Auditing can be a scary concept to people studying finance and accounting or those outside of the said domain, but it doesn’t have to be. What you can do, though, is having someone clearly and concisely explain the nuances of finance and accounting. That includes understanding the responsibilities of an internal auditor and an external auditor.
What is Auditing?
It would be more appropriate to understand the terminology first. Auditing is an evaluative process in which an auditor acts as an intermediary between two or more parties. It is the in-depth examination of various books of accounts by an auditor against predetermined criteria, and reporting the results to interested parties.
History suggests that evaluative practices recognizable as forms of auditing have existed since ancient times. Out of those ancient practices, modern auditing has emerged as a multifaceted and constantly developing discipline. The auditing profession today tends to be categorized in two main branches, external and internal auditing.
Although the two groups have different objectives, there can be areas of overlap between the two disciplines. While the internal auditor is primarily responsible to the organization and all of its stakeholders, the external auditor is responsible directly to the stakeholders. Unlike the internal auditors, the external auditor is a representative of the shareholders and has independence of status.
What is External Audit?
External audit is a detailed financial review conducted by a party not associated with the company. It first emerged as a professional discipline in the United Kingdom in the 19th century. In the 20th century, professional accountancy and auditing associations around the world gradually introduced certification programs for their members, followed by auditing standards to codify and define the discipline’s methodologies and ethical foundations.
Modern external auditing was therefore borne out of two centuries of continuous evolution. However, the core of external auditing has changed very little over the years. It has remained the independent examination of the financial statements of an organization by a qualified auditor.
Roles and Responsibilities
The primary role of an auditor is to provide an external objective review of the financial information so that those people who are actually reviewing information are able to say this is a fair presentation of the financial position of the company or organization.
External auditors are basically responsible for auditing the company’s financial statements and provide reasonable assurance that they are presented fairly and reflect true representation of the company’s financial position and results of operations. The external audit function is meant to lend credibility to financial reports and minimize information risks that financial reports are biased or misleading.
The keyword here is unbiased reporting and independence. So, you might wonder why is there a risk that the information provided by management may not be reliable. Well, there’s this concern about complexity of transactions as well as processing systems. The issue from a management’s perspective is if financial statements are not recorded correctly.
The external auditor looks at the financial statements which present what the financial information is based upon generally accepted accounting principles. The role of the internal audit function within an organization is determined by management and its functional objective differs from that of the external auditor. Instead, the external auditor is appointed to report independently on financial information.
Who appoints an external auditor?
External auditor is more independent in reporting than an internal auditor. An external auditor, as the name suggests, needs to be external or not part of the company or organization for which they provide audit or assurance work. This means that they are typically employed by a public accounting firm and not working directly for the company or organization. Instead, the company or organization will hire that auditor to perform that external audit.
In the United States, the external auditor must be a Certified Public Accountant (CPA). But there’s a catch here; non-CPAs can also be a part of the audit team and assist with performing the test work but they ultimately cannot be the ones who issue the audit opinion.
How to become an external auditor?
To become an auditor, there are regulatory requirements which you have to take into account, for example, you need to be chartered certified accountant. There are different names but in essence you have to understand what qualification for the same purpose is being mandated within your country.
Most external auditors major in accounting, finance, business administration, or statistics. Most public accounting firms require a valid state-issued Certified Public Accountant (CPA) license. This is often part of your degree program and requires up to 150 hours of study in accounting, economics, or other financial disciplines. Please note that not all auditing jobs require you to be a CPA, but if you’re serious about a career in accounting or auditing, a CPA license would be a major placeholder.
Most importantly, to become an external auditor, you have to mandatorily earn a bachelor’s or master’s degree in finance, accounting, business or a related field. This is the minimum requirement to become an auditor, whether internal or external, since they work with complex and sensitive financial data. Although a master’s degree is not required to become one, it would be a major bonus for your growth.
Can external auditor perform internal audit?
The role of an external auditor, as the name implies, is independent of the organization while an internal auditor works within an organization. In that context, an external auditor’s independent status is impaired if the auditor conducts both the financial statement audit and internal auditing services. External audits basically allow quality control of internal audits.
The external auditor generally relies on preparatory work done by the internal auditor, and much of the audit involves checking and verifying the internal audit. The wide experience of the external auditor may be of assistance to the internal auditor, while the internal auditor’s acquaintance with the business concern may be of help to the external auditor.
Here’s something every auditor should remember: just because a client comes to you and wants you to audit its financial statements, you don’t have to accept that. You’re not a salesman; you’re expressing an opinion on the fairness of the financial statements under audit. Major business financial decisions rely on your audit report. The idea is to make sure you can provide a client with a quality audit before you even get started. The key is to fully understand your duties and responsibilities. One of your primary duties is to ensure client’s financial statements and reporting systems are free from material misstatement.
O’Regan, David. International Auditing: Practical Resource Guide. New Jersey, United States: John Wiley & Sons, 2004. Print
Rezaee, Zabihollah. Corporate Governance and Ethics. New Jersey, United States: John Wiley & Sons, 2008. Print
Loughran, Maire. Auditing For Dummies. New Jersey, United States: John Wiley & Sons, 2008. Print