What Is An External Audit And How Can A Business Benefit From It?

The idea of auditing is foreign to many, even the people who are aware of it think of it as grueling interrogation that aims to unearth the deep dark secrets that companies conceal.

However, a concept as misleading as this ignores the foundational role that auditing plays in the business world. Auditing is so vital for the welfare of a company that without it, business operations would lose their integrity and become less efficient.

Since Auditing is a complex job that entails multiple tasks, it has been divided into two main branches i.e External audit and Internal audit.

How is an external audit different from an internal audit?

Although both external and internal are essential to ensure that the company’s financial reporting complies with the accounting principles set by it, their areas of work are different.

As the name suggests, internal auditing works within the organization as its other employees. On the other hand, external auditing is the kind of auditing that is independent of the organization. Another company or a third company comes to visit your company and analyze its work. Later on, they tell the business owners all the loopholes of their company and what they can do to eliminate them.

There are advantages and drawbacks to both types of auditing. With that being said, this blog aims to explain how external auditing can be beneficial for the company.

• It offers validity

Being an outsider company, an external auditor provides the company with a purely objective opinion on the accounting process of businesses. It is especially helpful in terms of small businesses because usually, they lack the essential understanding of major elements like accounting principles.

Modest business owners simply prepare accounting information to the best of their abilities. Later on, professional accountants would review this information and offer insights regarding the validity and accuracy of that accounting information. Valid accounting information is essential for business owners because it helps them secure external financing from their investors and lenders.

• It helps them to discover their errors

External audits can be helpful for businesses to identify the basic errors in their accounting process. Errors are imperative to know because it helps companies to make the best decisions given their situation. Business owners who have just started their venture, usually find it difficult to review their errors and the historical financial information.

However, external auditing enables emerging business owners to plan their future production output. Furthermore, it helps them to discover new trends that could benefit them in the future. Knowing the current business trends allow owners to strategize their production output and the estimated sales for the coming months.

External audits are also significant to make sure that business owners are keeping records of all the financial transactions according to the GAAP i.e. generally accepted accounting principles.

• It limits the tax and legal issues

External auditors also make sure that their clients understand the legal and tax issues attached to their accounting information. Usually, legal issues emerge when business owners fail to give accurate accounting information to their investors, lenders, and the general public. That is because everyone feels conned and deceived. Understandably, in such cases, business owners are held responsible for not revealing correct information.

Inaccurate accounting information also increases the tax liability of the company. Especially if the business owners have overstated their income, inventory value, and other valuable items, the amount of taxes owed by the company would increase to an incredible level.

Since income would be reported on the business owner’s tax return, small businesses are organized as the only proprietorship. Moreover, fraudulent or incorrect accounting information can stimulate business and personal tax returns.

• It educates the business owners

In addition to everything, external auditors also educate business owners regarding how important accounting information is to their businesses. Oftentimes, business owners work in close association with external auditors, therefore they get an opportunity to learn valuable lessons about their weak and best skills.

Moreover, public accounting firms can provide business owners with free educational seminars. Such theoretical and hands-on lessons can equip business owners with the ability to upgrade their accounting process.

In addition, External auditors can help business owners to build new relationships with not just their businesses but also the public accounting firms. Consequently, business owners gain insight regarding how they could navigate their business scheming shortly.

We hope this blog has convinced you regarding the importance of external auditing. Now, if you believe that external auditing could also help you elevate your business, contact BSA Auditing & Consultancy as soon as possible for it is one of the best Free Zone Company.