The Benefits of External Audits
To review the accounting processes and financial information of their business, companies use external audits to do so. Most of the time these external audits are executed by public accounting firms. Professional accountants interview owners, discuss the accounting process of the business and test the business’s accounting information.
External audits have several benefits for small business owners. These include:
Provision of Validity
External audits offer objective opinions on the accounting process of a business. Most small businesses prepare accounting information in the best way they can according to basic accounting rules. They do not have an in-depth understanding of certain accounting principles. By reviewing this information, professional auditors can provide business owners with insight into the accuracy and validity of the accounting information they have. Valid accounting data or information help businesses secure external financing from investors and lenders.
Helps in the Discovery of Errors
External audits help in the discovery of errors in the accounting process. Errors in any accounting information may prevent businesses from making the right and best decisions. Businesses may find it difficult to review financial information and see trends if errors are present. Trends let business owners plan future production and estimate sales for the future. External audits make sure that the business is recording financial transactions according to Generally Accepted Accounting Principles or GAAP. GAAP is the authority on accounting standards that should be followed when preparing financial information for businesses.
Limiting Legal and Tax Issues
External auditors help attain information on the legal and tax issues relating to accounting information. Legal issues may arise when business owners provide fraudulent or inaccurate accounting information to the general public, lenders or investors. Businesses are liable for not properly reporting financial information accurately.
False and incorrect financial data can increase a company’s tax liability. Overstating inventory value, income, and other items can increase the amount of taxes owed by a company. Small businesses need accurate accounting information because income is reported on the owner’s income tax return. Inaccurate accounting data can cause a personal and business tax return audit.
Education of Business Owner
External audits can educate business owners on the importance of correct accounting information in businesses. Auditors work with business owners in improving accounting processes. They also provide businesses with information on current accounting issues. Businesses may also be given education seminars to improve their accounting processes. A good relationship with a public accounting firm helps a business gain professional insight for more accounting questions.
Advantages of an External Audit
Helps identify weaknesses in internal control. A material weakness in internal control is a deficiency or combination of deficiencies that can escalate or increase the possibility of misrepresentation of financial data by a business. External auditors verify if a company’s financial data is correct and also tasked to assess if the process used to compile and report information has the necessary internal controls in place to reduce the chance of fraud and misreporting. Internal control review considers the paperwork trail or track of financial documents, the systems that processed the papers or documents and the delineation of duties or responsibilities to the employees who take care of or handle the data.
Gives More Credibility to Financial Documents or Statements
Audited financial statements that have been verified by an appointed external auditor are considered and deemed more reliable in the marketplace. Investors, lenders and potential clients usually require audited financial statements before deciding to work with a company. Audited financial statements gives investors, lenders and potential clients some security that the data they get are free from error and that no fraud was committed to compiling the statements to secure an investment, loan or new client.
Unbiased and Expert Recommendations
External auditors are highly trained in improving business processes and reduce or lessen the amount of risk of misreporting financial data. External auditors do not bring likes and dislikes to the job. An external auditor works with the purpose of improving the business in general. Company management that may not be amenable to change may delay process improvements because they do not want to learn new systems and processes. Therefore, risking the success of a company.
External audits are important to any kind of business. External audit helps see troubles that can be remedied with proper processes, changes, and improvements that may be beneficial for the business.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.