The internal functions work as the backbone of the organization. They play a very crucial role in the success of the organization. The internal functions such as bookkeeping, accounting and recording will provide the management with historical data on the direction of the company’s journey towards achieving the goals and targets. Similarly, the audit mechanism will check the processes and alarms the company’s management if a course correction is required.
External Audit and Its Importance
An external Audit is an audit carried out by the certified auditor with no links to the organization to confirm the accuracy of the company’s accounts and financial statements. The External auditors are independent third-party auditors with the necessary qualifications and experience to evaluate the company books and report inaccuracies and errors found in the Audit.
The company’s shareholders appoint the external auditors during the annual general body meeting through voting. The Independence of the external auditors is very important. The shareholders should have confidence that the appointed external auditors will perform their audit duty with the utmost integrity and make their judgment free from any bias.
The strict protocols and procedures generally followed by the external auditors are designed to identify any misstatements, involve testing samples of account transactions and bank balances, etc. The auditor also performs an end-to-end review of its financial statements, including any disclosures, and checks if they comply with the required accounting standards and prevailing company laws.
The External Audit process produces the External audit report, which is generally of interest to company shareholders, institutional investors, government agencies, financial institutions, stakeholders, etc. The External audit report is treated as an unbiased and non-tampered report by an independent third party, which can be considered the true indicator of an organization’s performance and financial health.
Objectives of an External Audit
The External auditors’ duties and responsibilities mainly concentrate on the company’s accounting and financial aspects, unlike the internal auditors, whose role also includes auditing the organization’s internal processes. The main objectives of the External Audit include the below:
- External Audit should scrutinize and report whether the company’s financial statements are up to date, error-free, trustworthy, and indicate the right picture with regards to the company’s financial health.
- External auditors are required to maintain objectivity. The auditors must never let any relationship influence and thereby compromise their objectivity when examining supporting documents or making a professional judgment on any audit process area.
- The external Audit should review and confirm whether the financial statements prepared per the all the accounting standards such as IFRS, US GAAP or regional GAAP.
- The accounting and financial statements of the company comply with the necessary laws and regulations of the country. It is crucial in publicly listed companies, banks, insurance companies, and government institutions that have mandatory audit requirements to be carried out by an independent third-party auditor.
- The external Audit may enhance the quality of company financial recording and reporting so that all the stakeholders, including the company’s shareholders, vendors and service providers, gain more confidence when dealing with the company.
- The external auditor, who is also a qualified expert, will provide the management with a different perspective regarding accounting and financial processes, waste reduction, optimal resource utilization and other governance matters for the benefit of the company.
- At the end of the Audit, the external auditor will generate a report of the findings, which provides an overall picture of its financial standings. This neutral assessment report will be further referred by interested investors while calculating the company valuations and deciding to invest in the company.
