This blog is written by Mr. Adnan Khan, Associate Audit and Assurance Services. Please read this blog and provide us your valued comments.

External Audit – Simplified

An external audit is a periodic audit conducted by an independent qualified auditor with the aim to determine whether the accounting records for a business are complete and accurate. It is also done to ensure that the statements accurately represent the organization’s financial position and are prepared in accordance to the set laws.

An external auditor is an independent, third party professional who performs an impartial review of the financial records of a certain organization. He or she typically reports to an audit committee composed of company executives. He is responsible for evaluating payroll, accounting, and purchasing records. He also looks at the organization’s loans and financial investments to identify any irregularities. Internal and external auditors typically have the same job responsibilities; however, an internal auditor is more focused on internal control procedures and risk managements.

The Process

Appointment of auditor. The process starts by appointing an independent auditor. This means hiring someone who is not working for the organization or the company that requires auditing. Shareholders are usually the ones who choose and appoint auditors at the Annual General Meeting. However, governing legislation also has the power to choose an independent auditor. Typically, auditors will be chosen based on their reputation, qualifications, and skills.

Acceptance of the project. The next step of the process is the terms of engagement. In this part, the auditor confirms that he or she has accepted the appointment. He or she will be informed of the scope of the audit plus his or her expected responsibilities throughout the contract.

Audit program. This is where the actual external auditing will take place. The auditor will collect, assess, and interpret data to gain understanding of the organization’s activities. For each major activity listed in the financial statements, external auditors will have to identify and assess risks that may have significant impact on the organization’s performance or financial position.

The external auditor will also look for any irregularities. These may include the company manipulating its own financial performance to mislead investors, delaying the disclosure of future financial performance, etc.

Evidence gathering. External auditors will obtain evidence in order to successfully satisfy the requirements of the audit program. This may include confirming compliance with accounting policies, examining accounting records, and verifying assets that the organization has purchased.

Reporting. After a thorough investigation, the auditors will submit a financial report and state their objective opinion. The scope of the audit and the outcome will be outlined in their report.

The findings of an external audit can strongly influence the reputation of the company. There can be serious consequences if the conclusions about debts, assets, tax responsibilities, and payments do not match the organization’s own statements. External auditors will rate the client depending on their review. An unfavorable rating and this can influence if they can stay in business.

Adnan Khan