An external auditor is a certified public accountant (CPA) or an auditing firm that is independent of the company it is auditing. External auditors review the financial statements of a corporation to ensure compliance with Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), or other relevant accounting standards.
The external auditor’s main responsibility is to conduct a thorough and unbiased examination of the company’s financial records and business transactions. This includes testing the accuracy and reliability of the financial statements, verifying supporting documentation, and evaluating internal controls over financial reporting. The ultimate goal is to form an opinion on whether the financial statements present a true and fair view of the company’s financial performance and position.
At the end of the audit process, the external auditor issues an audit report, which includes their opinion on the financial statements. This report provides valuable information to shareholders, creditors, regulators, and other stakeholders, helping them make informed decisions.
External auditors are typically appointed by the shareholders and report to them through the audit committee of the board of directors. The independence of external auditors is crucial as it ensures objectivity and enhances the credibility of the audit report.
It’s important to note that external auditors must comply with the ethical and professional standards set out by relevant professional bodies, and they must maintain their professional knowledge and skills at the level required to ensure that a client or employer receives competent professional service.
Example of an External Auditor
Imagine a large, publicly traded company, let’s call it “AutoFab Motors”. AutoFab Motors manufactures and sells vehicles globally. As a public company, AutoFab Motors is required to have its financial statements audited annually by an external auditor.
For this purpose, AutoFab Motors hires an independent auditing firm, “Pinnacle Audit Group”. Pinnacle Audit Group is a well-known auditing firm and is not connected to AutoFab Motors in any way, ensuring their independence.
The auditors from Pinnacle Audit Group review AutoFab’s financial statements in detail. They examine the income statement, balance sheet, statement of cash flows, and notes to the financial statements, among other information.
The auditors verify AutoFab’s financial transactions by checking original documents like invoices, receipts, and bank statements. They test internal controls to ensure they’re robust and functioning effectively. They may also physically count inventory and get third-party confirmations for certain account balances.
After conducting their review, Pinnacle Audit Group compiles their findings and issues an audit report. If they believe AutoFab’s financial statements are a fair and accurate representation of its financial status and comply with applicable accounting standards, they will issue a clean or unqualified opinion. If they find issues or have reservations about the financial statements, they will express these in their report.
This audit report, issued by the external auditors, is then included in AutoFab’s annual report, providing shareholders, potential investors, lenders, and other stakeholders with an independent opinion on the company’s financial health and integrity.