What are limitations of External audit?

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Limitations mean restrictions or factors that limit the effectiveness of audit engagement and limits the auditor to restrict only to provide reasonable assurance.

Most of the time when we refer to limitations of external audit we mean inherent limitations of external audit engagement or in other words inherent limitations of assurance engagement. But it does not necessarily always mean inherent limitations of audit engagement it may mean other restrictions or factors that are causing obstruction in auditor’s work or affecting the effectiveness of audit engagement. You can read in great detail about inherent limitations in our QnA What is meant by inherent limitations of audit and what are these?

It is because of these inherent limitations that auditor is not able to provide absolute assurance to the users of financial statements. However, limitations may become so serious that auditor may not be in a position to provide any assurance at all i.e. unable to provide opinion because situation and circumstances surrounding the engagement is such that auditor is unable to obtain sufficient appropriate audit evidence then auditor may decide to disclaim an opinion or resign from engagement altogether.

Some of the important limitations of external audit are as follows:

  • Use of estimation and judgement by the management of the entity in numerous values reported in the financial statements e.g. depreciation, provision for doubtful debt etc. This is one of major limitations of financial accounting
  • Historic nature of reporting – audit opinion is expressed on historic information which is most of the time pertains to period 3 months to 1 year old and this information may not be true by the time user actually uses such information and similarly the audit report is also expressed on information that is 1 year old in case of annual audits and such information may not be relevant anymore. This seriously questions the relevance of audit report and the financial statements for the purpose of decision making.
  • Use of sampling basis to extract conclusions regarding population of large sizes that cannot be examined 100% by the auditor. May be because of cost-benefit woes or simply not much resources are available
  • Humans – from preparation of accounting records to finalizing financial statements to planning audit to expressing audit opinion, humans are involved and they are prone to error. Also lack of knowledge, experience and failure to identify misstatements cause effectiveness of audit to reduce.
  • Nature of evidence – many a times evidence collected by the auditor is of persuasive nature rather than conclusive i.e. it is left on the auditor to decide what conclusion should be drawn or what steps should be taken further. Conclusive evidence help us reach conclusion with complete authority whereas in case of persuasive evidence we have to seek additional evidence to corroborate our understanding and support our conclusion and this may not be possible because of lack of resources or just because it is not possible given the situation.
  • Nature of audit – Audit provides assurance regarding accuracy of assertions or in simple words whether financial statements reflect true state of affairs of the entity. External auditor’s opinion in no way help users to derive conclusions regarding managerial effectiveness or future viability of the entity and thus limited only to provide assurance regarding preparation and presentation of financial statements according to specific accounting framework.

To learn in more detail about limitations of external audits please visit this page

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