External Audit
An audit involves examining and providing an evaluation of the items reviewed. A financial audit specifically refers to the examination of a company’s books of accounts and related records. This process enables the auditor to gather the necessary information to express an opinion on whether the accounts have been accurately maintained and comply with applicable statutory requirements, accounting principles, financial reporting standards, and auditing guidelines.
Earnest Consultants is a leading audit and accounting firm based in Dubai, UAE, providing top-quality external and financial audit services.
A financial statement audit is an independent evaluation of the financial statements prepared by an organization. The primary objective of this audit is to offer independent, third-party assurance that the management’s financial statements present a “true and fair” view of the company’s financial performance.
The outcome of this examination is an auditor’s report, which confirms the fairness of the financial statements and related disclosures. This report must accompany the financial statements when they are distributed to the intended recipients or stakeholders.
What is meant by External Audit?
An external audit is a process in which a company’s financial records are thoroughly examined. This type of audit is typically carried out by an independent third party who has no affiliation with the company being audited, and sometimes it may be conducted by court order. Like an internal audit, an external audit provides detailed insights into the company’s financial status, benefiting both management and investors or shareholders.
Because it is performed by an independent auditor, an external audit is considered more objective and free from bias. The management is responsible for appointing a separate auditor or auditing team to conduct the external audit. For these reasons, conducting an external audit is a crucial step in ensuring transparency and accountability within a company.
What are the Benefits of External Audit?
Besides being impartial, conducting an external audit offers several benefits for a business, such as:
- Providing a thorough and detailed business report.
- Ensuring adherence to all regulatory and compliance requirements within the jurisdiction.
- Offering an independent perspective on business management and operations.
- Helping management optimize resource utilization and reduce unnecessary waste.
- Boosting investor confidence, thereby attracting potential new investors.
- Enhancing the understanding of the business’s processes and preparing it for future challenges.
Why is an external audit necessary for businesses?
There are several reasons why a company may require an external audit. Some of the key benefits of conducting an external audit for a business include:
It offers an objective perspective on the business, helping management better understand both the company and its operating environment.
It establishes benchmarks that assist management in effective future planning.
It ensures that the business meets various regulatory and compliance requirements.
It enhances the credibility of the business, making it more attractive to potential investors.
What distinguishes an external audit from an internal audit?
There are two main types of audits for a business: Internal Audit and External Audit. While both aim to achieve similar outcomes, they differ in several key aspects.
An external audit is carried out by an individual or a team who are independent and have no affiliation with the organization. In contrast, an internal audit is performed by employees or a team within the organization who are on the company’s payroll.
The purpose of an external audit is to verify the accuracy and reliability of the information presented by management, providing assurance to external stakeholders. On the other hand, an internal audit is conducted by management to review business operations and identify areas for improvement.
External audits typically take place at the end of a financial quarter or year, or following significant organizational changes, whether financial or structural. Internal audits, however, can be conducted as needed throughout the year, depending on the specific requirements of the business, since they are managed internally.
What are the important considerations before undertaking your first external audit?
Before initiating an external audit for your company, management should consider several important factors:
First and foremost, management needs to have a clear understanding of how an external audit operates and the kind of outcomes it can deliver.
Once familiar with the audit process, management should gather all necessary documents and information required for the audit.
In some cases, the management may not be equipped to conduct an internal audit on their own. In such situations, it is essential to engage an expert who understands the specific needs of the business and can provide appropriate solutions. For this reason, it is advisable to seek the support of a reputable firm that can handle all the company’s auditing requirements professionally and efficiently.
What are the procedures involved in an external audit?
A well-structured verification process is essential to ensure that all financial items are reviewed with appropriate audit materiality. An audit involves gathering and evaluating evidence to support the conclusions reached. The key procedures that guide the auditor in this process include:
Planning and Risk Assessment: This step involves gaining a thorough understanding of the business and its operating environment to identify any risks that could potentially affect the financial statements.
Testing of Internal Controls: This procedure assesses the effectiveness of the company’s internal controls, focusing on areas such as proper authorization, asset protection, and segregation of duties.
Substantive Procedures: These consist of various tests, often involving sampling, to verify the accuracy and completeness of financial information.
Understanding the various levels of assurance in auditing
An audit provides the highest level of assurance. In contrast, a review engagement offers a moderate level of assurance, as it does not involve all the procedures performed during a full audit. For publicly traded companies, quarterly financial statements must undergo a review in addition to the annual audit.
At times, the requirement may be limited to reporting on specific financial data or a particular set of financial statements, such as certifying only the company’s turnover. This type of engagement, known as agreed-upon procedures, provides a lower level of assurance compared to a review.
In a compilation engagement, the auditor assists in preparing the financial statements by collecting, classifying, and summarizing financial information. However, this service does not provide any assurance regarding the accuracy or completeness of the financial statements.
Areas commonly covered in these engagements include:
- Revenue
- Procurement of goods and services
- Inventory management
- Logistics
- Information technology infrastructure
- Finance
- Fixed assets
- Statutory compliance
- Administration and general operations
Why Earnest Consultants?
Earnest Consultants is a reputable audit firm offering a comprehensive range of business services, including accounting, auditing, software consultancy, and management. We have been delivering top-quality audit services in Dubai and beyond. At Earnest Consultants, we employ a precise and proven methodology to ensure that every aspect of financial records requiring investigation and verification is thoroughly substantiated.
Our External Audit services include:
Analyzing business performance against established management objectives
Examining accounting records and verifying supporting evidence for financial statements
Assessing business risks and providing relevant recommendations
Preparing follow-up and action taken reports
