An external audit consists of a review of a firm or organization's financial statements by an independent body. External audits are imperative to give confidence to investors, regulators and the public that the financial data and representations in the statements are, in the auditors' opinion, true and not misleading.
Differences Between Internal and External Audits
Internal audits are similar to external audits in that they review the operations and processes used by a company to prepare financial statements. However, internal auditors are employees of the organization whereas external auditors are independent. Also, external auditors focus primarily on whether the financials are misleading, and internal auditors review risk management and control procedures.
Firms may experience immediate benefits from having en external audit, the main benefit being that any process or operational deficiency the auditor finds can be quickly corrected or improved. Also, many companies rely on their financials to compute tax filings, which would be incorrect because of faulty statements, thereby resulting in tax penalties and interest.
The long-term benefits of external audits include assurance for management and the board of directors that the accounting controls and processes used are effective, as well as increased confidence in the company by investors, regulators and the general public.
Main External Auditing Firms
Although there used to be eight main accounting firms hired to do external audits, mainly because of mergers, there are what is called the "Big Four" firms--PricewaterhouseCoopers, Ernst & Young, Deloitte Touche Tohmatsu, and KPMG.
Choosing the Right Auditor
Before selecting an external auditor, each firm must have a selective process to determine which accounting company is right for it. To do this, several factors must be taken into effect, including the size of the company, the scope of the project, the legal requirements for the industry and the budget available for the audit.