05/05/2018
External Audit Definition
An external audit, defined as a company audit which is performed by a party which is not a department or employed by business to be audited, are very commonly performed. The external audit approach has 2 main purposes: The company believes an outside party will be more efficient at the work or because a governmental entity, such as the IRS, is auditing the business.
External Audit Explanation
An external audit, explained also as a voluntary or non-voluntary audit performed by a 3rd party, is a necessary tool. It provides both business and government with a valuable check of company accounting. The internal and external audit differences effect the value of the audit in many ways. Generally, an external audit conflict of interest is less likely to happen than when an internal audit occurs.
2 Reasons for an External Audit
When contracted from the business controllers, the external audit process happens for 2 reasons. First, the company can receive more efficiency by using an external auditor. This could happen for many reasons: company employees are already occupied on other tasks, external auditors are better trained for the purpose, internal fraud may prevent an internal audit from being valuable, and more. In any event, the company will use an external auditing company to find the answer to certain questions about their accounting. The external audit plan by professional companies may be concerned with missing funds, providing a second opinion, or merely auditing the Accounting Cycle which a company follows.
Second, an external audit report may occur when a governmental entity questions part of the financial statements of a company. In this instance, an external audit will not be voluntary. The IRS or a court usually mandates it. There are many reasons why an external audit will occur under these situations: the IRS questions the financial statements of a company, the IRS may detect internal fraud, the company may not be creating GAAP compliant statements, a court authorises the audit because they suspect funds may have been spent on illegal activities, and more. External audit fees are usually paid by the business being audited. The exception to this is that if they find illegal activity; then the business may be charged with the costs of the external audit.
