External audit refers to a review of financial statement by an independent auditor. In other words, it’s an inspection/examination of the numbers & facts stated in the financial statement.
Generally, auditors follow the given approach in external auditing.
- Client acceptance/reacceptance based on independence, conflict of interest and other ethical/legal considerations.
- Business understanding and understanding of internal controls.
- Assessment of the risk based on understanding obtained in step 2. In other words, assessment of the risk of material misstatement.
- Planning for the audit procedures.
- Obtaining audit evidence.
- Forming an opinion.
- Reporting on the audit findings.
Also read, Steps to perform an external audit.
Suppose the client is new to the audit firm. In that case, the following assessments need to be made in terms of a preliminary evaluation: independence, objectivity, evaluation of management integrity, and business records kept by the audit client. Let’s go through the details for these aspects.
It’s the first step of client acceptance. The auditor needs to assess the following two attributes.
- ‘’Risk in the new audit engagement.”
Different audit clients carry different intensity of risk. For instance, small businesses carry lower risk than national banks. So, auditors need to assess preliminary risk in the engagement and then accept if they have sufficient competence & resources to execute the audit.
- ”If the auditor is competent & got sufficient resource s to cover the risk in a new engagement.”
Read – What is audit Risk?
Auditors need to assess their competence, experience, resources, and other aspects if they can reasonably execute audit procedures.
The auditor needs to be independent of the audit clients. The independence means auditors should have no conflict of interest, any bias, or any personal interest with the audit client. The Application of independence is necessary to enhance public confidence in the financial statement as It helps the public to ensure assessments and opinions of the auditor are unbiased and carried with professional accounting/auditing standards.
Further, it’s important to note that auditors should not only be independent but perceived as independent. So, public confidence in the financial statement is not impaired.
Example – The auditor may be the second cousin of the company’s CFO. In such situations, the auditor and company CFO might be friends. Hence, the assessment & opinions of the auditor may be biased and not independent.
Types of auditor independence threats
There are different threats to auditor independence; let’s go through common ones.
Self-interest threat arises when the auditor has some financial benefit linked with the audit client. This link might lead to impairment in the professional attitude/behavior of the auditor. Hence, there is a strong need to avoid such threats to independence. Following are some of the instances of self-interest threats faced by external auditors.
- Family and personal ties between auditor & audit client.
- The close business relationship between auditor & audit client.
- Hospitality/gifts from audit client – (for auditor).
- Some financial incentives – loans & financial guarantees etc.
- Auditors might have extensive fee receivables from the audit client. If the fee receivable from the audit client is extensive, it might become a financial incentive/self-review threat.
So, audit firms must implement certain policies and procedures that help remove self-interest threats.
Self-review threat– Self-review threat is when the auditor is required to review their own work. For instance, the financial statement to be audited was prepared by the auditor. In this situation, the auditor is required to audit their own work. Hence, this situation definitely creates a self-review threat for the auditor.
Familiarity threat-We are humans with emotions in our souls and hearts. So, there may be some bond/relation between the auditor and the client. In this situation, the auditor may favor an audit client unfairly. This threat is called familiarity threat.
Advocacy threat– Advocacy threat is when an auditor represents/promotes their client. This promotion is to the extent that the auditor’s objectivity seems compromised. In simple words, it’s a threat that auditors will be advocates of their audit clients.
Intimidation threat– Intimation threat is when an audit client intimidates the auditor. This intimidation may be to the extent that it impairs auditor objectivity. For instance, audit clients may intimidate the auditor to inflate profit; if they do not, they may not get next year’s audit.
Objectivity means the assessment and opinions of the auditor are based on facts. And they have not been biased in auditing the business’s financial statements in any way.
If we observe closely, independence and objectivity can be linked with each other. If an auditor is independent, he can be expected to perform work with objectivity and audit financial statements with higher ethical instances and a professional attitude.
I have observed with my personal experience that audit clients try to win the sympathy of auditors. For instance, sometimes, they offer free lunch, free traveling, and even sometimes promise for the job in their company. All of these instances might create a soft corner in the auditor’s heart. Hence, auditors should remain alert for any such offers if they think it might compromise their objectivity.
