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What is an External Audit?


What is an External Audit?

An external audit is an independent examination of the financial statements prepared by the organization. It is typically conducted for statutory purposes because it is necessitated by the legal system or statutory provisions. The article explains the important relevance of an external audit conducted by reviewing the company’s financial statements, and the functional role played by external auditors. External auditors should follow special formats for the reports created by them. The formats are prescribed under the Companies Act. The scope of external audit in view of the limitations of internal audit is also laid down under the Act. 

Features of External Audit

  • An external audit is an audit which is performed to ensure the correctness and accuracy of the accounting records maintained by a company.
  • An external audit takes into consideration the question of whether the annual accounts give an impartial and fair view and are prepared according to the applicable legal requirements.
  • The process of an external audit should compulsorily be conducted by a practising Chartered Accountant.
  • The external audit is an audit by a practising Chartered Accountant which has its operations exterior to the organization which it is auditing. External Auditors are a part of an independent audit process.
  • External auditors are focused on the various financial accounts or risks associated with the domain of finance. For serving this purpose, the external auditor is recommended by the board and appointed by the members.
  • The chief responsibility of external auditors is to perform the process of the annual external audit of the company’s financial accounts and providing studied opinions on whether they are an impartial and fair reflection of the company’s financial position.
  • As part of the effort to express an opinion on the financial information of the company, external auditors by means of the external audit process often deal with the examination and evaluation of internal controls to manage the risks that could possibly affect the financial accounts, so as to decide if they are working as according to the plans formulated by the key managerial personnel of the company.
  • The external audit is related to the reports on financial statements of the corporate entity. The external auditor as part of the external audit process reports to the company’s members.

Role of External Auditors

The chief task of the external auditor is to verify the general ledger and make all the essential inquiries of company management. An external audit helps to determine the company’s actual market and financial situation that provides a basis for further managerial decisions. The external audit is compulsory for public companies that mobilize their shares with the stock exchange and must be fulfilled at the expiry of every financial year. 

Independence of External Auditors

The independence of external auditors is a vital element in their external audit activity. The external auditors in the process of external audit do not focus on revealing different fraudulent activities, but if they discover information related to such operations in the auditing process, they put in order a special report for the management level, which presents additional details related to case and give recommendations how to prevent similar situations in the future. In India, Chartered Accountants are the only authorized non-governmental type of external auditors who may perform external statutory audits and attestations on the company’s financial statements and provide audit reports for public review.