An external audit is a financial examination that an independent accountant conducts. The sole purpose of an external audit is to provide confidence and assurance to lenders, stakeholders, or investors about the financial statements issued by their company that they are truly and fairly present their organization’s results and financial position.
The primary objective of an external audit are:
- To determine the authenticity and completion of all the accounting records of the client.
- To determine either the accounting records of the client are suitable for the accounting framework.
- And to determine whether the financial statements of the client accurately present its financial position and results.
The Major Types of External Audit
1. Financial Statements Audit or Attest External Audit
A financial audit is conducted to examine whether all the financial statements, records, operations, and information are in an accordance with specified criteria. The criteria are generally the internationally accepted accounting standards.
The role of the independent auditor is to conduct the audits of the financial statements using the cash basis or other accounting basis which are applicable for the organization.
To examine and provide an opinion regarding the financial statements that are fairly stated in accordance with accepted accounting standards or not, he needs to check the statement to make sure these files don’t contain any material errors or any misstatements.
The auditor’s opinion has to provide the assurance and confidence that all the financial statements are presented fairly in all material respects. Furthermore, all the statements are applicable to the financial accounting framework.
The purpose is to conduct an independent and fair examination of all the financial statements to ensure and build the value and credibility of the management. As a result, it not only boosts user confidence in the financial statements, it also reduces the cost of preparing financial statements.
Auditors have to give an objective opinion of all the financial statements in accordance with US GAAP in their auditor report.
Types of Financial Statement External Audit Report
There are four types of auditor reports or statements.
- The unqualified auditor opinion
the unqualified or unmodified opinion states that the financial; statements are presented fairly.
- The modified or qualified opinion
The qualified opinion states that all the financial statements are presented fairly in all material aspects and also in accordance with US GAAP.
- A disclaimer
An auditor can also issue a disclaimer due to not having sufficient evidence or information or due to the lack of objectivity and independence. He also thoroughly explains all the reasons for not issuing a formal opinion.
- Adverse Audit Opinion
An adverse audit opinion is issued when the financial statements do not present fairly all the US GAAP and consequently, it affects the transparency of financial statements.
2. The Operational External Audit
An operational audit basically examines the organization’s overall activities to assess the performance and present recommendations for improvements.
An operational audit is the evaluation of the efficiency and effectiveness of any part of the organization. The part can be the production department or the management of the organization. The operational audit can be subjective as there are no standard criteria. The auditor and the client can have their own set of rules and standards.
For example, if the auditor is evaluating the computerized payroll system for efficiency and effectiveness, the auditor will be looking at the numbers of records processed, costs of the department, and the number of errors.
The set criteria can be company standards of efficiency and effectiveness in the payroll department. And to conduct the operational audit the auditor will look at the payroll records, payroll processing cost, and error reports.
3. Compliance External Audit
A compliance audit is about auditing whether a company is following the established principles, procedures, or regulations. The rules are set by higher authorities.
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