Evaluation of management integrity
Recently, we have observed several instances where management has been dishonest regarding financial statement preparation. So, it’s an auditor’s responsibility to assess management’s integrity & attitude towards audit. It can be done by multiple methods, including but not limited to the following.
|Management attitude||Auditors need to assess management’s attitude towards risk, control, misstatement, & corrective actions.|
|Any intent to deceive an auditor||By discussing with management and talking with employees, auditors are required to develop some judgment if the audit client intends to hide some facts & figures in the financial statement.|
|Ask the same questions in different ways.||Try to ask the same question to different people in the company in different ways. If you think answers by both are the same, it’s good; otherwise, there may be a need to further think about management integrity.|
Further, it should be noted that management integrity directly impacts the extent, scope, and time required to execute audit procedures. For instance, if an auditor finds that management integrity is impaired, in this situation, they are required to plan extensive audit procedures to cover the risk. On the other hand, if the risk gets significantly higher, auditors might have to withdraw from the audit engagement.
Usually, audit firms are required to fill out a risk assessment form while accepting engagement. If the work remains within tolerable limits, an engagement is accepted, and vice versa.
Business records kept by audit clients
It might be difficult for auditors to collect sufficient & appropriate audit evidence if the audit client does not have sorted and well-maintained books. In such circumstances, auditors choose not to accept a new engagement for the audit.
Another important aspect of audit planning is Materiality. Let’s understand detailed aspects related to Materiality.
The amount is material if it can impact the decision of the financial statement user. In practice, the amount can be material by following three ways.
Materiality by amount
The value can be material by amount. For instance, the auditor might assess that any amount above 2% of total assets is considered to be material. Further, it’s important to note that Materiality by amount can classified into the following categories.
Performance materiality – Performance materiality is about account balance or transaction. It’s always less than the overall Materiality set for the financial statement. The purpose of setting performance materiality is to allocate Materiality for different account balances. So, if misstatements are found at the account balance level, all of these misstatements are combined to see if the total/aggregated amount exceeds overall materiality/not.
Overall Materiality – overall Materiality is for the financial statement as a whole. An aggregate of misstatements found at the level of account balances is combined and compared with overall Materiality. So, if an aggregated misstatement is less than overall Materiality, an auditor is safe to conclude a clean audit report and vice versa.
Materiality by impact
Materiality by impact is when a transaction comes with a certain impact. For instance, you are auditing FK LLC with an overall Materiality of $22,000 and notice a loss in the financial statement amounting to $2,000, and the audit client comes up with a transaction amounting to $5,000. This transaction of $5,000 reduces liability and increases profit. So. If this transaction is posted in the accounting system, the loss of $2,000 gets converted into a profit of $3,000. So, the impact of this transaction is higher as loss becomes profit. Hence, this transaction is material, although it’s lower than the Materiality of $22,000.
Materiality by nature
Some transactions, balances, and disclosures can be material by nature. And there is no need to have a look at the amount. For instance, related party transactions and remuneration of directors are material by nature.
Here, we conclude with an understanding of the client.
Understanding the business from an external audit perspective
Auditor needs to understand business to assess the level of risk brought by audit engagement. Understanding business includes but is not limited to understanding business operations, marketing channels, applicable laws & regulations, financing structure (equity + debt), and other factors associated with the business.
It’s equally important to note that business operations create business risk. For instance, your audit client is a construction company. They construct residential & commercial properties in the United States. Now, think about the level of risks brought by the business operations of this audit client. Here are some of the risks that you can think of.
- Insolvency, going concern, lower profit margins etc.
- Financing needs for the projects.
- Cost overruns.
- Applicable zoning & regulations.
- Budget overruns and competition.
It’s important to note that external auditors are more concerned about risks that impact financial statements and their preparation. For instance, lower industrial profits for the business indicate that the audit client might try to understate the expenses and overstate profit (To show business stability, which might not be a reality). Hence, the auditor needs to remain alert in connecting business risk with the audit risk (misstatement in the business’s financial statement).
If the business understanding of the auditor is strong, they will be in a better position to identify the risks and plan the response that impacts a financial statement. Hence, audit quality can be enhanced this way.
So, the auditor can’t execute a quality audit without understanding the business. Hence, it’s more than important for the external auditor to understand the business, identify risks, plan audit procedures, collect audit evidence, make audit opinion, and prepare reports on the financial statements the audit client prepared.
Further, it’s equally important to note that an auditor needs to show professional scepticism and a professional attitude while assessing risk.
Also read, Duties of an external auditor
Professional skepticism refers to being alert to situations and conditions that might indicate the existence of a misstatement of a financial statement. In other words, auditors need to ask questions and assess things based on facts & figures without compromising their independence.
Another aspect to describe professional scepticism is a critical assessment of audit evidence. To evaluate audit evidence in a true spirit.
