DISADVANTAGES OF AUDITING 5
Anaudit is a systematic and scientific assessment of the financialreports of an entity. It is undertaken by an independent individualor a body of professionals duly qualified for the job. The activityverifies the results indicated in the financial statements such asthe profit and loss, the statement of the financial position as wellas the statement of income. It examines and verifies whether thereports indicate a valid and fair position of the (Porter,et.al, 2008). Despitethe advantages of the auditing activity to the stakeholders of acompany, it is also associated with various disadvantages. Theyinclude the lack of assurance, inconclusiveness, dependency oninternal controls, lack of first-hand information, subjectivity tocorruption, over reliance on quantitative data and determination ofauditor’s independence (Auditors`rotation, 2004).
Thefirst disadvantage of an audit is the failure to provide assurance ofthe future viability of an organization. Despite the opinion that thefinancial results provide a genuine and fair view of an organization,the auditor does not provide an assurance of future viability of thebusiness to the shareholders or investors. For example, the auditreport confirms that the business is a viable going concern in theshort run. It fails to provide assurance that the business is freefrom failure due to business or economic related risks that arebeyond the scope of the audit due to over reliance on past data fromthe financial statements. The heavy over reliance on past performancedetermines the true and fair view of the financial position butreduces the ability to foresee the future of the business (Auditors`rotation, 2004).
Second,an audit only results in persuasive evidence as opposed to conclusiveevidence due to the limited chances to obtain absolute certainty.Auditors cannot detect and assure the shareholders that the financialstatements are free from fraud or material misstatements. Theauditors provide information based on their assessment of the levelof reasonableness within management’s estimates in the preparationof financial statements. Consequently, the auditor only serves as ajudge of the procedures and not a participant in the practicalexecution (Shaftoe, n.d).
Theaudit process is dependent on the internal control process. Internalcontrols determine the level of accuracy and fair representation ofthe financial position of an organization since they are applied inthe execution of the organization`s transactions. Internal controlsface the risk of failing to operate as they are designed. They facethe likelihood of failure to control fraudulent activities happeningbetween the employees of an organization. For example, the power ofthe individuals in the management position bestows them the abilityto override the internal controls in place. The management canconceal as well as direct their subordinates to record transactionsincorrectly or suppress the information related to thosetransactions. Consequently, an audit fails to identify the occurrenceof fraud and misrepresentation of transactions. (Porter,et.al, 2008).
Thirdis the lack of original information for the auditors. An auditordepends on information obtained from officers responsible for thepreparation of accounts. Consequently, the audit report faces therisk of material misstatement due to the provision of falseinformation. Besides, since an auditor cannot be an expert in allfields, the audit officer is dependent on the opinion of otherprofessionals such as lawyers, engineers, and architects. Thefinancial statements are also subject to estimates in the valuationof non-monetary items such as goodwill. As such, the non-monetaryitems are subject to overstatement (Shaftoe, n.d).
Anaudit process is subject to corrupt practices. The management of acompany has an option to use corrupt practices to influence theauditors of a company. The management can bribe the auditors toprovide favourable reports on the state of affairs of theorganization. Consequently, the shareholders of the organization maybe led to believe in manipulated information regarding the status ofthe company (Auditors`rotation,2004).
Anadditional disadvantage is the lack of a detailed checking by theauditors. An auditor does not conduct a detailed check, but onlyconducts test checking on the various transactions that support thefinancial statements. Consequently, the audit process is subject tooverlooking potential areas that may contain fraud as well asmaterial misstatements (Porteret al., 2008).
Theaudit fails to account for qualitative approaches to the presentationof the financial statements. For example, the auditors fail to reporton the job satisfaction of the employees as well as the experience ofthe human capital employed by the firms (Carey, n.d).
Finally,the audit process is dependent on the independence of the auditorwhich is hard to examine. History has indicated that the independenceof an auditor determines the quality of the audit report. Forexample, the fall of Enron was due to the lack of independence ofArthur Andersen auditors. Similar was the case of Bernard Madoff,whose auditors allowed for him to commit the largest Ponzi scheme inhistory. Bernard was able to perpetuate fraud for an extended perioddue to lack of independence of his audit firm. The independence ofthe auditor is hard to measure and ascertain. Consequently,shareholders, as well as other investors and stakeholders who relyheavily on the information from auditors, are at risk of identifyingthe level of independence behind the preparation of audit reports(Porteret al., 2008).
Inconclusion, an audit evaluates the position of an entity to increasethe confidence of investors in the activities of the business. Itrelies heavily on the past performance of an entity and hampers theability to provide assurance on the future of a company. Besides,the process fails to provide assurance that the financial statementsare free from fraud and misstatement since the auditor is neverinvolved in the preparation process. Additional limitations emanatefrom the dependence of the audit on internal controls that aresubject to fraud, misstatement and manipulation by the management. The quality of an audit relies on the overall independence of theauditor that is hard to establish from the stakeholder’sperspective (Porter,et.al, 2008).
Carey,J. (n.d). TheAdvantages & Disadvantages of Investigative Auditing Firms.AZCentral.Web. Retrieved March 18, 2016, fromhttp://yourbusiness.azcentral.com/advantages-disadvantages-investigative-auditing-firms-29025.html
Porter,B., Hatherly, D. J., Simon, J., & Porter, B. (2008). Principlesof auditing.Hoboken, NJ: Wiley.
Auditors`rotation: do disadvantages exceed benefits? (2004). Dawn.Web. Retrieved March 18, 2016, fromhttp://www.dawn.com/news/371010/auditors-rotation-do-disadvantages-exceed-benefits
Murray,Z. (2012, 10 Dec). The pros and cons of professional scepticism. TheJournal of the Global Accounting Alliance. Web. Retrieved March 17, 2016, fromhttp://www.gaaaccounting.com/the-pros-and-cons-of-professional-scepticism/
Shaftoe,R., (nd). The disadvantages of audit & consulting services on thesame client. AZCentral.Web. Retrieved fromhttp://yourbusiness.azcentral.com/disadvantages-audit-consulting-services-same-client-28344.html