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Limitations of Auditing
Let’s learn more about the limitation of auditing. A financial statement audit is subject to a number of inherent limitations. One constraint is that the auditor works within fairly restrictive economic limits. Following are two important economic limitations.
1. Reasonable cost: A limitation on the cost of an audit result in selective testing or sampling, of the accounting records and supporting data. In addition, the auditor may choose to test internal controls and may obtain assurance from a well functioning system of internal controls.
2. Reasonable length of time: the auditor’s report on many public companies is usually issued three or five weeks after the balance sheet date. This time constraint may affect the amount of evidence that can be obtained concerning events and transactions after the balance sheet date that may have an effect on the financial statements. Moreover, there is a relatively short time period available for resolving uncertainties existing at the statement date.
3. Another significant limitation: is the established accounting framework for preparing financial statements. Following are two important limitations associated with the established accounting framework.
4. Alternative accounting Principles: Alternative accounting principles are permitted under GAAP. Financial statement users must be knowledgeable about a company’s accounting choices and their effect on financial statements.
5. Accounting Estimates: Estimates are an inherent part of the accounting process, and no one, including auditors, can foresee the outcome of uncertainties. Estimate 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 certainly to financial statements when these factors do not exist.
