Question

What are the inherent limitations of an audit?

Answer 1

Answer -

Audit system is aimed at finding out if financial statements are presenting true and fair view of business, thereby they do not disclose anything which is not correct as well financial statement do not conceal or hide any material fact about business.

It is important to note that sometimes auditors are not able to make audit report which is 100% error free because audit system has certain / inherent limitation, because of which audit sometimes not able to fulfill its purposes or aim.

Limitation of Audit –

• Limitation of scope of audit

Scope of work or data on which audit needs to be conducted, called scope of audit, is restricted in scope of audit. Sometimes scope of audit is decided by auditor and majority of times the same is decided by management. Thereby it can affect the quality of audit report.

• Use of judgement while taking samples for audit

Auditor do not audit 100% of records, but they take sample from 100% records and based on audit of said samples they draw conclusions, which form part of audit report. However the sample size depend of judgement of auditors. In case the judgement goes wrong it might result in insufficient data point, which may lead to inaccurate audit report.

Similar situation may arise if audit misjudges or overlook or misses to verify evidence (s) or situation.

• Frauds Risk

As the name suggests, sometimes by intention material facts / information is concealed by management or by their representatives. If this is the scenario then audit report will not be accurate or correct.

• Conflicts of Interest

In case auditors have conflicts of interest in the business, they will issue bias report. For example if client is generating major revenues for audit firm, there is clear threat to accuracy of audit report. As auditor will not be able to work independently since they are having interest in client business.

•   Limitation of Time

As audit work will have to be completed in a fixed time frame, sometimes if audit is not programmed properly, it might hamper the quality of audit.

• Too much reliance on management statements.

Management gives certain statements / data points, audit can rely on the same, however too much reliance can be harmful for audit report’s quality.

• 7. Human Errors

Error of omission or commission are example of human errors, these can be hurdle in deciding accuracate views on financial statement.