External Auditing of Financial Statements: Its Importance to Your Company and Business

Do you have your own company? Do you prepare financial statements for tax, loans and other compliance purposes? If yes, then you may already experience appointing a C.P.A. (Certified Public Accountant) to audit your financial statements. According to GAAS (Generally Accepted Auditing Standards), auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

There are two kinds of auditing, namely internal and external (independent) auditing. Internal auditing focuses on the audit of an entity’s operational effectiveness and control. Internal auditors are usually employees of the audited entity. On the other hand, an external or independent audit focuses on the assessment of the fairness of an entity’s financial statements – that is expression of an opinion whether an entity’s prepared financial statements present fairly in all material respects in accordance with the financial reporting standards applicable to that entity. External auditors are independent from the audited entity or company.

External auditing is usually engage by company owners for the purpose of complying requirements with the Internal Revenue Agencies, Securities and Exchange Commission and other agencies that require opinion from an independent auditor. However, some of these company owners don’t realize that independent auditing is not just a matter of signatures and opinions that after they obtain these things from an auditor, the process of audit ends.

The main purpose of an independent audit is the rendering of auditor’s opinion on the fairness of presentation of an entity’s financial statements. But the auditor’s opinion should be completely supported by evidences and working papers. To support the audit, the auditor must perform procedures to obtain audit evidence about the amounts and disclosures in the financial statements. He also tests the entity’s internal control and policies that are relevant to the entity’s preparation and fair presentation of financial statements. In the conduct of these procedures, the auditor accumulates findings and observations on the entity’s accounting and internal control system. By analyzing these findings, the auditor formulates appropriate recommendations that will improve the accounting system and internal control of the entity.

The importance of independent auditing is beyond the compliance requirements of an entity. It helps the credibility of the reported financial statements because of the independence and impartiality which are the qualities of external auditors. Moreover, external auditors are more exposed on the audit of various audit entities and industries than internal auditors which are employed by an entity. Consequently, external or independent auditors can provide their audited entities with appropriate recommendations to improve their accounting system and internal control that will accordingly boost their operational effectiveness and efficiency.

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