Audits have become a common theme across a wide variety of different business sectors as they allow an independent entity to analyze a company’s accounting and financial records to make sure everything is in order. This allows businesses to improve their financial strategies as well as to make sure they are conforming to the Generally Accepted Accounting Principles (GAAP) put in place by the Financial Accounting Standards Board (FASB). But what are some of the limitations and pitfalls of audits that business owners should be aware of?
Use of Professional Judgement
An auditor has a responsibility to provide a business with an unbiased analysis of their current accounting strategy, financial standing, and everything in between. Auditors are given a set of standards and guidelines to help them through the auditing process, however, there will always be a slight amount of personal judgement utilized in every audit. Auditors will typically have their own set of personal preferences for how they perform the audit which can unintentionally compromise the integrity of the audit. This also goes hand and hand with auditors making occasion mistakes or misjudgments because they are human. The auditors may have no ill-intentions or even know they are doing it but there will always be a slight degree or professional judgement utilized on each audit.
Audit Sampling Techniques
In order to make audits effective and less time consuming, auditors will only analyze bits and pieces of a company’s financial records, this is called sampling. If auditors didn’t use sampling then they would have to manually comb through every single record of a company’s accounting and financial history. This would be nearly impossible to do at scale as it is so incredibly time consuming.
Although audit sampling provides the auditor with a quicker and more effective method of analyzing a business, it also means they aren’t taking a look at the financial history in its entirety. It is possible that the samples that are drawn from a company’s financial history are missing a key piece of data that an auditor could provide with the client. This typically means that auditors will provide their clients with a reasonable assurance of accuracy compared to a confirmation of 100% accuracy.
Typically an auditor is give an incredibly tight time constraint for each audit project. Time constraints are created because of pressure from both parties, strict bookkeeping deadlines, and overall unorganization. With time constraints in mind, auditors typically will place more value on the larger tasks in order to get the most done, but this will also leave tasks completely untouched. This forces the auditor to pick which tasks they believe are the most important, while the untouched tasks could have shed invaluable information about the company’s financial standing.
Risk of Fraud
Often times auditors are brought in to double check the wellbeing of a company’s accounting, but also to rule out the possibility that fraud is occurring. However, because by definition fraud is intended to be concealed from the company, it is possible that even auditors wont be able to find signs of fraud. That’s not to say that an accounting audit will never detect signs of fraud, it is just explaining that an audit is not a guarantee that fraud will be detected.
Are Audits Beneficial?
Even though audits do come with the limitations that were mentioned above, having routine audits performed is invaluable for the health and success of your business. Not only will audits help your accounting and financial health run more smoothly, it will also help you prepare for federal bookkeeping deadlines. Audits can be a vital part of keeping your accounting systems healthy and should be done routinely for maximum efficacy.
Contact Us For Small Business Accounting Services In Raleigh
Our team of financial professionals at Steward Ingram & Cooper PLLC are trained to help small business succeed. We can help you with your bookkeeping, tax planning, financial statements, and much more. Contact us today at 919-872-0866 to schedule an appointment for a consultation.