Page 100 - DCOM509_ADVANCED_AUDITING

Unit 6: Internal and External Audit

6.5 External Audit Notes

An external audit is a review of the financial statements or reports of an entity, usually a
government or business, by someone not affiliated with the company or agency. External audits
play a major role in the financial oversight of businesses and governments because they are
conducted by outside individuals and therefore provide an unbiased opinion. External audits
are commonly performed at regular intervals by businesses, and are typically required yearly
by law for governments.

6.5.1 Function

External audits are performed to verify that the financial statements of an entity are correctly
presented. They do not involve an actual accounting of a business’ or company’s financial
accounts, but rather external audits are an independent review of financial documents provided
to the auditor.

For a private-sector business, an external audit will typically include a review of the company’s
quarterly or monthly financial reports as well as statements on revenues and expenditures to
ensure they are correctly tabulated and reported.
For governments, an external audit will include a review of the budget, the allocation of funds
and the actual expenses to ensure the budgeted revenues and expenses were correctly compiled
and used.

6.5.2 Time Frame

External audits are typically conducted once a year at the end of the company’s or government’s
fiscal year. They are performed after the entity’s in-house bookkeepers prepare a year-end
financial report, which is one of the documents verified in an external audit.
Companies and governments will typically issue quarterly financial reports throughout;
however, these are usually by internal accountants and bookkeepers, and have not been externally
reviewed for accuracy.

6.5.3 Significance

Because external audits are performed by third-party accountants, they represent an unbiased
view of an entity’s financial standing. For governments, this independent review will ensure
taxpayers that budgeted funds are being appropriately spent and the revenues are not being
under- or over-projected.
In the private sector, external audits are valuable to stockholders as they provide an independent
assessment of the company’s financial holdings and can be used to determine investment levels
in the business.

6.5.4 Features

An external audit will feature a report outlining the auditor’s findings. This will generally be a
summary of the overall validity of the financial statements and documents as presented by the
company or government.
Should the external auditor uncover discrepancies between the statements presented by the
company and his findings, these will be noted in the report as well. The audit will often include
financial suggestions for the entity as ways to improve its overall financial standing and
accounting practices.

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