Circumstances when an auditor is required to apply professional scepticism
Generally, in the following circumstances, auditors are required to exercise a professional attitude.
- Acceptance of audit engagement – The auditor needs to exercise professional scepticism while accepting an engagement. At this stage, the auditor is required to assess and document if new engagement comes with a risk that can be covered with audit procedures. For instance, an auditor assesses the risk of material misstatement in a financial statement. In this case, the auditor will be required to assess if they will be able to cover the assessed risk of material misstatement in the financial statement. So, if the auditor concludes that they have sufficient resources and will be able to cover the risk of material misstatement, in this case, they should accept a new engagement and vice versa.
- Risk assessment for audit execution – At this stage, auditors are required to remain alert to all facts and figures that generate risk. As we have discussed, auditors are required to understand the business and then assess the risks carried by operations and finance, etc.
- Obtaining and evaluating audit evidence – Auditors are required to professionally evaluate the quality and quantity of audit evidence. For instance, if evidence comes from an independent source, it can weigh more and vice versa.
- Accounting estimates – The auditor needs to be highly alert while assessing accounting estimates. The reason is that these estimates significantly impact the profit/loss and assets/liabilities.
- Going concern aspects – The auditor needs to closely understand business dynamics and stability. They are required to assess if the business seems to be operational in the foreseeable future and vice versa. It’s important to note that auditors are required to analyze facts & figures and then form an opinion if the business seems concerned or if it may not be able to sustain itself in the long run.
- Related party transactions & disclosures in the financial statement – All transactions with the related party need to be disclosed in the financial statement. The auditor is required to remain alert and identify if transactions are not at arm’s length.
- Consideration of laws & regulations in the preparation of financial statement – The auditor needs to be alert and ensure the financial statement was prepared based in line with applicable laws and regulations as this matter can be materially pervasive.
Auditors must act honestly and ensure all of their work is done tactfully and professionally. Let’s further explore what means by professional attitude.
- Showing honesty in all of the professional dealings and tasks.
- Maintaining professional behavior and professional integrity.
- Deal with all team members and seniors with respect.
- Be open-minded, efficient, tolerant, responsible, fair, proactive, and honest professionally.
Professional accounting bodies have introduced certain codes of conduct that auditors need to follow. The components of the codes include but are not limited to the following.
Integrity – Integrity means being honest in all professional dealings and work. In other words, auditors must not compromise on professional ethics and professional practice.
Confidentiality– The auditor is required to maintain confidentiality in all auditing matters. They must not disclose information acquired during the audit process.
Objectivity– Objectivity means the auditor needs to be impartial & unbiased in executing audit procedures and their judgment/thoughts must not be compromised/influenced by bias/personal objectives. In other words, the auditor must be objective in achieving auditing tasks.
Professional competence– Professional competence means an auditor must be aware of professional accounting and auditing standards required to execute the audit procedures. The competence lies in professional skepticism, emotional intelligence, business acumen, critical thinking, communication, and updated accounting/auditing standards knowledge.
Professional behavior– Auditors are expected to behave professionally with the audit team, audit client, audit staff, and everyone involved in the overall process. Their behavior should reflect ethics, objectivity, flexibility, efficiency, humility, kindness, and proactiveness in managing audit activities.
Practical understanding of the risk assessment
The first step for the auditor is to assess risk and then plan audit procedures. For instance, the auditor analyzes that the warehouse is full of mud and goods/products seem older. In this case, the auditor must remain alert and document that there may be a risk of overvalued inventory. The risk of overvalued inventory means that the assets & profit of the business may be higher in the financial statement.
It’s important to note that auditors set procedures in line with the risk. For instance, if they conclude that the risk of material misstatement is lower, they are required to plan less audit procedures and vice versa.
Let’s understand the above statement with a practical approach.
For instance, a firm of professional accountants measures the risk of material misstatement in the following way and sets risk intensity with numbers. For instance, if the risk is lower, they measure it as 1, higher, 2,3, and so on.
|Risk assessment||Measured Risk||Response required|
|Low Risk of Material Misstatement||1||Relatively lower audit procedures can be planned to cover the risk of material misstatement.|
|Normal Risk of Material Misstatement||2||Reasonable audit procedures can be planned|
|Higher Risk of Material Misstatement||3||Intensive audit procedures need to be planned.|
The auditor concludes that the inventory of the audit client carries a higher risk of material misstatement. In this scenario, the assessed risk is 3. Hence, the auditor is required to intensively plan audit procedures to ensure risk is appropriately covered.
