External Audit

The auditor comes from an outside firm, is appointed by shareholders or under law, and reports to the owners rather than to management. The work starts with understanding the business and assessing where misstatement is most likely. The auditor then tests controls and balances, collects evidence, and forms an opinion. Because it relies on materiality and sampling, an audit gives reasonable assurance, not certainty, and it is not designed to find every fraud. A statutory audit is an external audit required by law, typically for listed companies and larger private ones; the size tests vary by country. Lenders and investors may also ask for voluntary audits. Independence rules, partner rotation and regulator inspections protect the auditor’s objectivity. Besides the opinion, the auditor reports findings to those overseeing governance. Without it, outsiders would have only management's word that the numbers are right.

A private manufacturing company crosses the size limit that makes an audit compulsory. Shareholders appoint an audit firm, which meets the audit committee to agree the plan. During the year-end work the auditors confirm bank balances directly, attend the inventory count and test a sample of sales to delivery records. They report one unadjusted misstatement below materiality, raise a control weakness in purchasing, and sign a clean opinion.