External Audit Definition

See Also:
Audit Committee
Compliance Audit
Audit Scope
Forensic Audit
Maintenance Contract

External Audit Meaning

An external audit, defined as a company audit which is performed by a party which is not a department or employed by business to be audited, are very commonly performed. The external audit approach has 2 main purposes: The company believes an outside party will be more efficient at the work or because a governmental entity, such as the IRS, is auditing the business.

External Audit Explanation

An external audit, explained also as a voluntary or non-voluntary audit performed by a 3rd party, is a necessary tool. It provides both business and government with a valuable check of company accounting. The internal and external audit differences effect the value of the audit in many ways. Generally, an external audit conflict of interest is less likely to happen than when an internal audit occurs.

2 Reasons for an External Audit

When contracted from the business controllers, the external audit process happens for 2 reasons. First, the company can receive more efficiency by using an external auditor. This could happen for many reasons: company employees are already occupied on other tasks, external auditors are better trained for the purpose, internal fraud may prevent an internal audit from being valuable, and more. In any event, the company will use an external auditing company to find the answer to certain questions about their accounting. The external audit plan by professional companies may be concerned with missing funds, providing a second opinion, or merely auditing the Accounting Cycle which a company follows.
Second, an external audit report may occur when a governmental entity questions part of the financial statements of a company. In this instance, an external audit will not be voluntary. The IRS or a court usually mandates it. There are many reasons why an external audit will occur under these situations: the IRS questions the financial statements of a company, the IRS may detect internal fraud, the company may not be creating GAAP compliant statements, a court authorizes the audit because they suspect funds may have been spent on illegal activities, and more. External audit fees are usually paid by the business being audited. The exception to this is that if they find illegal activity; then the business may be charged with the costs of the external audit.

External Audit Example

Dwayne owns a healthcare research company. His business, fueled by his years of experience in healthcare research, provides analysis of samples sent by doctors offices as well as hospitals. Dwayne knows the operations of his business left and right. Recently, Dwayne’s business has come under an IRS audit. The IRS suspects that he may be excluding some of their profits from the books to be in a lower tax bracket. Dwayne is afraid that the audit will expose problems which he is not responsible for.
After some time, Dwayne is acquitted of any wrong-doing. The auditor has found that this is not the case: his company temporarily took less profit due to the recent recession. Dwayne is relieved to hear this as he continues his work.
Dwayne made sure to comply with the auditors requests. The reason for this is two fold: he knew he was innocent and wanted to present a reputable picture to the IRS. In doing this he made his experience much more pleasant than it might have been.
Dwayne now appreciates the auditor because he was merely doing his job. Dwayne, the average patriotic American, respects the auditor as an accountant. He is glad to help in preventing fraud in even his own business.
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