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Advanced Auditing

Notes The more important feature of an external audit is the conclusion of the auditor. A favourable
conclusion is unbiased evidence that the entity is reporting financial data correctly while a
negative conclusion is a red flag for poor accounting practices.

6.5.5 Misconceptions

An external audit is not related to an inquiry conducted by the Internal Revenue Service. The
role of an external auditor is not to investigate fraud or tax evasion, but rather to ensure the
financial documents presented by a business are an accurate reflection of its financial standing.
External auditors are not employed by the IRS or any government agency. They are generally
certified public accountants hired by the entity.
6.5.6 External Audit Activities

Figure 6.2: External Audit Functions

Appointment of Auditor

A
U Terms of Engagement
Audit Report D agreed by Auditor
issued to Organisation I and Organisation
T

C
Y
Audit performs C Organisation submits
detailed examination L financial report to Auditor
of financial statements E

Auditor compiles a
detailed program for
the examination of
financial statements

Source: http://www.audit.gov.sh/publications/briefguide_extaud.pdf
Appointment of Auditor: Auditors are usually appointed by shareholders at the Annual General
Meeting. Governing legislation may also state who the auditor shall be.
Terms of Engagement: An engagement letter provides written confirmation of the auditor’s
acceptance of appointment, sets out the scope of the audit plus auditors and management
responsibilities.

Audit Program: Sets out the extent and type of audit procedures.
Auditors work to internationally agreed auditing standards: Auditors start by gaining an
understanding of the organisation’s activities. For each major activity listed in the financial
statements, auditors identify and assess risks that could have a significant impact on the financial
position or performance.

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