What is External Audit & When is it Applicable in India?
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 is applicable to them and to ensure that the financial statements of the client present the true and fair results and the financial position.
Example of External Audit
Company XYZ ltd manufactures the garments and is listed as a publicly-traded company 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.
Roles & Responsibilities of an External Audit
The main responsibility is to verify the general ledger of the company and make all other essential inquiries from the management of the company. This helps to determine the real picture of the company’s market situation and the financial situation which further provides the basis for the managerial decisions.
Examination of the validity of financial records of the company to find out if there is any misstatement in the company’s record because of fraud, error or embezzlement. So, it increases the authenticity and credibility of financial statements as the financial statements of the company.
If there are errors in the accounting process of the company than it may prohibit the owner of the company is taking the decisions which are best for the company. An audit helps in overcoming to this problem to a great extent as the procedures in the audit are designed in such a way that they help in detecting the errors in the system and the other fraudulent activity. The audits also ensure the recording of accounting transactions as per the generally accepted accounting principle. This helps the owner of the business to cover themselves when it comes for following the different rules and regulations which the registered entity needs to follow.
Limitations of External Audit
- The audit is conducted by reviewing the sample data of the company which the auditor thinks is material for his examination. An auditor does not assess and review all the transactions which occurred in the company and thus he merely expresses his audit opinion on the financial statements and data on the basis of the sample data provided to him. So this does not give the total assurance about the financial position of the company.
- Expenses involved in conducting an audit may be very high.
- In all stages of the accounting, from preparation to finalizing of the financial statements and for expressing the audit opinion, there is involvement of the humans and thus making it prone to the error. Also if there is a lack of knowledge or experience of an auditor in the relevant field then the purpose of the audit will not solve.Important Points
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 is applicable 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 company’s any financial books, records or information in relation to that for which he cannot be denied by the management.
After conducting the audit and gathering necessary information, the external auditor is supposed to 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.
Most commonly, external audit is intended for getting 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 also 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 audit in which auditors work over the accounting books, purchasing records, inventory and other financial reports in order to check that the company is functioning in the right manner. They do audit planning and work on the basis of that. They also determine whether company following GAAP or not. They perform the test and then submit the 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 statements as the financial statements of the company are being verified by an independent external party.
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