An external audit is a process of independently examining and assessing various financial statements, books of accounts, and reports of a company or a person. This is done to ensure that they are correct and prepared in accordance with the relevant laws and regulations. Companies utilise external audits to examine the accounting procedures and financial data of their organisation. Public accounting companies perform these external audits the majority of the time.
Professional accountants speak with business owners, go over the company's accounting procedures, and verify the accounting data. This guide will help you understand external audits better. Find more about external audit services and their benefits in the following sections.
Did you know that the first Auditor General (Sir Edward Drummond) was elected in 1860 and had control of both accounting and auditing functions? Also, the Indian Departments of Accounts and Audit were created in 1862.
What is an External Audit?
The goals of an external audit are to ascertain the accuracy and completeness of the client's accounting records. This is done to ascertain whether they were prepared in conformity with the appropriate accounting framework and whether the client's financial statements correctly represent its performance and financial situation. Other kinds of external audits, such as an investigation that looks for fraud, may be focused on particular problems with a client's accounting records.
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Types of External Audit
External audits are audits that are conducted by independent auditors who are not affiliated with the organization being audited. There are several types of external audits, including:
Financial Audit
This type of audit is focused on the financial statements of an organization, such as the balance sheet, income statement, and cash flow statement. A financial audit seeks to provide an independent opinion on the fairness and accuracy of financial statements.
Compliance Audit
A compliance audit is a systematic examination of an organization's adherence to laws, regulations, rules, policies, and procedures. The objective is to assess whether the organization complies with applicable regulations, standards and laws, and to identify areas where improvements can be made.
Operational Audit
This type of audit is focused on evaluating the effectiveness, efficiency, and economy of an organization's operations and procedures. An operational audit examines the organization's internal control systems and procedures and makes recommendations for improvements where necessary.
Integrated Audit
An integrated audit is a combination of both financial and operational audits. It is meant to evaluate the overall performance of an organization by assessing the financial and operational systems together. This type of audit provides a more holistic view of the organization's performance and areas for improvement.
Forensic Audit
A forensic audit is an investigation with the primary objective of gathering evidence that could be used in court. Forensic audits are used in situations where fraud or mismanagement is suspected.
Information Systems Audit
An information systems audit is focused on evaluating the systems and controls that an organization has in place to protect its information assets. This is to ensure the integrity of the data. The auditor will assess the overall security and compliance of the organization's systems and technology infrastructure.
These are some of the most common types of external audits, and the type of audit performed will depend on the specific needs and goals of the organization.
Internal and External Audit
There are two major types of audits: internal and external audits. Both types of audits have their advantages for businesses. Here is a brief overview of both types of accounting.
Internal Audit
Internal audit is the process of evaluating the effectiveness of internal controls within a company. As internal personnel, internal auditors work for the company. An internal auditor's goals are to add value, enhance organizational processes, and ensure compliance with laws and regulations established by the governing body. Internal auditors often gather all the necessary data on the organization's operations and use that data to highlight areas of success and areas for improvement.
An internal audit's objective is to periodically assess an organization's performance and pinpoint any weaknesses that may be closed to maintain any size of business. Organizations across a wide range of industries benefit from planned internal audits.
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Responsibility of an Internal Auditor
Internal audits of organizations can be conducted every day. Internal audits are conducted more frequently by some departments than by others. Here are the responsibilities performed by an internal auditor.
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Tracking, assessing, and determining the organization's risk and control.
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To present to the organization's board, management, and other members with the report's findings and suggestions.
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An internal auditor serves as a dependable consultant for a firm, advising management on the most effective ways to handle risks and achieve objectives.
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Promoting ethics and assisting in the detection of unethical behaviour are the responsibilities of an internal auditor.
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Internal auditors are tasked with identifying frauds and errors and implementing controls to prevent them, which is one of their most crucial responsibilities.
Importance of an External Audit
Internal audits are crucial, and many firms perform them frequently, yet they can never be completely objective in nature. Internal auditors being employees of the same company tend to be biased by nature.