Forming audit procedures
It’s a process executed by auditors to obtain sufficient and appropriate audit evidence. By applying audit procedures, auditors obtain audit evidence on different financial statement assertions. Different audit procedures include Substantive Analytical Procedures, substantive procedures, test of controls etc. Let’s have a detailed understanding of these audit procedures.
Substantive Analytical Procedures
Analytical procedures is when auditors find a logical relationship between data. This data can be financial and non-financial as well.
Comparing financial data with financial data
For instance, you see there is a 30% increase in marketing expenses and you see there is a 10% decrease in revenue. So, this relationship is not logical/plausible. Hence, there is a need to further investigate the effectiveness of marketing expenses. In this scenario, the auditor is required to remain alert to the situation that marketing expenses are overstated and the profit of the business is understated.
Comparing financial data with non-financial data
Consider that the audit client operates in a luxurious industry, and the country’s economy is facing substantial problems. In this situation, predicting that business revenue should decrease is logical. However, the financial statement of the audit shows that business revenue has increased.
In this situation, the auditor needs to exercise professionals’ scepticism and investigate if an increase in revenue is a genuine phenomenon.
Hence, analytical procedures are based on logical grounds and limited assurance can be obtained by executing these audit procedures. Further, it’s important to note that analytical procedures are performed at the following two audit stages. These include the following.
PAR – Preliminary Analytical Review
It’s the initial audit stage, where a preliminary business analysis is conducted. At this stage, different numbers of the business are compared. The comparisons can be in different ways that, include the following.
- Comparing numbers with previous years/preceding year –For instance, you have been auditing the financial statement 2023 and comparing net profit with 2022. You notice there is a 65% increase in net profit. In this situation, auditors are required to thoroughly understand why there has been a significant increase in the profit. Hence, PAR sets the direction for the auditor to plan audit procedures, obtain audit evidence, and act in the right direction.
- Comparing numbers with other numbers in the financial statement – This review is about comparing numbers in the financial statement with other numbers in the financial statement. For instance, you need to compare current assets with current liabilities. It shows that the business is liquid and has sufficient funds to pay back liabilities falling due in recent times.
- Comparing numbers with the industry/competitors involves comparing numbers in financial statement with the industry/competitors. It gives us an understanding that our numbers align with the industry. For instance, you find audit client is more profitable than other players in the industry. In this scenario, the auditor’s risk is increased, and you might expect some window dressing in the financial statement. In simple words, if an auditor finds that their client is more profitable than others in the industry, they must properly document the reasons and logic behind higher profitability. Please note there can be different scenarios for different audit clients. So, there is a need to understand the audit client’s financial statements and act accordingly.
FAR – Final Analytical Review
A final analytical review is performed to assess if the final look of the financial statement is the same as the auditor’s understanding. It’s not performed to collect audit evidence. Suppose there is any conflict between the auditor’s understanding and the final numbers in the financial statement. In that case, the auditor is required to reassess the risk and plan additional audit procedures if required. Usually, audit partners carry out a final analytical review when the audit is finalized, and they need to sign the audit report.
The auditor performs substantive procedures to detect if there is any material misstatement in the financial statement of the audit client. If the risk assessed by the auditor is higher, they are required to plan and execute extensive audit procedures and vice versa.
In simple words, substantive procedures are activities/procedures performed and documented by the auditor to detect if there is a material misstatement in the financial statement of a business. Let’s discuss different types of substantive audit procedures performed by auditors.
Testing transaction classes, account balances, and disclosures – It’s about testing the classification of the balance. For instance, if there are credit sales, an auditor must track sales and receivables classified in the correct chart of accounts. Similarly, auditors are required to read, understand disclosure and suggest if they have been consistent with the numbers in the accounting record. For instance, as an auditor, you find disclosure that transactions with the related party have been at arm’s length. Here, you are required to compare facts of related party transactions with other transactions and understand if the disclosure stands true. This procedure can also be referred to as an examination of financial statement numbers and notes.
Auditors are responsible to document all the procedures performed. There is a saying in audit world – the work not documented in the work not done.
Also read, contents of permanent audit file.
Reviewing journal entries – Journal entries have the potential to window-dress financial statements. Hence, these are considered to be risky, and the auditor is required to place close consideration. For instance, if an audit client posts a journal entry by debiting deferred liability and crediting revenue, this increases revenue and profit. Hence, the auditor is required to understand the calculations behind the debit of the liability.
