
What is an external audit?
All businesses, big or small, should focus on regular audits to stay on track. However, even with frequent internal audits, many still face issues like fraud, inefficiencies & compliance problems. These can impact financial reporting accuracy & lead to conflicts of interest. Here’s where an external audit comes in handy: it gives a clear view of financial health, builds trust with stakeholders & makes financial reporting more reliable. An external auditor reviews a company’s internal controls, accounting processes, records, financial statements & overall business activities.
An external audit is an unbiased review of a company's financial records, it is usually required by law or legal regulations for official purposes. External auditors must follow specific formats when preparing their reports, as outlined by the Companies Act.
Role of an external auditor
An external auditor’s primary role is to check the company’s general ledger & ask key questions to management. External audit gives a clear view of the company’s financial health, market position, and also helping in future decisions. Publicly traded companies must complete an external audit by the end of each fiscal year.
The goal of an external audit is not to uncover a variety of fraudulent actions by the external auditors. If, however, they discover information about these operations while doing the audit, they quickly set up a specific report for management that contains more case facts and recommendations for preventing such situations in the future. In India, chartered accountants are the only approved non-governmental type of external auditors. They can do external statutory audits, attest to the financial statements of the company, and provide audit reports for public review.
Main purpose of External Audit
- Determining the completeness and accuracy of the client's accounting records, confirming that the records are prepared in accordance with the applicable accounting framework, and confirming that the client's financial statements accurately reflect their financial position and true and fair results are the primary goals of the external audit. The company's financial accounts, records, or information related thereto may be requested by a statutory auditor, for which the management cannot object.
- Once the audit is complete and all necessary information has been gathered, the external auditor must create a written report for the relevant parties. This report will be based on the evidence & data collected, reflecting an honest and accurate view of the financial statements provided to the auditor by those involved.
- The primary goal of an external audit is typically to obtain the company's financial statements certified. For their analysis, a few investors and lenders need this accreditation. Additionally, it is legally necessary for all publicly traded companies or corporations who sell their shares to the general public to have their financial accounts audited and obtain this certification.
Objectives of external audit
Determining whether the client's accounting records are accurate and complete, confirming that the records are prepared in accordance with the applicable accounting framework, and guaranteeing that the client's financial statements accurately depict their financial position and true and fair results are among the goals of an external audit report.
- As part of their effort to provide an opinion on the company's financial information, external auditors frequently examine and assess internal controls through the external audit process in order to manage risks that may have an impact on the financial accounts and determine whether or not they are operating in accordance with the plans developed by the company's key managerial personnel.
- External auditing is when an auditor, or a team of auditors, reviews the company’s financial records. This process is done to ensure there’s no theft, fraud, or honest mistakes made by the people working for the organization/company.
- External auditors review the inventory, purchase records, accounting books, & other financial info to ensure everything is running smoothly. With these guidelines, they then carry out the audit process.
- In addition, they decide if the business is adhering to GAAP rules. After conducting the test, they provide the authorities with a thorough report. It was carried out with the intention of gathering various data so that the auditors could express their judgment regarding an accurate and fair assessment of the company's financial situation as of the balance sheet date. Since an impartial third party verifies the company's financial accounts, an external audit enhances the validity and credibility of the financial statements. An external audit considers whether the yearly accounts are prepared in compliance with applicable legal requirements and present an unbiased and fair picture.
- External auditors concentrate on the different financial accounts or hazards related to the finance industry. The external auditor is chosen by the members and recommended by the board to fulfill this function.
- The primary duty of external auditors is to conduct the yearly external audit of the business's financial statements and offer well-informed judgments regarding whether or not they fairly and impartially depict the company's financial situation.
- The reports on the corporate entity's financial accounts are connected to the external audit. The company's members receive a report from the external auditor as part of the external audit procedure.
Roles and Responsibilities
- The main responsibility is to check the business's general ledger and ask the right questions to the management. External audit helps to understand the real financial & market situation of the business, which then guides important decisions for the management.
- Check the accuracy of financial records to spot any errors, fraud, or theft in the your business or company's documents. This helps improve the trustworthiness and authenticity of the financial accounts, including the company's.
