External audit is a series of procedures undertaken to examine the financial statements and records of an organization by an independent, qualified auditor.

By the end of the fiscal year, companies are required to provide information regarding their financial performance, and such information must be free from errors.
This is where the importance of external audit procedures becomes evident, as they examine the accuracy and reliability of financial data. In this article, we will explore the significance and steps involved in an external audit.

Definition of External Audit

It is defined as a process of auditing and reviewing an organization’s systems by an independent auditor to verify the accuracy of its data and records.
The auditor reviews transactions and accounting balances to ensure their accuracy and completeness.

Many countries, including Saudi Arabia, require large companies to undergo external audits, typically at the end of each fiscal year.
The information produced by such audits must be accurate and credible.

The primary goal of external audit procedures is to ensure fairness and transparency—not necessarily to detect fraud or irregularities.
However, in some cases, external auditors may uncover fraudulent activities within a company.

Some may ask: “Is internal audit enough?” The answer is: not always. Internal audits may be prone to bias or error.
Since internal auditors are part of the company, they may not always report risks due to concerns about job security.
In contrast, external auditors are independent and thus more likely to report risks objectively.

The Importance of External Audit

External audits play a critical role in sustaining a company’s operations and success by providing objective insights. Key benefits include:

• Delivering financial reports based on neutral and objective standards.

• Helping identify errors that internal audits may overlook.

• Highlighting potential compliance risks.

• Identifying company weaknesses and proposing solutions.

• Enhancing the company’s ability to maintain success and meet its goals.

• Promoting transparency with shareholders.

• Resolving disputes between business partners.

• Reducing fraud through independent scrutiny.

• Serving as a basis for accurate financial settlements.

Principles of External Audit

To ensure a reliable audit report, certain principles must be followed:

• Accurate audit reporting that highlights findings and obstacles.

• Methodological approaches to obtain honest results.

• Independence of auditors to ensure objectivity.

• Evidence-based assessments to ensure validity.

• Professional competence throughout the auditing process.

• Integrity, transparency, and confidentiality as professional standards.

Types of External Audit

There are several types of external audits, including:

• Forensic Audit: Required in cases involving tax evasion, money laundering, embezzlement, or accounting negligence.

• Tax Audit: Conducted by Zakat, Tax and Customs Authority (ZATCA) to evaluate the company’s tax declarations.

• Environmental Audit: Carried out when a company’s operations potentially affect environmental standards.

• Information Systems Audit: Evaluates system security, data integrity, and information confidentiality.

• Public Sector Audit: Legally mandated for government institutions in some countries, performed by public sector auditors.

External Audit Procedures

So, what are the external audit procedures? They typically involve the following steps:

1. Auditor Appointment
   The company appoints an independent auditor. After ensuring independence, a formal agreement is signed between both parties.

2. Planning
   The auditor prepares an audit plan with a proposed timeline, then begins the auditing process, including risk evaluation and standard audit programs.

3. Evidence Collection
   The auditor gathers evidence to support the findings of the audit report. This evidence must be robust and well-documented.

4. Report Preparation and Signing
   The audit ends with a detailed report including data and conclusions, which must be signed by the auditor and submitted to the organization.

These steps summarize how external audit procedures are carried out to provide accurate assessments of an organization’s financial standing.

Who Conducts External Audits?

External audits are conducted by independent, qualified professionals.
You can hire licensed firms or certified auditors to perform these services.
These auditors are responsible for submitting the audit report to shareholders along with recommendations and insights.

The Role of External Audit in Enhancing Accounting Information Reliability

Now, let’s discuss how external audit procedures contribute to the reliability of accounting information.

• Compliance Verification: Ensuring accounting records follow established standards and regulations.

• Record Accuracy: Validating the integrity of accounting entries and adherence to required practices.

• Balance Confirmation: Reviewing financial statements to confirm account balances are correct.

• Legal Compliance: Ensuring the company abides by laws and tax regulations.

• Recommendations: Providing suggestions to improve accounting systems and organizational processes.

Through these external audit procedures, organizations can achieve accurate financial reporting and improved decision-making.

Read also:

Accounting and Auditing Firms in Saudi Arabia

Business Pillars CPAs Company – Accountants and Legal Auditors

Guidelines for Selective Taxation

Withholding Tax in Saudi Arabia and How to Calculate It

Transaction Pricing in Saudi Arabia: The Pricing Guidelines