If you’re new to external auditing and want to understand the roles and responsibilities of an external auditing service provider, this article will help you.
Let’s first understand what an external audit is and how it can help your organization.
An external audit is an independent and objective examination of an organization’s financial statements, records, and operations to ensure that these statements are presented following specified criteria and standards
External auditing provides an independent opinion on the fairness of the financial statements and compliance with regulations. The assurance it provides gives investors greater confidence to invest in a business they may otherwise be unfamiliar with or uncomfortable with.
Through their findings, external auditors can help businesses prevent potential irregularities by identifying any opportunities for fraud or mismanagement.
Furthermore, it also helps to uncover any potential additional revenue sources and current cost savings.
4 Key Roles of Third-Party Audit Firms
1.Independent Assessment of Financial Statements
Inaccurate financial statements can bring a number of challenges to an organization, including decreased confidence among stakeholders, regulatory penalties, and difficulty in obtaining and maintaining financing. Invalid transactions may go undetected or overlooked due to inaccurate financial statements, and this can lead to fraud or other misappropriation of funds. Inaccurate financial statements can also result in incorrect tax payments, which may lead to fines or criminal penalties for the organization.
Therefore, one of the primary roles of third-party audit firms is to independently assess the financial statements of organizations. This includes reviewing and testing financial information to ensure that it is accurate, complete, and in compliance with accounting standards. The firm issues an opinion on whether the financial statements are presented fairly and in accordance with the appropriate financial reporting framework.
2.Assessing Compliance with Laws and Regulations
Organizations typically engage audit firms to ensure compliance with applicable laws and regulations. This involves conducting an evaluation of the organization’s internal processes, procedures, and controls to ensure they are meeting their obligations outlined in applicable laws and regulations. This may include reviewing financial records and making sure they adhere to Generally Accepted Accounting Practices (GAAP) or regulatory requirements.
Additionally, audit firms may also assess whether a company’s data is stored safely and securely from cyberattacks or other meddling efforts, especially if they use any automated financial system such as Enterprise Resource Planning (ERP). Furthermore, audit firms can ensure that the organization complies with fair labor practices set forth by relevant labor laws.
3.Identifying Potential Fraud or Mismanagement
Audit firms help organizations uncover potential fraud and mismanagement through rigorous evaluations of internal processes, procedures, and controls. For instance, an audit firm may review a company’s inventory to identify discrepancies between reported and actual stock values. If there is a significant difference between the two numbers, this could indicate potential theft or fraud.
Additionally, an audit firm can analyze the organization’s financial data to identify any potential issues or mistakes with cash flow or income statement reporting. For example, if there is a discrepancy between the net income reported and the actual profits earned in a period of time, this could be indicative of intentional mismanagement. As such, audit firms provide organizations with invaluable insights into their operations and financials that can help reduce risk related to fraud or mismanagement.
4.Providing Assurance to Stakeholders
Audit firms provide organizations and their stakeholders with assurance regarding the accuracy of financial information. For example, an audit firm can review a company’s balance sheet to ensure that all assets and liabilities are properly stated at the end of a given period. Additionally, audit firms are often engaged to perform procedures like substantive testing or analytical review to assure stakeholders that income statement figures are properly reported and the overall financial position of the organization is adequately reflected.
Furthermore, audit firms can help identify areas where operations can be improved. For example, an audit may reveal discrepancies between reported and actual numbers or uncover inefficiencies in internal processes or financial controls. With this information, a company can examine these issues further to reduce costs, tighten controls, and improve profitability.
By providing assurance to stakeholders that financial information is accurate and actionable insights into operations improvement opportunities, an audit firm can add value beyond just verifying the accuracy of financial statements.
