External Audit (External Auditor): Definition, Products, and Services

Definition:

External audit or external auditor refers to the CPA firm or people who are working in the CPA firm that perform audit services to their client. Both assurance and advisory such as financial audit, statutory audit, internal audit, tax consultant, and more. The reason behind calling them the external auditor is because they are not independent and not employed by the company and the organization that the service is being provided to.

These firms normally operate independently from the clients they are providing services for.

External audit firms are normally engaged by entities to audit their financial statements annually based on the requirement of local laws, management, board of directors, shareholders, as well as other requirements.

In order to provide their services, the firm needs to get approval from the local authority that manages all the CPA firms, partners need to hold a CPA certificate or equivalence, comply with local laws, regulations, and international standards on auditing (ISA).

Services and Products:

External auditors provide many assurances and non-assurance services. Those services include an audit of financial statements, IFRS reporting, review of financial statements, compiling financial statements, internal audit service, advisory services, Risks assurance, as well as corporate secretary.

There are many other services that could offer by external auditors based on the firm’s competency. Normally, big audit firms like the big 4 have many more available services than small or local firms.

Independence and Objectivity:

External auditors normally work independently and objectively. This is to ensure the good quality of work they perform and the integrity that has for the company being audited and shareholders of the company.

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The external auditor needs to be independent and objective not only in person but also in the firm.

This can help to make sure that the trust of the public in audit firms is at an acceptable level and the value that the firm provides is for the company, shareholders, and the public.

Standard of Use:

An external auditor performs its services based on International Standards on Auditing (ISA), audit local standards, and relevant local laws & regulations.

External auditor also performs their services based on their internal policies and procedures designed to ensure that the high quality of services is maintained.

These policies and procedures are typically tailored from and address the international standard on auditing, local standard, relevant local law & regulation.

Appointment and termination:

Normally, the appointment of an internal audit is done by management and needs to be approved by the audit committee or board of directors. The appointment is generally for three to five years in office.

The termination of the auditor is normally done by the board of directors as the result of the request from management.

Approach:

Auditors do not review all the accounts or items in the financial statements. They normally perform the risk assessment related to the financial statements and then perform their testing based on the sample selection. There are many audit approaches used by auditors to perform their audits.

Reporting:

External auditors report the result of their auditing to the audit committee or board of directors. Those reports include the audit report and management letter.

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External auditors also report the problems related to their auditing or communication with the management of the company to the audit committee.

Opinion:

External auditors normally express their opinion as to the result of their audit in the audit report that they issued to the audit committee as well as the board of directors. Those reports include their opinion.

There are many types of audit opinions. For example, modified opinion, qualified audit opinion, disclaimer opinion, as well as adverse audit opinion.

Example of External Auditors:

It might be new to you if you are not in the audit or accounting industry. Or you just transition your role to accounting, auditing, or financial reporting related. However, if you are in this industry already, it is no surprise to you.

The best example of an external auditor or external audit are all of the auditing and consulting firms that offer the audit services. These include PWC, EY, KPMG, Deloitte, Grant Thornton, BDO, and more others external audit firms. The professional team that serves these firms is also called the external auditors.