External Audit

Intermediate

An external audit is an independent examination of a company's financial statements by an outside auditing firm, resulting in a formal opinion on whether the statements give a true and fair view.

External auditors are independent of the company they audit. They are appointed by shareholders, or by the company's audit committee on their behalf, and report on whether the financial statements are prepared in line with the applicable accounting standards.

The audit involves planning, assessing risks, testing internal controls, examining evidence for transactions and balances, and reviewing significant estimates and disclosures. At the end, the auditor issues an audit report containing their opinion.

For example, before a listed company publishes its annual report, its external auditor reviews the accounts and, if satisfied, issues an unqualified opinion stating that the financial statements present fairly the company's financial position and results.

Independence is essential. Rules limit the other services an audit firm can provide to the companies it audits, require partners to rotate periodically and, in some countries, require companies to change audit firms after a number of years.

External audits are legally required for listed companies and for larger private companies in most countries. They are a cornerstone of trust in financial markets, although high-profile audit failures have led to calls for stronger oversight and reform.

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