External Audit is: Knows 7 Differences, Steps, & Examples

In auditing, we know various types of audits that we can categorize depending on our needs and companies in checking documents and reports on company performance and finances. One type of audit that companies often conduct is an external audit.

So what is this audit? You can conclude that this audit is one conducted by a party outside the company. This term is also often written in reverse order as eksternal audit, or in English external audit — all three refer to the same thing.

This aims to comply with general regulations, where companies must have an open internal and external audit system. 

This audit is commonly known as a neutral audit because auditors is parties from outside the company and will conduct an audit from the beginning according to the existing stages.

This audit is very important because all the evidence will be collected either through internal audit process as well as those that have not or have been missed.

Let's get to know more about this audit and all its types and procedures.

We will get to know starting from the definition and function of an external audit, the difference with other audits, especially internal audits, to the types and procedures you must perform in an external audit, see the explanation.

Definition of External Audit

Let's first understand what an external audit is. You may have known about external audits before, but not the exact definition.

External Audit is a series of checks and reviews of performance and finances by a person or checking agency that is independent or not tied to the company.

This means that the company will submit their final financial or performance report to an independent auditor who is an outside party.

An external audit is a type where the auditor will check and scan all types of input errors or data manipulation in the company's performance or financial reports carefully.

Therefore, the inspector will collect all the evidence whether the company has attached or not.

The auditor in this case must be open without covering any details. Because the results of this audit will be a benchmark for whether the company meets the requirements of government regulations or not.

Who Is an External Auditor?

An external auditor is an independent public accountant from outside the company appointed to examine and give an opinion on the company's financial statements. Unlike an internal auditor, who is an employee of the company itself, an external auditor has no affiliation whatsoever with the company being examined, making their assessment considered more objective and independent.

External Audit Objectives

Well, after you know the meaning of external audit, we invite you to understand the purpose of the Audit.

An external audit is a type that has many purposes that are useful both for company reports and for the company itself.

Here we summarize the purpose of this type of audit which is very useful for you.

1. Providing Opinions Related to the Company's Financial Statements

One of the initial objectives of this audit is to provide a neutral opinion and recommendations for the company by the auditor regarding the audited company's financial statements.

There are four categories in audit opinion which is in the external type according to the type of opinion the auditor gives.

a. Unqualified opinion

Or also often referred to as Unqualified Opinionis an opinion from the auditor for the company's report which indicates that the company's financial statements have gone through the process properly without any errors. So that there are no significant exceptions to the report.

b. Unqualified opinion

Or Qualified Opinion is an opinion from an auditor who considers that the entire report has been audited properly and completely, but there are some exceptions in some sessions of the report. These exceptions must be fully and clearly explained by the auditor for reference for the company.

c. Adverse Opinion

In this opinion, the company's report will be considered adverse by auditors and unreliable for business decisions.

The flaws should be explained in detail by the auditor so that the company repeats the report from the beginning.

d. Refusal to Have an Opinion

Is an opinion from the auditor explaining that the auditor refuses to have an opinion and provides a continuation in the checking process.

This is generally because the report does not find enough evidence to conduct any audit process. For more information on audit opinions, you can visit the following page.

Audit Opinion: Definition, 4 Types, Stages, and Examples

2. Assessing the Quality of Financial Statement Information

One of the purposes of the external type is to assess how good the quality of the information or evidence of the financial statements is.

The auditor will collect all the evidence and forms of important information in the financial statements and then analyze it to determine the quality of the financial statements and continue the audit process to the next stage.

3. Identify System and Process Weaknesses

Another audit objective is to identify weaknesses in a company's systems and processes through their financial statements.

Auditors can compare which companies have good management systems and which do not through the results of inputting company financial data in the audited financial statements.

7 Differences between External and Internal Audit

You need to know about the differences between external and internal audits. Here are the seven differences that you should pay more attention to.

1. Auditor Institution Origin

In the external type, the auditor is a person outside the company hierarchy. While the internal type is for people within the company.

2. Auditor Qualifications

Internal audit qualifications usually have a background in accounting and management. While the external type classification has a background in public accounting with certain certifications.

3. Audit Objective

Both have differences in purpose where external audits aim to provide opinions in financial statements independently and neutrally. While internal audits are more about improving company performance.

4. Audit Scope

These two types of checks have different scopes. The scope of an external audit focuses on testing financial statements to controls on each related component. Unlike the internal type, which only performs limited controls internally.

5. Execution Time

As for the difference in timing, internal audits are conducted on a regular basis, while external types are conducted periodically at the end of financial reporting.

6. Standard

External audit standards are different, with all provisions regulated by IAPI (the Indonesian Institute of Certified Public Accountants), not by ministerial regulations and BPKP as with internal standards.

7. Responsibilities

External audits provide an independent opinion on the accuracy of the financial statements. While internal only helps in performance monitoring.

