Advantages and limitations of statutory audit

Below, we explained the advantages and limitations of statutory audit to an entity and its top-level management. The primary advantage is the enhancement of credibility the audit report provides. However, the cost involved in such an audit is a major limitation.

1. Advantages of Statutory Audit

1.1 Adds Credibility

Statutory audit adds credibility to the financial statement. It tells the shareholders and owners that the financial statements prepared by the directors or top managers can be relied on.

1.2 Ensure compliance

When a company engages an external auditor, it shows compliance on its part. It means that the entity is a good citizen of the country's law.

1.3 Prevent fraud

Audit processes reduce fraud. Knowing that an external auditor will examine the accounts of the company can serve as a deterrent to the management in the area of fraud if they have planned to do so.

1.4 Used in Computing Income Tax

A statutory audit verifies that the financial statements prepared by management comply with certain criteria. Therefore, they can be relied on in the computation of company income tax.

1.5 To access a bank loan

Companies seeking bank loans will need an audited financial statement. When the accounts are audited, they are not reliable and the bank may refuse to provide the loan facility to the company.

1.6 Good corporate governance 

Complying with the law in the area of audit is a sign of good corporate governance. Therefore, aside from being a good corporate citizen as a company, the directors show good corporate governance on their part. 

2. Limitations of Statutory Audit 

2.1 Cost of auditing

The cost of auditing financial statements is huge for large and medium-sized companies. For example, in 2023 financial statements, MTN spent a total sum of 1.4 billion on audit fees.

2.2 Audits do not prevent fraud

The primary objective of an audit is to check compliance with an entity's books of accounts. The compliance includes that of the international financial reporting standards and the company law of the country. 

2.3 There is no absolute assurance

Audit and assurance services don't provide absolute assurance. The assurance level and either be high or moderate. A complete assurance is not possible for now. These are because humans are involved and the use of sample size in an audit engagement.

2.4 Audit evidence is persuasive

The evidence used in auditing is mostly persuasive rather than conclusive. As a result, the opinions provided by the external auditor in a statutory audit are not in their absolute state. 

2.5 Time constraint

The time frame available for the audit might not be enough to complete the audit procedures. This might affect the reliability of the audit procedure as the auditor might not test some evidence to meet the deadline.