What is an External Audit?

An external audit is an examination that is conducted by an independent accountant. This type of audit is most commonly intended to result in a certification of the financial statements of an entity. This certification is required by certain investors and lenders, and for all publicly-held businesses. The certification, known as an auditor’s opinion, is attached to the client’s financial statements when they are issued to third parties.

Objectives of an External Audit

An external audit has several objectives. They are to determine the following:

The accuracy and completeness of the client's accounting records;
Whether the client's accounting records have been prepared in accordance with the applicable accounting framework; and
Whether the client's financial statements present fairly its results and financial position.

There are other types of external audits that may be targeted at specific issues concerning a client's accounting records, such as an examination that searches for the existence of fraud.

Related AccountingTools Courses

How to Audit for Fraud

How to Conduct an Audit Engagement

Types of External Audits

There are many types of external audits, which include the following:

Financial audit. This audit assesses the fairness, accuracy, and reliability of an organization’s financial statements.
Compliance audit. This audit verifies whether an organization adheres to applicable laws, regulations, policies, or contractual agreements.
Operational audit. This audit evaluates the efficiency and effectiveness of operational processes within an organization.
Forensic audit. This audit investigates fraud, embezzlement, or financial irregularities within an organization.
Tax audit. This audit verifies the accuracy of tax returns and compliance with tax laws and regulations.
Information systems audit. This audit examines the controls, processes, and security of an organization’s IT systems.
Environmental audit. This audit assesses compliance with environmental laws and sustainability standards.
Due diligence audit. This audit evaluates the financial and operational aspects of a company during mergers, acquisitions, or partnerships.
Performance audit. This audit assesses whether an organization’s programs, projects, or operations are achieving objectives efficiently and effectively.
Social audit. This audit evaluates a company’s impact on society, stakeholders, and corporate social responsibility (CSR) initiatives.

Each type of external audit serves a specific purpose and helps ensure accountability, compliance, and operational improvement in organizations.

FAQs

How Does an External Audit Differ From an Internal Audit?

An external audit is conducted by independent auditors outside the organization, primarily to provide assurance that the financial statements are fairly presented and compliant with accounting standards. In contrast, an internal audit is performed by employees or contracted professionals within the organization to assess internal controls, risk management, and operational efficiency. While external audits serve external stakeholders like investors and regulators, internal audits are designed to support management in improving processes and governance.