- Mistakes in your business accounting can stop the you from the taking strong decisions. Audits are there to spot system issues & fraud, ensuring all transactions follow the right standards. They also help protect the owner from legal & regulatory risks.
Limitations that’s follows with External Audit
A few things prove to be a pain, even though an external audit report boosts the legitimacy of a company's financials. Let's examine them through the following explanation.
- The audit is done by reviewing the company’s sample data that the external auditor considers important for the investigation. Not all of the company’s transactions are checked by the auditor, so they only give their opinion on the data & financial statements based on the sample provided. Because of this, there’s no guarantee about the company’s overall financial health. Also, the costs for conducting an audit can be quite high.
- Human mistake is a possibility in accounting since humans are involved in every step of the process, from planning to completing the financial statements and presenting the audit opinion. Furthermore, the audit's goal will not be achieved if the auditor lacks expertise or experience in the pertinent subject.
How SKMC Global can help?
SKMC Global supports external audits by offering independent reviews of a company's financial statements, internal controls, and compliance with relevant laws & regulations. External audits are key in building trust with stakeholders like creditors, shareholders, & regulators, ensuring the accuracy & fairness of a company's financial information.
1) Independence and Objectivity
The credibility of the audit is increased by the unbiased viewpoint that service providers provide as independent organizations free from internal influence and conflicts of interest. Since external auditors have no stake in the company's success, stakeholders trust them to give frank assessments.
2) Financial Statement Audit
Examining financial statements to make that they accurately depict the state of the company's finances, including the cash flow, balance sheet, and income statement. Testing and sampling financial transactions to ensure they are genuine, accurate, and compliant with accounting regulations. Confirming that the revenue recognition practices of the business adhere to applicable accounting rules.
3) Internal Controls Evaluation
Looking at how the company’s internal controls are set up & working to ensure they effectively reduce risks and prevent major errors. Checking the company’s control environment & finding any weak spots. Offering advice to management on how to improve controls, lowering the chances of mistakes, fraud, & financial misstatements.
4) Compliance with Laws and Regulations
Ensuring that the business conforms to tax laws, industry-specific standards, and financial reporting obligations. Looking for outstanding lawsuits, possible legal liabilities, or regulatory problems that could have an impact on the company's financial situation. Confirming that the business complies with both domestic and foreign tax regulations and that its tax returns and payments are accurate.
5) Fraud Detection
Employing specialist auditing techniques to find any financial data tampering or fraud. Assessing the controls and environment of the business to find high-risk areas for fraud and suggesting countermeasures. Examining transactions that are out of the ordinary or pose a high risk of fraud or asset theft.
6) Audit Reports and Opinion
Issued when financial statements adequately reflect the company's financial health and are free of major misstatements and adhere to accounting rules. Given when certain areas need attention or explanation yet there are small issues that do not significantly influence the overall financial statements. Issued when there are significant inconsistencies or misstatements in financial statements, suggesting that they do not give a truthful and fair picture. When there are limitations on the auditors' audit job or inadequate information that prevents them from forming a view.
7) Corporate Governance and Reporting
Evaluating whether the board's and top management's roles within the company's governance structure adhere to best standards for accountability and supervision. Ensuring that, in accordance with shareholder and regulatory expectations, the company makes complete, transparent, and intelligible financial disclosures.
8) Recommendations for Improvement
Releasing a management letter outlining the ways in which the business may enhance its internal controls, risk management procedures, and financial reporting systems. Recommending changes to internal control systems, accounting standards, and compliance frameworks in order to improve financial reporting and lower risks in the future.
9) International Standards Compliance
Carrying out audits in several jurisdictions to make sure the business's financial statements comply with national and international laws. Coordinating auditing activities among numerous foreign companies and affiliates to guarantee consistent reporting and adherence.
As a industry best External Auditor, it is our responsibility to make sure that a company's financial reporting is accurate, transparent, and compliant. Our team of External Auditor assist with identifying fraud, assessing internal controls, and giving stakeholders the confidence they need to make wise decisions by conducting independent assessments. Our experience reduces financial risks, improves corporate governance, and guarantees that businesses follow laws and regulations. Retaining reputation and financial integrity in the marketplace requires this collaboration with external auditors.