Why is external auditing important?

External auditing is important to assess the fairness of financial statements prepared by the management. As we understand, there is an agency relationship between shareholders (owners) and the company’s management. Hence, we need some professional and independent accountants to test the accuracy and completeness of financial statements. That’s the reason the company’s management needs to appoint external auditors.

External auditing important practice

Following are some of the important aspects that enhance the value of the external audit profession.

1- Prevention of errors and fraud

There may be some errors in the financial statement of the company. Management might have overstated assets/profit or understated expense/liability to window dress the performance. Hence, there is a need for an independent and detailed review of the financial statement.

Further, we must not ignore human errors in the preparation of financial statement. Hence, there is a need to perform a detailed and independent audit of the financial statement and related accounting records.

2- Compliance with regulations

Companies need to comply with applicable regulations from Government and other financial institutions. In fact, auditors can review and help identify if there are some gaps in the accounting record. So, this activity can help fill the gaps.

In addition to this, banks and other financial institutions require companies to submit audited accounts as a condition to sustain working relations.

3- Enhanced credibility

An audit of financial statements helps to enhance credibility in the eyes of financial statement users. As we understand, an audit is a detailed and rigorous process of examination, reconciliation, vouching, analysis, and much more. Further, it’s backed by professional and licensed accountants. Hence, they add massive value to the financial statement regarding accuracy and completeness.

4- Promotes a culture of accountability

Auditors encourage responsibility accounting in the business. So, if anything goes wrong, responsible staff can be held responsible.

5-Improvement of Internal control

Although, external auditors are not directly responsible for assessing and reporting on the internal controls implemented by the audit client. However, they review processes and controls to understand gaps/weaknesses in the system. So, if they have any weaknesses, it’s reported to management for improvement purposes.

6-Professional competence/input

External auditors are licensed and competent professional accountants. They have a significant understanding of the financial reporting standards and market practices. Hence, their input in the process is considered valuable.

7-A detailed review of the business processes

Generally, auditors start by the understanding business. This understanding lies in business operations, internal risk, compliance, external market compatibility, employees’ skills, control environment, number analytics, and multiple other factors. Hence, such rigorous and detailed procedures enable auditors to understand the business processes and recommend some controls.


The external audit is important to assess the accuracy and completeness of financial statements. There are various advantages of an external audit that include but are not limited to preventing accounting errors and fraud, compliance with banking and Government regulations, enhanced credibility, promotion of accountability, and identification of gaps/weaknesses in the accounting system.

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