What Is An External Audit

What is an External Audit?
An external audit is an examination that is conducted by an independent accountant. This

type of audit is most commonly intended to result in a certification of the financial
statements of an entity. This certification is required by certain investors and lenders, and
for all publicly-held businesses.
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.
There are other types of external audits that may be targeted at specific issues concerning a
client's accounting records, such as an examination that searches for the existence of fraud.
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.
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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.
If you want to learn more about Auditing, you may consider taking
courses offered by Coursera –
1. Auditing I: Conceptual Foundations of Auditing

2. Auditing II: The Practice of Auditing
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. It helps to determine the real picture
of the company’s market situation and the financial situation, which
further provides the basis for managerial decisions.
 Examine the validity of financial records 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, then
it may prohibit the owner of the company is taking the decisions
which are best for the company. An audit helps in overcoming 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. It helps the owner of the business to cover
themselves when it comes to 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. Thus, he merely expresses his audit
opinion on the financial statements and data based on 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 the
financial statements and for expressing the audit opinion, there is
the 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
 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 report 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
reports 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 statements as the financial statements of the company
are being verified by an independent external party.

What Is An External Audit

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What Is An External Audit

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What is an External Audit?

An external audit is an examination that is conducted by an independent accountant. This

The objectives of an external audit are to determine:

 The accuracy and completeness of the client's accounting records;

What is External Audit?

Example of External Audit

1. Auditing I: Conceptual Foundations of Auditing

Roles & Responsibilities of an

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