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An external audit is a process via which an independent body examines the financial statements prepared by any business. In the majority of cases, an external audit will take place as a legal requirement. The difference between an internal and external audit is the identity of the people carrying out the analysis of the financial statements, with an internal audit, as the name suggests, being performed by individuals based within the business in question.
The aims of an external audit
In simple terms, an external audit will seek to determine the condition of a business and its operations across a specific period. It will be carried out by a registered firm of accountants, and can take place as part of a standard annual review or during a special review. Auditors will be appointed at an annual general meeting (AGM) or by the board of trustees.
The independence of the auditors is vitally important, and means that they must in no way be personally connected to your business, and cannot have played any role in preparing the accounting records being audited.
What to look for when choosing auditors
As well as being independent, the auditors appointed to carry out an external audit need to hold the relevant professional qualifications and should be chosen on the basis of their reputation, their experience of auditing similar businesses, and the fee they will charge for carrying out the audit.
What an external audit involves
The limited time frame for any external audit means that the auditors cannot examine every small detail of the accounts they are looking over but instead will focus their attention on a carefully selected sample of results, figures, and transactions. Ideally, the audit should be treated as a positive process designed to highlight the strengths and weaknesses of the way your business is run, rather than as a test that is looking for some form of wrongdoing.
An external audit report
Once the external audit has been completed, the auditors should provide a report that sets out the official “audit opinion”. This will establish whether the financial statements prepared give a true and fair picture of the operations and financial affairs of the businesses during the auditing period. If this is the case, then the report will state the fact, with “true” referring to the fact that all transactions listed occurred and all assets referred to exist, and “fair” confirming that assets and liabilities are fairly listed and that the value assigned to any transaction is fair.
Fair and true judgements
Although the above is the optimal result of any external audit, other opinions are possible, and could include the fair and true judgement being qualified in the following ways:
Disagreement – this could state that the accounts give a true and fair view aside from the impact of specific issues. These could include the existence of unsuitable accounting methods, the existence of debts that can’t be recovered, or a fraud that hasn’t been disclosed in the proper way.
Limited scope – this could state that the accounts are true and fair but with some aspects remaining uncertain. This could be because particular documents have not been made available to the external auditors, or due to the fact that the method for recording income is at fault.
Adverse – this states that there are so many issues with the accounts that they can’t be said to provide a true and fair view.
In some cases, the external auditors might state that they haven’t been provided with enough information for them to be able to reach a conclusion.
We Can Help
If you’re interested in finding out more about an external audit, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.