5 Tips To Prepare For Your External Audit

Your company’s first external audit can be overwhelming. The audit firm will seek a considerable amount of audit evidence from your business, and preparing in advance is crucial for a favorable outcome. Every company’s audit experience will differ depending on the scope and the standard against which you will be audited. Below are several actions to help you prepare for your first external audit.

What Is an External Audit?

An external audit is a procedure where an independent auditor or audit firm evaluates a company’s financial reports. In most cases, external audits are legally required. For example, all publicly traded companies in the United States must undergo a financial statement audit annually. Private investors or state law may also require audits for other organizations.

External audits are designed to assess how well a company’s financial statements adhere to specific standards, such as Generally Accepted Accounting Principles (GAAP) in the United States.

What is the Purpose of an External Audit?

An external audit provides assurance to investors and stakeholders that a company’s accounting records are fair, complete, and compliant with legal requirements or compliance obligations. "Full assurance" means that external auditors have thoroughly examined a company’s systems or controls and that the audit results are correct. "Fair" denotes objective or accurate.

A complete set of financial statements includes:

• ​A balance sheet
• ​A profit and loss statement
• ​A cash flow statement
• ​A statement of owners’ capital (stockholders’ equity)

What is an Internal Audit?

An internal audit is conducted by the company itself and is generally not required by law. It analyzes the primary risks the organization faces, the effectiveness in managing those risks, and the control systems management has put in place. Internal auditors often have a consultative function, making recommendations to strengthen systems and controls.

What is the Difference Between an External and an Internal Audit?

Internal and external audits are complementary but have different goals and areas of concentration. Internal auditors examine governance, risk, and control systems holistically, including non-financial issues and data. External auditors focus on the accuracy of business accounts and the organization’s financial condition or regulatory compliance.

What is the Purpose of the Audit Report?

The audit report is the primary deliverable after an external audit. It communicates the external auditor’s opinion on whether the financial statements are presented fairly and in accordance with GAAP and auditing standards. A clean audit opinion indicates that the financial records are free from material misstatement. Any disclaimers, qualifications, or adverse opinions are highlighted in the report, along with underlying issues. The report may also communicate significant findings or issues encountered during the audit.

5 Tips To Prepare For Your External Audit

1. Understand the Standard

Take the time to read and understand the standard you will be compared to. This helps you understand the approach external auditors will take and avoid unnecessary actions outside the audit’s scope.

2. Identify Your Subject Matter Experts (SMEs)

Determine which employees have the best knowledge to help the external auditor understand and evaluate your business and information security processes. Explain the importance of the audit to these SMEs and present your understanding of the standard.

3. Allocate Resources to the Experts

Ensure all necessary resources are available so your audit team can proceed efficiently. Auditing requires significant time and effort from your SMEs.

4. Determine Your Internal Procedures

Gather your SMEs and review internal audit processes relevant to the controls examined during the upcoming audit. Identify gaps where methods don’t exist or don’t sufficiently meet the standard. Ensure all required controls are in place and take corrective actions where needed.

5. Gather Documentation for Your Procedures

External auditors will ask for supporting materials as part of the audit process, such as policy documents, financial statements, accounting records, and process artifacts. Make a list of documents demonstrating the current internal control structure and review them to ensure accuracy and completeness.

What Are the Steps to Conduct an External Audit?

While every audit has unique details, all audits share some common steps:

1. Define Your Objectives

Determine what you want to achieve from your audit as part of your planning phase.

2. Announce the Audit

Ensure everyone in your company, including senior management and stakeholders, knows the audit is taking place.

3. Conduct an Audit Entrance Meeting

Present your objectives, the process, and the time frame for completion.

4. Fieldwork

Begin audit procedures, including a full investigation into your security system and tests of controls.

5. Review and Communicate the Results

Analyze and communicate audit findings to your committee and staff.

6. Conduct an Audit Exit Meeting

Follow up with your team to ensure everyone understands the audit’s findings and any next steps for remediation.

7. Audit Report

The auditor’s report reviews what was examined, whether the financial statements are fairly presented, and whether there are any significant deficiencies or material weaknesses. Use the report to guide your next steps and prepare for future audits.

Understanding the Auditor’s Conclusion

The auditor’s conclusion, or opinion, is the most critical component of the audit report. Depending on the findings, the conclusion is declared as either qualified or unqualified:

• ​Qualified opinion: Indicates material misstatements or noncompliance with accounting standards; the company must make adjustments.
• ​Unqualified opinion: A clean opinion stating that the company’s financial statements are fairly presented and comply with GAAP.

Understanding the auditor’s conclusion allows the company to take corrective actions to fix deficiencies before regulatory bodies are notified.