4 Main Responsibilities of Third-Party Audit Firms
Third-party audit firms have several key responsibilities in ensuring the integrity of financial reporting and maintaining transparency and accountability within organizations. These responsibilities include:
1.Maintaining Independence
A major responsibility of a third-party audit firm is to maintain independence from the organization they are auditing. This is done to ensure that they impartially review the organization’s financial information, as there could be a bias if the auditor has a close relationship with the organization.
In order to maintain independence, audit firms implement safeguards that prevent their personnel from having conflicts of interest with any companies being audited. This includes avoiding activities such as accepting gifts, providing services for compensation, or having personal investments or loans with clients. The audit firm must also ensure it does not structure its fees in such a way that creates an incentive for the auditor to provide unrealistic audit opinions or unduly manipulate financial statements.
An example of maintaining independence can be seen when one of the auditors involved in an audit has previously worked for or consulted with a company being audited—that auditor must recuse themselves from involvement and disclose any actual or potential conflicts of interest that may exist.
2.Conducting Thorough and Accurate Audits
A third-party audit firm is responsible for objectively and thoroughly examining an organization’s financial statements. The financial statements represent the financial position and performance of the organization. Therefore, an independent audit of the financial statements is important to provide assurance that they are free from material misstatements or inconsistencies.
For instance, the audit firm will be examining evidence to determine and document whether sufficient, appropriate evidence exists in support of management’s assessments and assertions about their financial position and results.
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3.Communicating Findings and Recommendations
Third-party audit firms are responsible for following professional standards and guidelines in order to ensure their audits are performed to a high standard that adheres to all the specific laws, regulations, and industry best practices. Auditors must use professional judgment that is independent of the objectives, strategies, and business operations of the organization being audited. Examples of professional standards and guidelines include:
The audit report typically includes details about notable risks, deficiencies in internal controls or accounting systems, as well as any material weaknesses or noncompliance issues. In addition, the report will identify areas where improvement or action is needed, such as providing better documentation for transactions to ensure that they comply with generally accepted accounting principles (GAAP). Furthermore, where applicable, the auditor may recommend additional procedures or changes in order for the entity’s financial statements to be presented in accordance with applicable laws or regulations.
The reporting engagement should also identify areas of significant fraud risk exposure and recommend monitoring remediation activities. Furthermore, if any fraud has been identified during the course of the audit process—whether it is suspected fraud or confirmed fraud—this should be reported in detail within the final report. Lastly, third-party audit firms should also advise management of implementation best practices based on industry standards they observed during their engagement process.
4.Following Professional Standards and Guidelines
Third-party audit firms are responsible for following professional standards and guidelines in order to ensure their audits are performed to a high standard that adheres to all the specific laws, regulations, and industry best practices. Auditors must use professional judgment that is independent of the objectives, strategies, and business operations of the organization being audited. Examples of professional standards and guidelines include:
Establishing an audit plan that appropriately addresses key risk areas, such as current accounting changes, disclosure requirements, and off-balance sheet liabilities.
Adhering to ethical principles by obtaining sufficient and relevant evidence to support conclusions while maintaining objectivity when forming opinions regarding financial information.
Establishing procedures designed to identify instances of misstatements due to fraud or error during the course of the audit process.
Evaluating internal control design effectiveness, as well as personnel competency with accounting systems/processes.
Using professional skepticism when reviewing financial statements, such as properly evaluating consolidation issues, complex transactions, and related party arrangements.
Maintaining an understanding of the legal environment in the particular countries/jurisdictions in which the organization operates before commencing an audit engagement.
Adequately disclosing any significant disagreements between third-party auditors’ findings and management’s assertions within their report.
Issuing audit opinions on conformance with applicable financial reporting standards (i.e., GAAP or IFRS) within a reasonable period of time after completion of fieldwork procedures.
Choose your third-party audit firm wisely
Third-party audit firms play a critical role in ensuring the integrity of financial reporting and maintaining transparency and accountability within organizations. They help organizations stay compliant with laws and regulations, protect against fraud and mismanagement, and provide assurance to stakeholders.
