Definition of External Audit
The company’s auditors perform an external audit to assess the accuracy and completion of financial statement. It’s defined as the audit of the financial statement/accounting records of a corporation in which independent auditors perform auditing procedures to assess the validity of financial records held by an organization.
The main objective is to find whether any misstatement due to fraud or embezzlement exists in accounts. Further, the purpose of an external audit is to obtain reasonable assurance on the set of financial statement generated by a business.
Meaning of External audit
The external audit is a critical examination of a company’s financial records by auditors independent of a company. Independent auditors are appointed for the external audit as per the requirements of International Accounting Standards and local regulators.
Financial statements certified by independent auditors are a must requirement for publicly held businesses. Further, shareholders, lenders, investors, and all other stakeholders use the financial statement to decide their affiliation with the business.
These auditors provide audited reports that add an element of credibility to the financial statements issued by the company. The auditors thoroughly review company’s accounts, accounting records, and financial statements during the external audit. The process of audit involves checking the accuracy and completeness of accounting records. The auditors confirm whether the accounting information and records are prepared under the Generally Accepted Accounting principles or not. In addition to this, the auditors verify that financial statements accurately represent the company’s current financial position with reasonable assurance.
Who conducts External Audit?
The registered firm of accountants is eligible for appointment as an external auditor of a company. The auditors are usually appointed at the annual general meeting; the companies have to appoint their first auditors by the board’s recommendations. Likewise, the commission is also authorized to appoint an external auditor if the board does not fill a casual vacancy or if the company fails to appoint.
It’s equally important to note that discussed authorization for auditor appointment are procedural requirements and varies from country to country. However, a general rule is that external auditors must be independent of any entity’s personal, employment, or business relations.
In addition to this, registered companies and not-for-profit organizations are legally bound to conduct external audits annually as per the local, federal, or state regulations. However, some other businesses that are not legally bound may also voluntarily perform the audit of their financial statements.
The external audit is conducted due to the beneficial nature of the independently verified financial statements. Generally, an external audit is conducted once a year, but it may be conducted in parts like an interim and final audit. However, most of the jurisdictions require quarterly and half-yearly reviews.
Purpose/Objective of External Audit
The main objective of an external audit is to validate the financial statements and to give assurance that financial statements are free from material misstatements. This assurance is important for management as well as third parties who rely on a set of the financial statement presented to them.
Management needs assurance on the financial statement to assess its performance and to analyze if necessary controls established for the preparation of financial statements and compliance with regulatory authorities are efficiently working.
By using financial statement, third parties decide whether it will be beneficial to invest in a specific company. So, an external audit is conducted to determine the condition of a business and its operational activities during a specified time, usually a year.
The availability of the audited financial statement validates that the company’s financial health is the same as what it has depicted in its financial statements.
In addition to this, the objective of an external audit is to determine the completeness and accuracy of the financial records kept by a company. An audit is performed to ensure that accounting records maintained by a company are as per the applicable accounting framework. The auditors obtain sufficient and appropriate audit evidence to ensure that financial statements present the true and fair view of a company’s financial position.
Reporting by External Auditors
The external auditor express their opinion in form of an audit report after performing planned audit procedures. They express their opinions on an entity’s compliance with accounting standards applicable as per a country’s law. Auditors also report any discrepancies found in the business records during the performing audit procedures. they also report any non-compliance with rules, regulations, or ethical principles.
Limited Timeframe for External Audit
The external audit has to be performed in a limited time frame. It means that the auditor cannot examine each small detail of the accounts; rather, they use sampling or judgmental techniques to conduct an audit. They carefully examine a sample of transactions, figures, supporting evidence of transactions to verify if there is/are any misstatements.
Stakeholders use the external auditor’s report to analyze an entity’s business’s true and fair picture. True means that all the listed transactions have actually occurred, and all the assets depicted in statements of financial positions actually exist. The word fair in the audit reports refers to all the assets and liabilities of a business are fairly listed and the value assigned to the transactions is fair.
External audit example
TQL Ltd Company wants to sell its shares to the general public. TQL has to register itself on the stock exchange to sell shares to trade as a public company. Further, in addition to this, it is a compulsory requirement for TQL ltd to get its financial statement audited by the external auditors and attach the audit report to make it available to all the stakeholders including shareholders who want to INVEST in shares of TQL ltd. Otherwise, it would be difficult for the stakeholders to determine the completeness and accuracy of the accounting records and financial statements and assess performance.
So, an audit report is needed to ensure that TQL ltd has kept the accounting data as per the accounting framework applicable to TQL.
The accuracy of financial position cannot be determined until an external audit firm conducts an audit and reports that the financial statements of TQL ltd give a true and fair view. TQL ltd has to appoint an auditor to conduct the audit and provide the audit report in writing based on the evidence and information obtained by the external auditor.
An external is about an independent assessment of the business’s financial statement and financial record. It’s about planning and understanding the risk via business and operational understanding.
After risk assessment, auditors plan auditing procedures to obtain sufficient and appropriate audit evidence. The next step is the collection of sufficient and appropriate audit evidence. Once evidence is collected, auditors examine credibility of the evidence and issue an audit report.
On the other hand, an internal audit is about assessing an organization’s internal policies, operations, governance, and structures. It’s not a legal requirement contrary to the external audit. Further, it can be performed as and when needed by the management.
Also read on, external audit companies