Why Should I Get an External Audit?

Quality external auditors will take
the time you don't have to go
through your records with a fine-
tooth comb. Protect your company.

Question: What IS an external audit?

External audits are independent, unbiased reviews of your business’s financial records. You usually can contract an accounting or auditing firm to conduct this review. It can be an expensive exercise, but it has its benefits. While you may consider your organization’s controls and records to be flawless, an external third-party review can assure you if that is actually the case.

Three main advantages are outlined as follows:

1. Identification of Errors: As a business owner, even if you have the expertise to conduct your own audits, the responsibilities of running a business may prevent you from dedicating the time required to seek out errors and omissions in your financial records. An external audit will identify these mistakes and rectify them over the historical data. This, in turn, will provide you with clearer business records and data.
   
2. Internal Control Effectiveness: External auditors perform walk-throughs of each of your business processes and verify that approvals and authority checks are in place and working before a transaction lands in your financial records. They also determine that your computer systems perform correctly. This doesn't cover IT functions, but entails a check for controls in your systems to ensure that only authorized personnel perform certain tasks. The external auditor will advise you on how to address any issues they uncover.
   
3. Acceptance of Audited Statements: You may require a loan for your small business or a letter of credit to obtain merchandise. Banks and lending companies typically will require that you provide audited and reliable financial statements. Your company's net assets adjusted for goodwill can help you anticipate its current value, which can help you set a price for it, if you are willing to sell it. Similarly, tax authorities may be more willing to place reliance on your calculations for income or sales taxes if you present audited financial statements.

Audited financial statements indicate that you are a responsible business owner who practices transparency in your activities.

These acts of transparency contribute to the goodwill of your business. This can all be used easily to settle accounts, diffuse disputes among partners, and to prevent employees from committing fraud. 

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READ MORE>> yourbusiness.azcentral.com: "What Are the Advantages of An External Audit?

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Managing External Audit Relationships

An external auditor is key in going
over all the details of your records.

External auditors are certified professionals who check the accuracy and completeness of a business's financial statements. Managing the external audit relationship can be difficult for small business owners who must balance the auditor's requests for sensitive financial information, the need for company confidentiality as well as the choice of which auditor to engage.

Up-front communication is the hallmark of the selection process. Business owners should seek an auditor who is keen to discuss issues as they arise and who doesn't hide the risk of financial decisions from the company or its managers.

Once you have selected a compatible professional, keep these three points in mind to guide you through the rest of the process wisely:

1. Traits of a Good Relationship: The key traits that define a good relationship between the external auditor and the business executives can be summed up in three words: collaborative, congenial and communicative. This last trait is merely an extension of the open communication policy the auditor and business should adopt starting in the selection process. Collaborative and congenial mean both parties recognize their obligations to the auditing process. The business owner is willing to provide documents when requested by the auditor, in a reasonable format, and timing issues are discussed forthrightly. In return, the auditor is fair and keeps an open mind, assuming that errors point to mistakes rather than fraud unless there is strong evidence to think otherwise.
2. Consequences of a Bad Relationship: A breakdown in any of the three key traits can have serious repercussions for the business. In most jurisdictions, the law requires companies to hire an external or independent auditor, so any snag in that process may put the company at breach of law. Further, the audit opinion may be delayed, withheld or qualified if something goes wrong. A qualified opinion means the auditor can complete her job but finds that the company hasn't provided full and clear information or possibly has been subject to fraud or tax evasion. The business should try to avoid these consequences at all times, keeping the lines of communication open and setting clear goals and expectations during the engagement process.
3. Extending the Auditor's Engagement: Sometimes, the auditor or the company may not be able to complete the audit in the time frame that was arranged initially. In this instance, it is important for the scope of work to be clarified so as to extend the auditor's engagement, lengthening the amount of time it hires the auditor. A scope of work document should be drawn up at this point, specifying the balance of work to be completed, the amount of time for the contract extension and any procedural issues that need to be addressed. External audits normally take place every 12 months, so any external audit engagement lasting for more than a few weeks is likely to throw this schedule off track in the future.

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READ MORE>> smallbusiness.chron.com: How to Manage External Audit Relationships

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