The Basics of External Audit
An External Audit is a periodic audit conducted by an independent qualified auditor with the aim to determine whether the accounting records for a business are complete and accurate. It is also done to ensure that the statements accurately represent the organisation’s financial position and are prepared in accordance to the set laws.
An external auditor is an independent, third party professional who performs an impartial review of the financial records of a certain organisation. He or she typically reports to an audit committee composed of company executives. He is responsible for evaluating payroll, accounting, and purchasing records. He also looks at the organisation’s loans and financial investments to identify any irregularities. Internal and external auditors typically have the same job responsibilities; however an internal auditor is more focused on internal control procedures and risk management.
Appointment of auditor. The process starts by appointing an independent auditor. This means hiring someone who is not working for the organisation or the company that requires auditing. Shareholders are usually the ones who choose and appoint auditors at the Annual General Meeting. However, governing legislation also has the power to choose an independent auditor. Typically, auditors will be chosen based on their reputation, qualifications, and skills.
Acceptance of the project. The next step of the process is the terms of engagement. In this part, the auditor confirms that he or she has accepted the appointment. He or she will be informed of the scope of the audit plus his or her expected responsibilities throughout the contract.
Audit program. This is where the actual external auditing will take place. The auditor will collect, assess, and interpret data to gain understanding of the organisation’s activities. For each major activity listed in the financial statements, external auditors will have to identify and assess risks that may have significant impact on the organisation’s performance or financial position.
The external auditor will also look for any irregularities. These may include the company manipulating its own financial performance to mislead investors, delaying the disclosure of future financial performance, etc.
Evidence gathering. External auditors will obtain evidence in order to successfully satisfy the requirements of the audit program. This may include confirming compliance with accounting policies, examining accounting records, and verifying assets that the organisation has purchased.
Reporting. After a thorough investigation, the auditors will submit a financial report and state their objective opinion. The scope of the audit and the outcome will be outlined in their report.
The findings of an external audit can strongly influence the reputation of the company. There can be serious consequences if the conclusions about debts, assets, tax responsibilities, and payments do not match the organisation’s own statements. External auditors will rate the client depending on their review. An unfavourable rating and this can influence if they can stay in business.
The main difference between an internal and external auditor is the one that employs them. An independent auditor works for an organisation but he is not employed by it. Usually, an organisation will appoint external auditor and will work on a per project basis although some organisation will retain the services of external editors that they’ve used in the past. On the other hand, an internal auditor works for the organisation that he reviews.
Both types of auditors provide similar services. They evaluate business operations, financial statements, and the organisation’s compliance with relevant laws. They also help organisations identify irregularities in their departments and make recommendations on how to address them.
Why do organisations hire external auditors?
Organisations hire external auditors for one main reason: to have an objective assessment of the organisation’s financial standing. As external auditors do not have a developed relationship with the organisation that they are reviewing, they are not biased in any way; this means that they can be objective throughout their audit. This translates to accurate data needed by the organisations in assessing their progress or lack thereof.
When organisations hire external auditors they ensure, to the best of their abilities, that he or she is not a relative or a friend of the owner, employee, or manager. Those auditors who are reviewing publicly traded companies should not hold stock in them or have any equity stake in any or their holdings or subsidiaries.
External financial auditors must follow GAAS or Generally Accepted Auditing Standards, which is a testament to their diligence, independence, and training. The International Standards on Auditing are enforced in many countries.
To become an external auditor, one must hold a CPA license (Certified Public Accountant). This means that the individual has successfully passed the Uniformed CPA Examination and is qualified to do the job. The auditor must have experience in financial analysis, auditing, or business administration to really succeed in this field.