Introduction.
External auditing involves a close examination of a company’s financial and operational records in confirmation of accuracy of statements. External auditors establish company’s credibility, and ensure tax laws compliance. They assist in double-checking of internal audits carried out in a company, train accounting principles to internal auditors, and explain any difference that may occur between internal audit and their audit (PORTER, HATHERLY and SIMON, 2008).
The limitation of depending with internal audits is that they cannot effectively critique the internal processes of a company since they are part of it. External auditors, therefore, provide independent results since they are acquired externally. They are better placed in offering critiques, and in recommending proper strategies for cost reduction and profit maximization. This paper discusses the importance of independence in external auditing in relation to the roles of external auditing, and how lack of independence may contribute to inaccurate audit.
The key roles of an external auditor include; fraud and error detection, identification of areas of improvement, protecting the public against corrupt interests, and encouraging investment (ALBRECHT, 2011). These audits are conducted by Certified Public Accountants, government entities, public accounting firms or compliance agencies. The audits guarantee external business stakeholders that a business is meeting its obligations. Independence of an external auditor implies that the accountant in question works in a company that he/she does not have any affiliations. This auditor is used to ensure integrity, and avoid conflicts of interest among company operators. For successful external audit, the accountant takes some time to familiarize with a company’s operations, and then uses the accounting standards in verification of the accounts.
Companies rely on external audits as their financial jury and judge. The findings of an external auditor have a massive impact on a company’s reputation. Companies face massive repercussions on cases where an external auditor finds differences in financial statements, as provided by internal auditors. The company loses its shareholders, stakeholders, customers, suppliers etc, and its stocks are rejected.
The public and private sector massively relies on financial statements and reports in making investment decision (ALBRECHT, 2011). This implies that such statements should be authentic and accurate in presentation. Occurrence of errors and frauds in such reports mean they lose trust. Internal audits may be sufficient but not satisfactory for such stakeholders to make conclusive investment decisions. This may be accrued to lack of experience, corruption and intentions to retain the image of a company.
External auditors do not have any mutual relationship with a company. This means that they have no interest in the status of a company, and in building its public image. Their role is to make the reports, identify any errors and make recommendations on procedures and controls. An external auditor needs to be independent to ensure reliability of the information that he/she provides (BODE, 2008). This is in relation to corporate governance, running systems and financial management of a company. This assists stakeholders in making their investment decisions. Lack of affiliation in this case creates trust and assurance to interested and existing investors.
Reliability of financial information creates an investment friendly company, which leads to an increase in the number of stakeholders, thereby leading to growth. Lack of independence of external auditors, may imply that a company depends exclusively on internal audit reports, which may not cover all areas or may be biased. This means that a company lacks publicity and development of reputation. This interferes with the growth strategy of an organization.
Contrary to internal auditors, who work closely with a company’s committee and management, an external auditor’s findings are reached in a professional and independent manner (ALBRECHT, 2011). Working with internal committees and management may lead to cases of corruption and biasness of financial statements. However, an independent auditor does not have any prior knowledge of a company’s procedures, management and internal committees. The auditor works closely with these parties but his reports are exclusive and not independent on their opinions.
Being independent, therefore, guarantees compliance and credibility of the financial statements. An external auditor’s independence ensures that the auditor works without any fear of repercussions. This contributes to capability of investigating mistakes in accounts, correcting such mishaps and assisting the business bet back on track. Credibility ensures lack of biasness, and this leads to growth in company’s image both in the private and public sector. The duties of an external auditor involve provision of credible and unqualified financial reports. The provision of such an unqualified report requires views from independent experts who are not influenced or motivated by individual interests. The opinions given by such auditors are, therefore, favorable and can be used as referral points for investments (PORTER, HATHERLY and SIMON, 2008).
Financial institutions like banks require external audit reports as a necessity in financial assistance. Through these reports, the institutions are guaranteed of a company’s compliance to the law, contractual agreements, and capability. Such information is used by institutions such as banks in offering business loans to companies. They guarantee that a company is better placed to acquire loans, and its capability to repay the loans. For instance, such reports may be used in determining how much a company is worth, and how much a bank can lend to such a company.
External audits involve investigative procedures, for example in cases that fraud, suspicious activities or unusual acts, have been detected. Such errors may not be determined by internal auditors, or they may detect them and fail to disclose them. External auditors are expected to work under accounting ethics included in FASB and IASB. With such investigative duties, the external auditors correct errors, reveal unethical acts, and leave the stakeholder in making decisions (BODE, 2008). The investigations may also be used in clearing up a company’s reputation in cases of customers and shareholders dissatisfaction.
In addition, an external auditor is expected to document and make notes on any irregularities in a company. Such notes may be inclusive of suggested areas of improvement in relation to internal controls, accounting procedures and spending habit (PUTTICK, VAN ESCH and KANA, 2007). Other areas of critical concern are employee classification and payments. For example when an organization has more expenditure on employee management as compared to inventory; the role of an external auditor in such a case, involves making suggestions on staff management, reduction of overhead and inventory control. Failure to present such recommendations may imply that a company underestimates its employees or overspends on employee management thereby compromising its inventories. This may lead to massive losses, which may lead to collapse of a company.
External auditing is also inclusive of follow up procedures referred to as remedial audits. A remedial external audit ensures that a company implements the proposed corrections in previous external audits, and to ensure that business operations are in compliance to the specified standards. External remedial programs are conducted after some period of time, to check on the implementation of recommendations and propose any changes, if found necessary. Such audits allow a company to remain focused to its initial objectives, and on improving its standards, as recommended. Remedial audits ensure that any suspicious errors, loopholes or acts are all covered to ensure proper application of a company’s procedures (RITTENBERG, JOHNSTONE and GRAMLING, 2012).
Failure to conduct independent remedial audit programs may imply that all the recommendations set forward by the auditor may not be implemented (BODE, 2008). This means that the company will not recover from its previous mishaps or fraudulent cases. This means that the image of the company remains at stake, and does not attract any external investors.
Conclusion.
Independence external auditing has shifted from being just a formal requirement by the law but also as a form of strategy in management. Independence auditing is now considered important for reliability and credibility assurance of a company’s financial reports. This assists in creation of interests and in making a company appealing to the public and private investors. The use of external audits creates value on auditing cost. Shareholders not only get satisfied from their results, but gain value of the paid audit fees since the reports provided assist in building of objectives. Lack of independence may lead to failure in fulfillment of auditor’s requirements in obtaining evidence that forms basis of audit opinions. The results of using independent auditors are building of a company’s image, and increasing on investors trust in making investment decisions. This leads to growth and development of an organization
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Reference.
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ALBRECHT, W. S. (2011). Accounting, concepts & applications: what, why, how of accounting. Mason, OH, South-Western/Cengage Learning.
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BODE, S. (2008). Auditor independence and regulation. München, GRIN Verlag GmbH. http://nbn-resolving.de/urn:nbn:de:101:1-2010081829366.
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PORTER, B., HATHERLY, D. J., & SIMON, J. (2008). Principles of external auditing. Chichester, England, John Wiley.
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PUTTICK, G., VAN ESCH, S. D., & KANA, S. P. (2007). The principles and practice of auditing. Lansdowne [South Africa], Juta.
RITTENBERG, L. E., JOHNSTONE, K. M., & GRAMLING, A. A. (2012). Auditing: a business risk approach. Mason, OH, South-Western Cengage Learning.
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