Sending balance confirmation for bank/creditors/debtors – At the start of audit fieldwork, auditors send balance confirmation requests to banks, creditors, and debtors. Upon receipt of their reply, the balance in the audit client’s books is matched with the balance confirmed. If there are differences in the balances, an inquiry is made, and invoice/payments creating differences are identified.
Subsequent Payment verification is one of the favorite substantive procedures auditors perform. The account balance is tested for subsequent transactions. For instance, at year-end, December 31st, there was a receivable of $10,000 from Mr. John, and you are doing fieldwork on January 25th. So, you need to see if the client has received any payment from Mr. John in the days between audit fieldwork and year-end. Suppose your client has received $10,000 from Mr. John in the bank. In this case, you’ve subsequently verified the balance receivable from Mr. John via substantive audit procedure.
This substantive procedure is used to verify the existence of stock at year-end. In this audit procedure, the auditor compares the stock on the sheet with the stock on the floor/warehouse. This helps understand whether the inventory shown in the financial statement exists.
On the other hand, auditors can also cross-check stock from floor to record. It helps understand if everything on the floor has been recorded in the financial statement. It helps to understand the completeness assertion of the financial statement.
Also read, Cut off in auditing
Source documents act as a basis for updating accounting records. For instance, an invoice is a source document that contains vital information about a business transaction. So, the auditor reviews the content/data in the invoice and compares it with the accounting record/financial statement. So, if there is any error/omission, it can be identified to assess the accuracy of the financial statement.
Analytical procedures on assets, equity, liability, revenue, and expenses
The analytical procedure is about evaluating financial and non-financial information presented in the business’s financial statement. This evaluation is executed by studying the logical/plausible relationship between financial/non-financial data.
For instance, if there is an increase in marketing expenses compared to last year, it’s logical to expect an increase in sales/revenue and vice versa. So, if there is no increase in revenue while there is an increase in marketing expense, it should trigger the auditor if the marketing expense is genuine or if there may be some overstatement in expenses.
Similarly, if the overall market size of the audit client is decreasing, still observe significant growth in your client’s revenues. It should trigger the auditor if revenue was overstated to inflate the profit and window dress financial statement.
Test of control
Test of control is an audit procedure that is conducted to test the effectiveness of controls implemented by a business. In other words, the test of control aims to assess if controls are effective and efficient to detect/prevent material misstatement in the financial statement of the business.
So, if the auditor concludes that implemented controls are effective, the audit risk is reduced, resulting in lower work for the auditor and vice versa.
Once audit procedures are completed and evidence is collected, it’s time to form an audit opinion.
When auditors have executed planned audit procedures, it’s time to form an opinion. Let’s understand the detailed aspects of audit opinion.
Audit opinion is when auditors conclude their opinion on financial statement. The audit opinion is communicated via audit report and can be of two types as below.
A clean/Basic audit opinion is issued when auditors conclude financial statements do not contain material misstatements/omissions. The financial statement’s content and presentation are in line with ISA 700 (Forming an opinion and reporting on a financial statement). When issuing a clean audit report, auditors issue statements like financial statements to give a true and fair view, or financial statement is presented in all material aspects.
Modified audit opinion
A modified audit opinion is issued in the following two circumstances.
- When there are omissions/misstatement in financial statement.
- When auditors were not able to obtain sufficient & appropriate audit evidence.
In the above-given circumstances, auditors need to issue any of the following three audit opinions.
- Qualified audit opinion
- Adverse audit opinion
- Disclaimer of opinion
A qualified audit opinion is issued when there is a material misstatement in a financial statement.
Secondly, a qualified audit opinion is issued when the auditor is unable to obtain sufficient & appropriate audit evidence, and its impact is material.
An adverse audit opinion is when there is a material misstatement, and its impact is material and pervasive.
Continue reading – What is adverse opinion?
The disclaimer of audit opinion is when the auditor cannot obtain material misstatement, and its impact is material and pervasive.
Let’s understand the difference between material and material & pervasive.
Material – Amount is material when it can distort the decision of financial statement users. However, this impact is only on one/or a few account balances in the financial statement and not the complete financial statement.
Material and pervasive – Amount is material and pervasive when it impacts the financial statement as a whole. Simply put, the matter is considered pervasive when an impact that affects all parts of a financial statement is created. In simple words, auditors state that financial statement as a whole is unreliable and should not be used in decision-making,
Please note its auditor’s judgment if the impact of misstatement is material or pervasive. Let’s understand, for example, when the impact of misstatement is material and when the impact is material and pervasive.
