Limitations of Financial Statement Audit
A financial statement audit is the assessment of an entity’s financial statements and accompanying disclosures by a sovereign auditor. The consequence of this assessment is a statement by the auditor, attesting to the fairness of management of the financial statements and related disclosures.
A financial statement audit made in accordance with Generally Accepted Auditing Standards (GAAS) is subject to a member of inherent limitations.
(a) Reasonable Cost: One constraint is that the auditors work within fairly restrictive economic limits. To be useful, the audit must be made at reasonable cost and within a reasonable length of time.
(b) Reasonable Length of Time: The auditor’s report on the financial statements is usually issued within three months of 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.
Accounting Framework Limitations
(c) Alternative Accounting Principles: Another significant limitation is the established accounting framework for the preparation of financial statements. Alternative principles are often permitted under GAAP.
(d) Accounting Estimates: Estimates are an inherent part of the accounting process and no one, including auditors, can foresee the outcome of uncertainties.
Despite these limitations, a financial statement audit adds credibility to the financial statements.