Audits are an indispensable part of most businesses in the UK unless you are running a small business that meets the audit exemption thresholds. However, If you are a small company with a group member exceeding the exemption thresholds, you must do a yearly audit. Further, companies exempt from audits need to do so if asked by the shareholders, investors, or your company’s articles of association.
These audits are best done by independent external auditors whose reports hold value and are accepted by shareholders, regulators, investors and the public. But why do you need to hire an independent external auditor, and why do their audit reports gain more value in the market? This guide will help you determine the necessity of an external auditor.
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What is an external audit?
Companies with frequent internal audits are good for determining whether the business is operating efficiently. Such an audit is limited to examining your business’s financial health or dives deep into all your business risks and challenges to prepare for the future.
An external audit is conducted by an independent auditors or an individual without any connection to your business. The external or statutory audit is focused on the financial statements and their report is addressed to shareholders.
Who are independent external auditors?
Independent external auditors are qualified chartered accountants mainly from ACCA (Association of Chartered Certified Accountants), or ICAEW (Institute of Chartered Accountants in England and Wales).
They audit your business financial records but have no financial interest in your company or are connected with anyone in the company who might be interested in or be affected by the outcomes of the audit.
Independent auditors are more qualified to approach the process objectively and perform the auditing task with integrity. They provide an unbiased opinion and determine the accuracy of companies’ annual accounts as a fair reflection of their financial position. Further, these auditors are avoid any conflicts of interest and safeguard shareholders and potential investors’ interests in companies.
What does an external auditor do?
The auditor is responsible for collecting, assessing and interpreting data to understand the business’s financial activities, examining accounting records and verifying assets you purchased and sold.
● An external auditor is an independent professional who examines an organisation’s financial statements and assesses whether they give a true and fair view of its financial position.
● Their work involves a combination of tests of controls and substantive procedures to gather audit evidence to support an independent audit opinion.
● External auditors also assess the adequacy of the organisation’s internal controls and risk management processes.
● External auditors may also be engaged to provide other services, such as due diligence reviews or investigations into suspected fraud or corruption.
● Most external auditors are Chartered Accountants with extensive auditing and accounting principles training.
● Large accounting firms typically employ external auditors, but they may also work for smaller firms or be self-employed.
● The role of an external auditor is governed by professional standards, which set out the requirements for conducting an audit in an objective, independent, and reliable way.
● External auditors must disclose any potential conflicts of interest before commencing an audit.
● External auditors report their findings to the organisation’s board of directors or shareholders
● The auditor’s report is sent to the registrar of Companies House with the business’s annual financial statements.
Why hire an independent external auditor?
Though employing external auditors is often a legal requirement, an independent external audit brings numerous advantages.
● Ensure tax compliance
Independent auditors often expose a business to a critical and bias-free assessment to ensure the company complies with local laws, tax regulations and follows industry standards. One of the benefits of such audit services is that they are not affiliated with your company and evaluate your business without worrying about repercussions.
● Offers independent credibility
Conducting an audit by an external firm enhances the credibility of your financial statements by offering written reasonable assurance from an independent source. It represents a true and fair view of your business financials under an accounting standard.
It is most important to build a strong reputation within the industry. Such auditors do not work directly for your company, so they will not be partial in making audit reports and are trusted by the report users.
● Allows critique of internal processes
Internal auditors cannot be a good critique of the company’s internal processes as they are a part of it. However, an external auditor can observe business operations and determine which part of the business wastes time and resources.
Most of them generally critique day-to-day operations and accounting practices and develop action plans for the company to reduce waste and enhance efficiency.
● Allows quality control of internal audits
External auditors look into the same factors as internal auditors do, but in a different way, as they are independent of your business. These auditors measure the effectiveness of internal audits.
External auditors are often more knowledgeable and experienced in financial matters and accounting know-how. They can train management on key accounting issues.
● They offer validation to specific situations or events discovered in internal audits.
● They look for potential opportunities to ensure compliance
● They may find out things that were previously missed or reveal possible irregularities in the system that can be improved or corrected
● They can easily identify trends to offer necessary knowledge on how to stay prepared
● They are only focused on audits, whereas internal auditors have other jobs, responsibilities, and duties, which can be a hindrance in the audit process
● They can enhance productivity by identifying slow and faulty business processes
● They help potential investors, banks, and lenders gain confidence in your financial statements, management and operations
However, some business owners regard independent external audits as a little pricier and more time-consuming. But a good audit is useful in any business. When done by an external auditor, you can be assured of clarity and accuracy in your business processes and stay compliant with government regulations and industry standards.