An effective and insightful external audit function provides confidence to leaders that their organization can meet the demands of changing environments. Managing risk, monitoring controls, enhancing security, and improving efficiency and effectiveness of operations are crucial audit services. Organizations are increasingly leveraging external audits as a strategic resource, reaping benefits for the organization such as enhanced efficiency and the ability to move more quickly and take advantage of opportunities.
The direct and ultimate responsibility for internal control always lies with management. However, the baseline responsibility is usually attributed to the frontline personnel, while the oversight board (Directors, Trustees, etc.) is responsible for guidance and oversight. Management must take this responsibility very seriously or run a substantial risk of loss of funding, contractual penalties or regulatory scrutiny.
What is External Auditing?
An external audit is an examination that is conducted by an independent local accounting firm. This type of audit is most commonly intended to result in a certification of the financial statements of an entity. This certification is required by certain investors and lenders, and for all publicly-held businesses.
The objectives of external audit services are to determine:
- The accuracy and completeness of the client’s accounting records;
- Whether the client’s accounting records have been prepared in accordance with the applicable accounting framework; and
- Whether the client’s financial statements present fairly its results and financial position.
There are other types of external audits that may be targeted at specific issues concerning a client’s accounting records, such as an examination that searches for the existence of fraud.
Benefits of External Auditing
1. Provides Validity: External audit services provide an objective opinion on a small business’ accounting process. Many small business owners do not have an in-depth understanding of accounting principles. They simply prepare accounting information the best they can according to basic accounting rules. Professional accountants and CPAs can review this information and provide business owners with insight on the accuracy and validity of the accounting information. Valid accounting information can help business owners secure external financing from lenders and investors.
2. Limits Legal and Tax Issues: Professional accountants provide business owners with information on the legal and tax issues relating to accounting information. Legal issues arise when business owners provide inaccurate or fraudulent accounting information to lenders, investors and the general public. Business owners are usually liable for not reporting their company’s financial information accurately.
Incorrect accounting information can increase a company’s tax liability. Overstating income, inventory value or other items can significantly increase the amount of taxes owed by the company. Small businesses organized as a sole proprietorship also need accurate accounting information since income will be reported on the business owner’s personal income tax return. Inaccurate accounting information can trigger a personal and business tax return audit
3. Lends Credibility to Financial Statements: Financial statements that have been audited and verified by an external auditor are considered more reliable in the business marketplace than those that have not. Lenders, investors and potential clients often require externally audited financial statements before making the decision to work with a company. An externally audited set of financial statements gives lenders, investors and potential clients some security that your financial statements are free of error and that you have not committed fraud while compiling the statements to secure a loan, investment or new client.
4. Unbiased, Expert Recommendations: External auditors are trained specifically to focus on tightening and improving small business processes to reduce the amount of risk of misreporting financial data. An external auditor does not bring individual likes and dislikes to the job, such as personnel favorites or aversion to change.
Existing company management may allow favored or long-term employees latitude that creates dangerous exposure for internal control. Company management that is adverse to change may also stonewall or delay necessary process improvements because they do not wish to learn new systems and processes. An external auditor works with the single-minded purpose of improving the business.
5. Identifies weaknesses internally: Having weaknesses within your internal structure is inevitable – what matters is how you tackle them. Some companies prefer to sweep their weaknesses under the rug and continue to operate with blinders on. However, business owners always have the option of taking an assertive approach by giving underperforming areas within their company the attention they’re due.
Since internal auditors cannot effectively critique their company’s internal processes because they form part of it, external audit services can observe the operations from the outside and recommend ways to promote efficiency and refine the accounting process.
The Bottom Line
Business owners can use external audits to review their accounting processes and financial information. Local accounting firms are usually responsible for conducting these audits. Professional accountants will interview the owner, discuss the accounting process and test the company’s accounting information. External audits offer several benefits for small business owners.
Limitless Investment and Capital Audit Services in Denver
It’s not about simply checking all the boxes and moving on; our accounting firm develops longterm relationships with our clients and approaches each situation with a focus on bringing value to business owners. The benefits of having a good system of internal controls are limitless and we specialize in building a plan that is customized for your company and its specific needs.