External Audit

What is External Audit?

External Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.

The objective of the external audit includes the determination of the completeness and accuracy of the accounting records of the client, to ensure that the records of the clients are prepared as per the accounting framework which applies to them and to ensure that the financial statements of the client present the true and fair results and the financial position.

External-Audit

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Example of External Audit

Company XYZ ltd manufactures the garments and is listed as a publicly-traded companyPublicly-traded CompanyPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market.read more, i.e., sell their shares to the public. The company wants to know whether they are liable to get their financial statements audited by the external auditor or not?

As per the law, all the company publicly traded businesses or the corporations which sell their shares to the public are legally required to get their financial statements audited by the external auditor. The objective includes the determination of the completeness and accuracy of the accounting records of the client, to ensure that the records of the clients are prepared as per the accounting framework and to ensure that the financial statements of the client present the true and fair financial position. So the company will appoint the auditor who will conduct the external audit of the company and give its audit report in writing, which will be based on the various evidence and information gathered on the true and fair view of the financial statements provided to him to the concerned parties.

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Roles & Responsibilities of an External Audit

Limitations of External Audit

Important Points

  • The main purpose for which the external audit is conducted includes the determination of the completeness and accuracy of the accounting records of the client, to ensure that the records of the clients are prepared as per the accounting framework which applies to them and to ensure that the financial statements of the client present the true and fair results and the financial position. A statutory auditor can ask for the company’s financial books, records, or information in relation to that for which the management cannot deny him.
  • After conducting the audit and gathering necessary information, the external auditor is supposed to give its audit reportAudit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements.read more in writing, which will be based on the various evidence and data collected on the true and fair view of the financial statements provided to him to the concerned parties.
  • Most commonly, an external audit is intended to get the certification of financial statements of the company. Certain investors and the lenders require this certification for their analysis. Also, all publicly traded businesses or the corporations which sell their shares to the public are legally required to get their financial statements audited and get this certification.

Conclusion

From the above, it can be concluded that external audit is one of the main types of audits in which auditors work over the accounting books, purchasing records, inventory, and other financial reportsFinancial ReportsFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read more to check that the company is functioning in the right manner. They do audit planning and work based on that. They also determine whether the company following GAAP or not. They perform the test and then submit a detailed report to the concerned persons. It conducted with the purpose is to gather different information so that the auditor can give his opinion on the true and fair view of the company’s financial position as on the balance sheet date. External audit increases the authenticity and credibility of financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more as the financial statements of the company are being verified by an independent external party.

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