An external audit is an independent assessment of an organization’s financial statements, accounting records, and internal controls conducted by an external auditor who is not an employee of the organization.
The primary objective of an external audit is to assurestakeholders, such as investors, lenders, and regulators, that the financial statements are free from material misstatements, errors, or fraud, and that they are presented by generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).
The execution of the audit assignment is predicated on three tripods; Audit plan, Audit procedures and Audit programme.
An audit plan is the first step of an audit which details the phases or steps with the timing and manpower requirement of the audit exercise from commencement to conclusion. It is aimed at providing the schedule of resource allocations and cost implication of the exercise.
Audit procedures refer to the steps undertaken by an auditor to achieve the specific objectives of an audit when conducting the fieldwork phase of the audit. These objectives include ensuring the organization’s risks are identified and managed effectively, ensuring that employees comply with the organization’s regulations and policies and that the assets of an organization are acquired properly and used efficiently.
An audit programme is a detailed written statement highlighting the work to be accomplished, the audit tests and procedures to be followed, the persons responsible for the accomplishment of the work, and the time within which the work is to be accomplished.
During an external audit, the auditor will examine the organization’s financial records, including its income statement, balance sheet, cash flow statement, and any accompanying notes to these financial statements. The auditor will also evaluate the organization’s internal controls, such as its processes and procedures for financial reporting and compliance with relevant laws and regulations.
Once the audit is completed, the auditor will issue an audit report that expresses an opinion on the fairness of the financial statements and the effectiveness of the organization’s internal controls. This audit report is an important tool for stakeholders to assess the organization’s financial health and performance, and to make informed decisions about investing, lending, or regulating the organization.
The primary purpose of an external audit is to provide an independent assessment of the organization’s financial statements, internal controls, and compliance with applicable laws and regulations.
Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It encompasses the relationships among the board of directors, management, shareholders, and other stakeholders and sets out the framework for the company’s decision-making and operations.
The primary objective of corporate governance is to ensure that the company is managed in the best interests of all stakeholders and that it operates responsibly and ethically. This includes ensuring transparency and accountability, promoting ethical behaviour and corporate social responsibility, managing risks effectively, and maintaining compliance with applicable laws and regulations.
Good corporate governance is essential for building trust with stakeholders and maintaining the company’s reputation. It can help to attract investment, enhance shareholder value, and reduce the risk of legal and financial penalties.
Some of the key components of corporate governance include:
1.Board of directors: The board of directors is responsible for overseeing the company’s management and making strategic decisions.
2.Management: The management team is responsible for executing the company’s strategy and managing its operations.
3.Shareholders: Shareholders have a vested interest in the company’s performance and governance and have the right to vote on major decisions.
4.Ethics and corporate social responsibility: Companies are expected to operate in an ethical and socially responsible manner, taking into account the impact of their operations on the environment and society.
5.Risk management: Companies are expected to identify and manage risks effectively to protect their stakeholders and the business itself.
Here are some ways in which an external audit can impact corporate governance:
1.Increased transparency: External audits promote transparency by providing an objective view of the organization’s financial statements and internal controls. This can enhance the organization’s reputation and increase stakeholders’ confidence in its operations.
2.Improved accountability: External audits can help to identify weaknesses in the organization’s internal controls and provide recommendations for improvement. This can increase the organization’s accountability to its stakeholders, including shareholders, customers, and employees.
3.Compliance with regulations: External audits can ensure that the organization is complying with applicable laws and regulations. This can help to reduce the risk of legal and financial penalties, as well as reputational damage.
4.Identification of risks: External audits can identify potential risks and vulnerabilities in the organization’s operations, which can help the organization to take proactive measures to mitigate those risks.
5.Enhanced decision-making: External audits can provide valuable information and insights to the organization’s management team and board of directors, which can inform strategic decision-making.
Overall, external audits play a crucial role in ensuring that an organization’s financial statements are accurate, reliable, and compliant with applicable regulations. This can help to promote good corporate governance and increase stakeholders’ trust in the organization.