A: An external audit is an independent examination of the financial statements prepared by the organization. The objective of external audit is for the auditor to express an opinion on the truth and fairness of financial statements.
External audit is also called statutory audit of financial accounts to express an opinion whether the financial statements in all material aspects are in accordance with an acceptable financial reporting standard or not.
It is called statutory audit because it is a creation of the law to protect the interest of other stakeholders especially the government. The audited financial statement is the one used by the tax authorities for tax assessment and forms the basis of tax audit. The law also specifies that the audited financial statement should be filed as one of the major document for filing of annual returns to Corporate Affairs Commission. It is also used by banks for appraisal for loans and overdraft. It is used by customers and suppliers to know the financial health of a business and to assess the credit worthiness of a company.
The primary role of external audit is to report on the company’s financial statements and to carry out such examination of the statements and underlying records and control systems as are necessary to reach their opinion on the statements and to report on the appropriate use of funds.
The purpose of external audit is to verify that the annual accounts provide a true and fair picture of the organizations finances; and that the use of funds is in accordance with the aims and objects as outlined in the constitution.
Statutory audit has the following benefits to the companies, if all the recommendations from the audit is well implemented.
- It improves or enhances accounting procedure, internal control, internal reporting, operations and cash flow.
- It reduces, relieves or eliminates exposure to material errors, losses, and bottlenecks.
- It protects assets, credibility, lines of credit, liquidity and profit.
- It can help in the restructuring of quality reporting system, unprofitable operations, unnecessary reports, and branch operations.
- It can help to identify and develop external reporting and install management information systems, cost systems and decision making model.
- It will help to restore and resolve image of client, reliability of financial statements, backlogs, uncertainty, inefficiencies and management anxiety.