Understanding the Purpose and Benefits of External Audits

An external audit provides management, investors, and lenders confidence that financial reporting presents an accurate view of the company’s financial performance. 

External audits have become more crucial in light of constantly evolving compliance regulations. New regulatory requirements, global tax changes, and new fraud schemes also pose continuing challenges. 

What is an external audit? 

External audits are independent assessments of your financial statements, records, and internal controls. The goal is to validate processes to ensure the accuracy and effectiveness of your financial management and identify areas for improvement. 

External audits are performed by third parties to provide a comprehensive review of your financial practices. An external auditor will typically review your: 

• Reporting accuracy 
• System configurations 
• Access controls 
• Transaction processing 
• Data integrity 
• Compliance 

The benefits of external audits 

There are several key benefits organisations get from conducting external audits that go well beyond check-the-box compliance. 

Producing financial transparency 

With an external audit, you get an unbiased assessment to ensure the information is complete, accurate, and complies with accounting and industry standards. This creates greater transparency to build trust within your company and with investors or lenders. You also get increased accountability. 

Ensuring compliance 

External audits help companies meet legal and regulatory obligations, provide peace of mind, and help avoid potential fines or legal repercussions. 

Validating internal controls 

During the audit process, an external auditor will assess the effectiveness of your internal controls. This process helps identify any gaps in policies or controls, highlighting areas for improvement. Strong internal controls help maintain internal compliance and reduce the risk of errors or fraud. 

Enhanced decision making 

The insights from your audit can give you confidence to make decisions. When you understand your financial position and risks, you can move forward, developing more effective strategies. 

The process of external audits 

An external auditor typically follows a few key steps, including: 

• Planning and Preparation: Working closely with your finance team to understand operations, internal control systems, and any specific risks or areas of concern. 
• Data Collection and Review: Compiling and analysing financial records, documents, and other relevant information to assess the accuracy and completeness of your financial statements. 
• Evaluation of Internal Controls: This involves evaluating the design and effectiveness of the organisation's internal control systems and identifying any weaknesses or areas for improvement. 
• Substantive Testing: Performing tests, such as sampling and analytical reviews, to verify the validity and accuracy of the financial information. 
• Reporting and Recommendations: Preparing a report that outlines their findings, issues or discrepancies, and recommendations for improvements. 
• Follow-up and Remediation: Addressing any concerns or weaknesses identified in the audit report, and implementing corrective actions. 

Key considerations for successful external audits 

To make the external audit process run more smoothly, here are a few tips to consider. 

Collaboration 

Some financial team members worry that audits will catch them doing something wrong. However, an external audit can validate their work and find areas for remediation to improve outcomes. Rather than catching them doing something wrong, an audit can ensure that proper policies, procedures, and safeguards are in place. This, in turn, makes the job easier for finance teams. 

Providing auditors with complete information, and being willing to engage transparently, will greatly improve the audit process. Timely responses to inquiries from auditors will also help prevent delays. 

Rather than hoping auditors don’t notice any areas of concern, pointing them out can provide faster resolution and give you confidence that you have the right systems in place. 

Preparation of records 

Making sure documentation is accessible and organised can help streamline the audit process and reduce costs. Relevant documentation of financial records, internal controls, and systems is a key part of the process. Unorganised data dumps will only extend external audits and may make them more costly. 

The right systems and policies 

A fundamental principle of effective internal controls is the segregation of duties to make sure that no single person can initiate, approve, and record transactions without some level of oversight. Reviewing user rights, roles, permissions, and approval workflows ensures there are checks and balances in place. 
 
In preparing for an external audit, companies should review their policies and workflows to make sure proper segregation is in place. There should also be a reviewable audit trail on every transaction along with supporting documentation. 

The right technology 

94% of executives agree that advanced technology can promote the quality of audits. By embedding intelligent spending reviews throughout your workflow, you can significantly reduce non-compliance and exceptions in your expense reporting. 

Automating the internal audit process is 36% more efficient for expense report intake and handling and results in 65% more expense reports that are compliant with company policies. This provides better internal auditing, which in turn makes any external auditors easier and less expensive. 

Managing expectations 

Finance leaders need to make sure team members know what’s expected. In a best-case scenario, no audit adjustments are needed. By setting this as the bar, you signal to everyone on your team that accurate, quality financial reporting and efficient systems are a priority. 

If discrepancies or weaknesses are discovered as part of the audit process, they must be dealt with promptly to avoid creating larger problems down the line. 

Get the latest industry insights, trends and research to support your business today - subscribe here to receive our timely updates.