre-conceived notion suited to the objective.|
|Period covered||Generally one financial year.||Not necessarily restricted to one financial year. It can extend for a period consisting of several years.|
|Protection of interests||Work is carried out on behalf of the owners even if the power of appointment is delegated to say, a board of directors.||Work is carried out from the viewpoint of the appointing agency|
|Scope and coverage||General- when compared to investigation seeks, to form an opinion on the financial statements.||Specific- seeks to answer only those questions laid down in the engagement letter.|