External auditor play a critical role in validating your company's finances. Potential lenders and investors often require externally audited financial statements before extending credit or providing funds for your business. If it is discovered that an auditor failed to detect material misstatements, it reflects poorly on the firm and the profession in general. For that reason, various accounting bodies release auditing standards and expectations to define the role of external audit firms.
Role of External Auditor
The investors and shareholders of the company rely and are dependent on the reports that are being audited by the independent auditors of the company. Even the rating agencies, rate the companies on the basis of the reports that are being audited by the external auditors. The purpose of having external auditors for a company is that, the auditing should be done fairly and with reliability. External auditors are being assigned for the auditing of reports so that there should be no deliberate changes made in the reports. Moreover, the auditors should not be under anybody’s influence and they should perform the audit independently and on their own and fairly.
The auditors are supposed to make the report which has two main purposes;
- To give an expert opinion, whether the financial statements are fair and true or not
- To give an expert view, whether the financial statements are in accordance with the relevant laws or not.
The purpose of assigning the external auditors to a company is that they are independent auditors and are not under anybody’s influence so that they can perform a real, fair and true auditing of the financial statements of the company and make the shareholders aware of the true and fair financial health and position of the company. The financial health of the company is shown by the ‘Profit and Loss Account Statement’ while the financial position of the company is shown by the ‘Balance Sheet’ of the company. The income statement of the company is made at the end of every year i.e. on annual basis. While, on the other hand the balance sheet of the company can be made at any point in the year for the company.
Purpose of External Auditing
The main purpose of financial statement to be audited by the external auditors is that the information in financial statements is believable, true and fair. The purpose is reassurance that there has not been any fraud or error in the financial statements of the company. Frauds and error result in; incorrect use of accounting policies, omission of facts, misrepresentation of facts.
Responsibility of Detecting Fraud and Error
There is a misconception that the fraud detection and error detection is the function of external auditors. However, this is not true, the responsibility of external auditors rather the responsibility of fraud and error detection is of the internal auditors. The external auditors just to have make sure that whether the reports are true and fair or not and whether they are following the relevant laws or not.
It is the responsibility of the management of the company through proper system of accounting and internal controls to detect the fraud and error being made in the financial statements of the company. Auditors assess the risk of possibility that fraud or error might have caused financial statements to be materially misleading. There are chances of occurring fraud or error but not detected, As system of accounting and internal controls are also unsafe and vulnerable and can get under somebody’s influence.
Fraud or error may arise from; Criminal collusion between employees, they would do it deliberately in order to betray each other and resulting in imprisonment of one of the employees. This all happens when the employees have grudges against each other and they want to harm other employees. Moreover, auditors are potentially liable to shareholders or stakeholders who suffer loss as a result of negligence in audit. Negligence usually arises because of the auditors being under someone’s influence of the failure to comply auditing rules and regulations and guidelines. However, because of failure it is difficult to carry out the audit with the skill, diligence and expedition.
The auditors then have to rank the financial reports and only then they can be displayed in the annual report of the company to the investors and shareholders. Otherwise, without their ranking this can’t be done.
March 20, 2019