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Home » What is an External Audit – Types and Functions of an External Audit

What is an External Audit – Types and Functions of an External Audit

By Richard Daniels Reading Time: 3 mins
Updated October 22, 2018

The business environment is very complex and the number of operations and processes that are developed in an organization are many, especially in companies that already have a sufficiently large dimension and operate internationally. This is where the concept of audit becomes important to have greater control over the company.

Companies should try to have all the ends tied and comply with the regulations required in each of their internal processes, so that in case of an external audit, the result is favorable. Of all the types of audits that we can find, this is one of those feared by companies since they are carried out by a person independent of the company.

What is an External Audit?

The external or independent audit is that an outside company supervises that the financial statements of an organization comply with the specific regulations.

Through the external audit, an exhaustive analysis and control is carried out by an auditor, who is totally oblivious to the activity of the company, with the aim of issuing an impartial and independent opinion on the company’s operating system and your internal control. In addition, through the external audit, suggestions are made to improve the organization.

The external audit examines the information systems of a company and issues an independent and impartial opinion of them.

The opinion that is born as a result of the external audit has full validity and transcendence in front of third parties, a document that is given under the figure of the public faith, having total credibility and being verified all the information reflected in it.

The purpose of the external audit is none other than to provide the information systems of a specific company with reasonableness and authenticity. In this way, the users of such information (think, for example, in a credit institution) can make decisions relying on the statements made in the external audit report.

Types of External Audits

The external audit is carried out at the request of official bodies, clients or certification bodies (private organizations that certify compliance with a reference standard).

This external audit can be subdivided as follows:

  1. Second part audits: Requested by a client of the audited company, which serves as information prior to making a purchase or contract to verify that the company really complies with the legal requirements
  2. Third party audits: Executed by an independent third party of the audited company. For example, the audits regulated in the Law of Prevention of Labor Risks or the certification of management systems ISO 9001

Functions of an External Audit

The purpose of the external audit is to obtain as much information as possible from an organization, not only on information management systems, but also on their financial and commercial status. In this way, an exhaustive analysis and control is carried out on the progress of the company, as well as the realization of a reliable and truthful audit report that will be delivered to interested third parties (be it an investor, purchaser of a product or an entity).

Difference between External and Internal Audit

  • A prior, there are two terms that can lead to confusion, but there are important differences between internal and external audit:
  • In the internal audit there is a labor link between the auditor and the company; in the external audit, the relationship is of a civil nature.
  • In internal audit, the result granted by the auditor is for the organization itself, for internal use; in the external audit, the opinion is intended for third parties interested in said information.
  • The internal audit is disqualified to give public faith, on the contrary that the external audit.
Author at Business Study Notes
Richard DanielsAuthor at Business Study Notes

Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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