External audits offer a more objective view of how the business is supposed to run, making it less likely for inefficiencies, errors, and fraud to go undiscovered. Unless external audits are conducted regularly, a business could gradually acquire immoral behaviours or errors without becoming aware of them until it is too late.
Responsibilities of an External Auditor
An external auditor is responsible to take care of the following functions.
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The primary responsibility of an external auditor is to certify the financial statements.
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The main goal is to assist the organisation's shareholders by recommending the accuracy of the financial reports the company has produced.
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The external auditor is tasked with rendering an unbiased assessment of the company's financial accounts.
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The responsibility also includes understanding the organisation's internal controls, operations, and work environment.
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The job also involves assessing the organisation's financial and market situation, thereby aiding managerial choices further.
Advantages of External Audit
An external audit is typically carried out by a third party and is, therefore, much more impartial. A corporation can gain a lot of advantages from an external audit. Among these advantages are the following:
Offers an In-Depth Report
An external audit gives a broad perspective of the business processes and confirms the accuracy and correctness of the data in the books of accounts. The auditor submits an audit report that clearly explains all business operations and enables management to take corrective action in the event of a sluggish or flawed procedure.
The report would also provide a comprehensive overview of how the various company departments operate. Additionally, an external audit gives business owners a chance to collaborate closely with external auditors to examine their accounting procedures critically and work on enhancing them.
Confidence in Compliance
An auditor makes sure that accounting records are created in accordance with the relevant authority's norms and regulations. Regular financial audits serve to maintain the accounts department's compliance with established norms and regulations. The external auditor will also ensure that the company's accountants are informed of any new or revised rules issued by the relevant government or authority.
A Different Viewpoint
An external auditor would be objective toward the company. He would present his reports and corresponding views in such a way because he is a distinct third party with no connection to the company in any way. The goal of an auditor is to reduce business waste and boost profitability.
Waste Prevention
There would be less likelihood of time and resource waste because the audit would streamline every step of the process. A thorough report will allow management to effectively focus on and improve the department that needs the most work done. This would increase the company's profitability because it would provide it access to additional resources and workers, as well as assist it in combating the issue of covert unemployment.
Attracts Investors
The audit report provides a thorough and accurate explanation of all the past and present operations of the company. This can assist an investor in making an informed investment decision. After carefully reading the audit report, the investor will decide whether investing in the firm is the most appropriate course of action. This is if he believes that the company is headed toward profitability. As a result, it would make a potential investor's decision-making process simpler.
Finding Weakness
The audit report will need to be carefully examined before the company's management can determine which processes need to be adjusted. This would aid in identifying the process's weaknesses, and management would then take appropriate corrective action.
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Independent Evaluation of the Business Increases the Credibility
There is no bias on the part of the auditor towards the corporation because the audit is carried out by an impartial third party. This means that the audit report will only include accurate information regarding the company's facts and figures. Profitability will also rise as a result of helping to catch and stop any fraudulent business activity that is taking place within the organization.
Evaluation of the Company's Internal Processes
Since the internal auditor is an employee of the organization, he is not permitted to publicly assess or discuss the internal operations of the company. An external auditor has a better possibility of thoroughly assessing every aspect of the company's internal operations and giving an honest evaluation of them. This will boost the effectiveness of the company's operations and assist management in developing fresh, improved initiatives for the future.
Better Audit Quality
Many internal auditors might not be familiar with recent developments in the corporate environment, which could result in them omitting crucial information from the audit report. The internal auditor is also highly familiar with how the firm operates and may purposely omit some information, which could have an impact on the company's profitability. When an external auditor is hired to audit a business, situations like this are not conceivable.
Gives Current and Potential Shareholders Assurance
Using an external auditor, the company aims to provide accurate and reliable information to its management and shareholders. Stockholders will benefit significantly from this and will be in a position to make thoughtful and well-informed choices. Additionally, it will guarantee that the business always considers the interests of shareholders when making decisions.
Conclusion
Any type of firm should seek external audits. External auditing aids in identifying issues that can be fixed with appropriate procedures, adjustments, and enhancements that might be advantageous for the company. These are the benefits that a business may have following an external audit. Due to these advantages, a business must use the services of a company that can assess its operations and offer solutions accordingly.
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