What is External Auditing and its scope and importance?
External Audit is an independent examination of the financial records maintained by the organisation done by an independent auditor (who is appointed by the shareholders of the company in the general meeting) and providing an opinion whether the financial statements give a true & fair view of the state of affairs of the entity, of the profit/loss of the entity & of the cash flows of the entity for the year ended.
When an auditor provides an unqualified opinion or clean opinion, it reflects that the auditor provides confidence that the financial statements are represented with accuracy and completeness.
The objectives of an external audit are to determine:
- The accuracy and completeness of the client’s accounting records;
- Whether the client’s accounting records have been prepared in accordance with the applicable accounting framework; and
- Whether the client’s financial statements present fairly its results and financial position.
3 Reasons why is Audit important?
- Improves Internal Systems and Controls
- Boost Shareholders Confidence
- Provide Credibility
There are several important advantages of having an audit conducted by an independent firm to determine your company’s financial status and reputational strength.
An External Audit Improves Internal Systems and Controls
Auditors do not just focus on the financial statement but will gain an understanding of the businesses overall systems and controls environment. This will enable them to identify deficiencies in the accounting systems or controls for which recommendations can be made, making business more efficient and less prone to fraud or error.
· An External Audit Gives Confidence to Shareholders
Many businesses are run by a small board of directors on behalf of the shareholders who can be remote and have little involvement in the day-to-day operations. An independent review of the financial statements can provide transparency to the shareholders that the company is being run within their best interests and can highlight any issues that have occurred which may not have been brought to their attention.
External audits are important for allowing various stakeholders to confidently make decisions surrounding the company being audited.
· An External Audit Provides Credibility
Having your financial statements verified by an external auditor can lead to more credibility in the business marketplace than those that have not.
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