What is the purpose of an External Audit?

While business owners sometimes question the value of external audit, there can be strong business benefits to having your financial statements independently verified, explains FPM Associate Director Karen Coulter.

Certain businesses are required by law to have an external or statutory audit. Others, although legally exempt from this requirement, often choose to be audited for sound business reasons. Examples of these reasons include:

• To identify risks and/or highlight opportunities to enhance an organisation’s compliance with its legal and regulatory obligations,
• To provide independently verified information for an organisation’s shareholders, lenders, investors, and other key stakeholders; and
• To prepare for due diligence when planning a transaction such as a merger or sale of the business.

However, it is also the case that some business owners regard external audit as little more than a costly and time-consuming activity. It can be seen as a box-ticking exercise that just highlights errors and mistakes. While a good audit will certainly identify errors, its real benefit for business owners is that it can highlight opportunities to strengthen processes that will ultimately improve productivity and enhance value.

So, what is an External Audit?

An external audit is an independent examination of an organisation’s financial statements. As mentioned above, while an external audit is usually conducted for statutory or regulatory purposes, there can also be good business reasons to have an audit.

The external auditor forms an opinion on whether the financial statements prepared by management are “true and fair” in all material respects and comply with relevant financial reporting requirements.

Who can conduct a Statutory Audit?

To conduct a statutory audit, the external auditor must hold an ‘audit registration’ from a recognised accountancy body. In our case, FPM’s Audit and Assurance services are regulated by Chartered Accountants Ireland, however, it should be noted that Brexit has meant that audit regulations do now differ in the UK and Ireland.

What are the Advantages of an External Audit?

An important advantage of external audit is that it is impartial. The absence of bias reinforces the credibility of the organisation’s financial statements and general financial health. This helps protect the organisation’s reputation and can be especially important for small and start-up companies as it helps to instill trust among shareholders and potential investors.

Another advantage is that external audit helps to strengthen an organisation’s internal control and compliance processes. An external auditor can identify areas of non-compliance and potential risks of fraud or abuse of company assets. This enables management to take corrective action and helps management demonstrate that they are fulfilling their legal and regulatory obligations.

Other advantages of external audit include:

• Enhanced productivity: By identifying slow and/or faulty processes, the external auditor’s report helps management to take corrective action. This potentially increases productivity and reduces waste across the organisation.
• Compliance: The external auditor will verify that the books of accounts are up to date and comply with the relevant rules and regulations that govern the business. They may recommend improvements to enhance compliance. A poor compliance record can be a barrier for potential investors or acquirers.
• Unbiased perspective: As the external auditor is an independent third party, there is no bias in their conclusions or reports. They can make recommendations without fear of repercussions in the workplace.
• Identify trends: The external auditor can easily identify trends, both good and bad, and recommend corrective actions to be taken where necessary.
• Validate internal audit work: In some situations, external audit helps validate the work of internal auditors for example by providing an independent perspective on problematic issues discovered during internal audits.
• Identify potential irregularities: The external audit can help to reveal potential system irregularities and areas where correction may be needed. Sometimes an outsider will spot potential problems that have previously gone unnoticed.
• Accurate Reporting: External audit tests the organisation’s reporting mechanisms to prevent errors in financial statements.
• Assurance for lenders: External audit helps bankers and/or other lenders have confidence in an organisation’s financial statements, management and operations.
• Attract potential investors: The external audit prepares your organisation for possible due diligence and enhances the confidence of investors who are considering potential investment in your business.