Limitations of Audit
dAn auditor cannot
obtain an absolute assurance that material misstatements in the
financial statements will be detected. There is unavoidable risk
involved that some material financial misstatements may not be detected
even auditing has been completed using proper planning and as per the
prescribed auditing standards. The Auditor can only obtain a reasonable
assurance that the material misstatements in the financial statements
will be detected.
The risk of not detecting a fraud is much higher that the risk of not
detecting a material misstatement resulting from an error as frauds are
much deeper rooted and well covered. Normal auditing procedures which
are effective in discovering error are usually not effective enough for
detecting frauds.
Management fraud is much more difficult to detect and the auditor may
simply not detect it at all. The opinions of the Auditors are base on
what is present before him and subsequent discovery of fraud or a
material misstatement in the financial statements does not indicate any
failure on part of the auditor to obtain reasonable assurance or
absence of professional competence or failure to comply with auditing
standards.
When planning and conduction audit, the auditor must make inquiries of
management, obtain a written assurance that the management has prepared
the financial statements with due care considering the fact that the
internal control and accounting and procedure put in place by the
management takes care of such risks. The management’s
assessment of the risk that there may be material misstatements in the
financial statements as a result of fraud. The Auditor must make
enquiries if the management is aware of any known fraud that had
affected the internal control system that the entity is investigating
into
Audit risk is the risk that the auditor gives an inappropriate audit
opinion when the financial statements are materially mismatched. Such
misstatements can result from either fraud or error. There are three
types of audit risks – inherent risk, control risk and
detection risk.