External Audit Function

External audit has many functions that can affect the performance and output of a company in the future. Here are some functions of the external type. 

1. Assess management performance

The function of an external audit is to provide an assessment of the management performance of a company in a certain period.

A company with good value will have better credibility. In addition, the company also knows the extent of the effectiveness of its work program during that period of time.

2. Provide recommendations for improvement

One of the other functions is to provide recommendations for the company to make improvements.

With the evaluation of several sectors that need improvement, the company will take actions to change the management system to be better than before.

3. Identify risks that occur

In addition, this type of function is to detect and identify risks that occur in the future if a company does not change its audited management system.

4. Presenting the audit report

Then one of the functions of external audit is no less important is to present a audit report effective and credible to related companies to provide an assessment as well as a relevant and rational evaluation of the management and financial system in a company or organization.

Types of External Audits

Here are two types of external audits according to the type of report being audited.

1. External Financial Audit 

An external type that focuses on financial statements, financial audit An external audit is one that checks all forms of financial statements and examines the evidence. 

The auditor will check all types of transactions, income, and expenses and align them with the budget written in the company's financial statements.

2. External Performance Audit

Is a type of external audit that assesses and reviews the company's performance and operations. The auditor will check all forms of performance and division of labor of each employee to the company's leadership structure listed in the report and company profile.

Then the auditor will analyze how the company is performing.

External Audit Procedures

Now that you know the types of external audits, we invite you to further understand the ins and outs of the external audit process.

There are several stages in the process externally that differ from other types. Here are audit procedure external starting from the initial stage to the end.

1. External Audit Preparation

The first stage is the preparation stage. This stage is where the auditor begins preparations and looks for ways to carry out the checking process. There are several steps in this initial stage of the external audit. 

a. Preparation of financial statements

The auditor and the company will prepare financial statements to be audited. The financial statements must be complete and contain at least one financial record for a certain period.

b. Mapping the organizational structure

Then you will define the complete organizational structure and analyze each of the their own jobdesk

Thus, the audit process will run more effectively with the auditor simply equating the report with the structure of the organization or company.

c. Determine the strategy and plan for checking

After mapping the organizational structure, the auditor will conduct an audit strategy and plan. Such as mapping out relevant evidence and determining to start auditing from a particular section of the report.

2. External Audit Implementation

After completing the preparation, the implementation of the external audit begins. There are several stages the auditor must carry out when performing the audit procedure, including the following internal control evaluation and substantive testing.

a. Observation

Auditors begin the implementation of an external audit by making observations and observations regarding any evidence and financial statements or performance reports that the company submits to the auditor.

b. Collecting evidence

Then the auditor collects the available evidence to begin matching it with the report.

This process is one of the processes in the external audit procedure that the auditor must be careful because if there is one evidence that is missed, then the auditor must repeat from the beginning.

c. Matching evidence

After all the evidence is collected, the auditor will match the evidence to move on to the analysis stage.

d. Analyzing the evidence

In this process, the auditor looks for “errors” found in the company's financial statements or performance by analyzing them against the evidence already gathered and each corresponding report.

3. Preparation of External Audit Report

Then comes the last stage, namely the report preparation stage. The auditor will compile a report on the results and provide an opinion or not on the audit results depending on the results of the report that has been checked.

Benefits from External Audit

After knowing some of the stages of auditing, the following article includes the benefits of external auditing.

1. Increased trust and transparency

External audit increases the trust of stakeholders such as shareholders, creditors, and regulators in the company's financial statements.

2. Fraud detection and Prevention

External audit helps in detecting and preventing fraud or irregularities in the organization.

3. Increased operational efficiency and effectiveness

Through external audits, companies can receive feedback and recommendations on ways to improve the efficiency and effectiveness of their operations.

4. Compliance with regulations and standards

An external Audit ensures that the company complies with all relevant regulations, accounting standards and legal requirements.

This is important to avoid legal sanctions and maintain the company's reputation in the eyes of regulators and the general public.

5. Improvement Of Internal Control System

External auditors assess the effectiveness of a company's internal control system. They provide recommendations to correct weaknesses in the internal control system, which in turn can reduce the risk of errors and fraud in the future.

External Audit Example

The following article includes examples of corporate audits to help you better understand the concept and workings of external auditing.

A company named Company XYZ is in need of an audit of their performance reports for one year.

Then the company asks the auditor from outside the company to conduct an audit for a certain period.

Then the auditor from outside the company will look for some problems that may occur between the report and some notes and will determine whether an opinion is needed or not.

FAQ About External Audits

Conclusion

This is the explanation of this article regarding the type of external audit. This type is very useful in determining the performance of a company according to its structure and financial statements.

You have understood external auditing from its basic definition to its objectives, functions, types and procedures.

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