Suppose you see receivable from Mr. Muller amounts to $20,000. And balance confirmation from Mr. Muller states they have to pay only $8,000. So, there is a difference of $12,000 ($20,000-$8,000). In this case, $8,000 is a material amount, and you notice this misstatement in the financial statement.
So, this difference only pertains to receivables and has nothing to do with other parts of the financial statement. In other words, it’s an isolated misstatement that is receivable, not with a complete set of financial statements. Hence, this is material and not pervasive.
Suppose you have been preparing financial statements in the United States. As per the guidelines of the competent authority, you must follow US GAAP but prepare a financial statement ignoring the facts and content of US GAAP. In this case, the impact of this misstatement is material & pervasive, impacting the complete financial statement. Simply put, this financial statement should not be used in the US. Hence, it’s materially incorrect and not useable. So, this is the concept of materially pervasive.
There are two important terms used in an audit report,
The emphasis of matter paragraph – (EOMP) – This paragraph is included in the audit report when the auditor wants the reader of the audit report to go into the financial statement and read some specific paragraph. The auditor believes ”the specific paragraph included in a financial statement ’’ is fundamental to understanding the financial statements. An important aspect to note is that this information is already included in the financial statement. Auditors just emphasize that the reader of the audit report should read that specific note in the financial statement. That’s why it’s called the emphasis of matter paragraph. (It’s just a reference or emphasis).
Example of other emphasis on matter paragraph – Suppose there is a note # 7.5 in a financial statement about a recent merger & acquisition; the auditor understands it’s necessary for the user to read about this fact, then they insert an emphasis paragraph like,
As discussed in note # 7.5 of the financial statement, the company has acquired a local transportation company. This transaction for acquisition/merger has been adjusted in the financial statement, and our report is not modified in this respect.
Other matter paragraph – (OMP) – This paragraph is additional to the financial statement. The content and facts discussed in OMP are not in the financial statement. However, the auditor understands that the content/facts in this additional paragraph is fundamental to any of the following.
- Audit report
- Auditor’s responsibility
- Subsequent events – It’s when the auditor discloses some subsequent events that were not present at the year-end of the audit. The auditor may not be required to adjust the event in the financial statement. However, they understand that the reader of the audit report should read/understand the additional information not given in the report.
- Specific purpose financial statement– If the financial statement was prepared for a special purpose, the auditor discloses this additional information in another matter paragraph.
Also read, Qualified Audit Report.
External audit refers to a review of financial statements by professional accountants. External auditors follow certain steps to execute the overall audit process. These steps include understanding the business, risk assessment, planning audit procedures, collecting audit evidence, forming opinions, and reporting on a set of financial information.
Understanding business – Auditors acquire business understanding via different means like reading financial statements, making inquiries, visiting a factory or warehouse, studying competition in the market, and different means of getting information.
Risk assessment – Based on business understanding, auditors assess risk for the business. The risk assessment is based on operational aspects of business and financial controls implemented by the audit client.
Forming audit procedures- Based on assessed risk, auditors plan their procedures. If the assessed risk is higher, auditors are required to plan extensive audit procedures and vice versa. Forming audit opinion- Based on performed audit procedures, the auditor is required to make an opinion. For instance, if the audit procedures successfully collect sufficient and appropriate audit procedures, the auditor forms a clean audit report. On the other hand, if performed audit procedures successfully do not collect sufficient and appropriate audit procedures, the auditor forms a qualified audit opinion.
Frequently Asked Questions
The external audit is concerned with the review and examination of financial statements. It’s focused on seeing if financial statement are free from material misstatement. On the other hand, an internal audit is about assessing risk, implementing, updating, and testing the controls.
Big Four are accounting firms around the globe. These firms provide auditing, consultancy, and accounting services throughout the globe. The big four firms include Ernest & Young, KPMG, Deloitte, and PWC.
To become an external auditor, you are required to have,
Membership in a professional accounting body.
External auditing aims to examine financial statements and ensure they are free from material misstatement. In addition, the business’s financial/accounting record was kept in compliance with applicable regulations.
Following are the steps of external auditing.
Understanding the business.
Identify the risk.
Form audit procedures.
Perform audit procedures.
Form audit opinion.
Form audit report.
Following are some benefits of external auditing.
It’s a great sign for shareholders as they get confidence that an independent professional accountant has reviewed the financial statement.
The overall credibility of the financial statement is increased as an independent professional accountant has reviewed it.
It helps ensure financial statements comply with applicable regulations. Independent auditors have reviewed financial statements.
It helps ensure appropriate accounting record has been kept.