Importance of External Auditing for Your business

Tally Solutions | Updated on: November 8, 2022

What is an external audit?
Goals of an external audit
How should you choose external auditors?
External audit main procedures
External audit report
Fair and true judgments
How can TallyPrime help?

Examination and auditing are common procedures to uplift any business. Quality control, joint venturing, financing opportunities, expansion plans, business certification, awards, and many other reasons would require you to opt for external auditing.

Management, shareholders, and the board of directors cannot evaluate the business's financial position according to an internal audit only.

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What is an external audit?

External audit refers to the auditing and examination process that is conducted by an independent external accountant or a financial firm to examine the financial statements prepared by any business.

In most cases, an external audit will take place as a legal requirement. Investors and shareholders rely on external auditors to present an unbiased and independent audit report. The independence of the external auditors is the point here, that means they must in no way be personally connected to your business, and cannot have played any role in preparing the accounting records which will be audited.

The goals of an external audit

Determine the condition of a business and its operations across a specific period
Examination, review, and auditing of a company's financial and accounting records
External auditing can be requested sometimes by shareholders, or investors if they suspected financial reports or records
Checking for the accuracy and completeness of financial and accounting records
Checking the correctness of financial statements representing the company’s current financial position

Some business owners also find it valuable to conduct external audits voluntarily due to the beneficial nature of having independently verified financial statements

How should you choose external auditors?

External auditors should match the following requirements:

Totally independent

Hold the relevant professional qualifications
Chosen on the basis of their fair reputation
Have auditing experience in similar industries

External audit main procedures

In most cases, the external audit is limited by a short time frame, which means the external auditors usually will not be able to review and examine every small detail of the accounts and financial records and statements.

External auditors focus and give their attention to a selected sample of results, figures, and transactions. It is a positive process designed to highlight the strengths and weaknesses of the business, rather than as a test looking for errors and issues.

External audit report

The external audit report clarifies whether the financial statements give a true and fair representation of the business position during the auditing period. If this is the case, the report will state it with (true) referring to 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.

The external audit report should have:

Objective and unbiased opinion
Clear language with no misleading terms
Accurate and clear information

Fair and true judgments

An external audit report could include other fair and true judgment situations which are being qualified in other ways:

Disagreement: This states that the accounts give a true and fair view aside from the impact of specific issues, such as the existence of unsuitable accounting methods, the existence of debts that can’t be recovered, or fraud that hasn’t been disclosed in the proper way.

Limited scope: This states that the accounts are true and fair but with some aspects remaining uncertain, such as particular documents were unavailable to the external auditors, or due to that the recording income method is at fault.

Adverse: This states that there are many issues with the accounts that can’t be considered providing a true and fair view of the business position.

Sometimes, the external auditors state that they haven’t been provided with enough information to be able to reach a clear conclusion and results.

How can TallyPrime help?

TallyPrime can help your business in the external auditing process with its smart integrated features including:

With a click of a button, you can identify the irregularities requiring your attention from every report you see, generate comparative analysis across a defined period

Flexible inventory management system to handle exceptions so that no crucial information stays outside the system
Variety of inventory reports such as stock summary, aging analysis report, item-wise profitability, etc
The job costing feature can track cost and revenue information like material, labor, and overhead for each job, down to the smallest detail
Item Cost Tracking feature can effectively track and ascertain the procurement cost, landing costs, manufacturing or production costs, order cost or profit, and job cost or profit
What’s more? TallyPrime’s comprehensive way of accounting and bookkeeping ensures all the necessary business data is readily available for audit purpose.