The external audit concludes lots of doubts regarding its efficacy using a rising number of corporate governance-related issues and fiscal irregularities. The external audit can also be referred to as an external audit as external and independent auditors participate.
Expectation v/s reality
In the present world, everybody needs a full-proof assurance of one kind or another. There are expectation gaps between the users of audited financial statements and the type of contract that statutory auditors provide.
Statutory provisions ask audited financial statements to assess if the companies have fulfilled legal requirements or not. Auditors put their efforts into finding out if the legal needs met and financial statements are reliable.
But, stakeholders need assurance in the areas of internal controls and fraud. They also need confirmation from the auditor that the company is a going concern, and it’s not going to close down shortly. The auditor’s report doesn’t contain any particular assurance to that facet.
Further, stakeholders also want auditors to share their views on the company’s performance. There are expectations from analysts that auditors must also perform value for money audits as part of their paychecks. They should publish their audit queries and the management responses to the stakeholders to take a peek.
In a external audit, an outside auditor with no links with the company is appointed and assesses the data present in the books of accounts, transaction details, accounting records, etc.. Based on the examination, the audit report generate.
A external audit ensures that audited financial statements are free of material misstatements and conform to statutory conditions. The statutory auditor’s opinion provides credibility to the accounting records maintained by the company and financial reports. It’s one of the best and exceptionally significant trust inducer. It’s printed openly for the stakeholders and possible investors to know more about the firm’s financial position. Because it’s connected to the company’s standing, it holds tremendous significance in the current world.
Further, a contingency audit also detects mistakes and frauds. It provides a check on such errors and cons as the statutory auditor expects to pay a visit to the client frequently.
With a growing number of corporate governance problems, people doubt the significance of statutory auditing. With each new financial fraud, be it a scandal in India such as Satyam or even a scandal in the US such as Enron, the stakeholder confidence hits a new low.
However, such cases are far off, and, by and large, statutory audits have always turned out to be a confidence booster for both investors and other stakeholders. With brand new and innovative auditing techniques, AI-enabled audit methodologies, developments in forensic accounting, statutory auditing is taking a contemporary form.
Independent outside auditors with the necessary skills are supplying a fair amount of confidence to stakeholders regarding the significance of statutory auditing. A statutory audit is a significant control designed to underline how the business is following the legal requirements. Its internal control system is sufficient to perform its day-to-day activities without harming the attention of its stakeholders.
Because there are distinct businesses, statutory audit requirements may vary. Therefore, a company must look for outside auditors who have worked with various industries and have the required domain knowledge.
A statutory audit is an essential audit that a company needs to run to present the business’s financial picture in front of the authorized authorities.
Validation of these Finances
The external auditor validates the accounting records which are prepared by the company staff. The auditor ascertains that the financial records are correct and they are free from material misstatements.
That supports the company’s financial standing and aids in securing more investment necessary for growth and sustainability.
Credibility plays an essential part in the growth of the corporation. When the provider is credible, it will undoubtedly attract more individuals to invest in the company. It also helps win government authorities’ confidence, which now knows that the company is reliable in the market. It creates a positive brand image in the eyes of the customers, which fuels the corporation’s development.
While the outside auditor conducts auditing, he goes through all the books of accounts and finds mistakes and omissions. Such errors and omissions can rectify, and accurate financial records could preserve.
Reduce the Odds of fraud
When a company doesn’t run external auditing, there will be no separate check of the provider’s financial records. Employees may start conducting scams that may remain undiscovered, causing a reduction of money and reputation. Statutory auditing is generally a yearly event. Therefore, the auditors expected to pay a visit to the client several times a year, making workers think twice before committing fraud.
Get an objective and independent opinion.
The external auditor goes through all of the business’s financial particulars and knows the best regarding the company’s financial condition. From an external auditor, you can find an impartial opinion regarding the functioning of the provider. That might help to take the business in a suitable direction. A statutory audit provides the required confidence to the shareholders that the company management is taking due care in the provider’s total operation.
Fulfillment of statutory requirements
A external audit provides the information needed by the law, which enables stakeholders to rate the operation of the business. Since auditors are objective and independent, stakeholders have confidence in them. They rely upon their statutory audit report also make economic decisions based on this. An outside audit ensures that financial statements conform to the statutory requirements and mandatory disclosures required by the legislation are adequately made.
Validation of Internal control frame
Statutory auditors assess the customer’s internal control framework and accounting methods and evaluate if the controls are adequate and operating. Accounting policies consistently follow, and the financial documents coincide together with all the audited financial statements. A statutory audit helps in enhancing the efficiency and honesty of all their workers. Employees know that their financial records are subject to an independent examination by external auditors, and therefore they remain far from wrongdoings.
Statutory auditors also ensure that audited financial statements are comparable with the previous periods and similar organizations concerning their format and content. If any incidents have occurred after the balance sheet date, they appropriately disclosed, all unusual transactions are told, making financial announcements free from material misstatements. Auditors also identify any material deviation from generally accepted accounting policies and reveal them suitably in their statutory audit report.
A external audit helps companies strengthen their internal audit function as it assesses the effectiveness of internal controls and internal audit procedures.