5 Benefits of an External Audit
We know how nerve-wracking an external audit can be for our clients. The compulsory nature of external audits often makes them seem like a test of a company’s operations and integrity – having something like this hanging over a business can easily bring about tension internally. However, we believe that it’s all about perspective. While the results of an audit can indeed hold bad news, an external audit holds a hidden added value – it offers you the opportunity to improve the running of your business.
So, what are the benefits of external audit?
- Provides validity of the accounting process
An external audit provides an objective overview of a business’ accounting process. By giving business owners insight on the accuracy and validity of their company’s accounting information, business owners who do not have an in-depth understanding of accounting principles are able to better grasp the financial situation of their business.
Furthermore, an external audit provides business owners with the opportunity to work closely with external auditors to look at their accounting process with a critical eye and work on making improvements.
- Discovers Errors
Errors in the accounting process may prohibit business owners from making the best decisions. Audit procedures are designed to detect errors in the system and fraudulent activity. External audits also ensure that the recording of the financial transactions is according to generally accepted accounting principles (GAAP). This essentially helps business owners cover their back when it comes to following the many rules and regulations that come with accounting within a registered entity.
- Identifies weaknesses internally (and suggests improvements)
Having weaknesses within your internal structure is inevitable – what matters is how you tackle them. Some companies prefer to sweep their weaknesses under the rug and continue to operate with blinders on. However, business owners always have the option of taking an assertive approach by giving underperforming areas within their company the attention they’re due.
Since internal auditors cannot effectively critique their company’s internal processes because they form part of it, external auditors can observe the operations from the outside and recommend ways to promote efficiency and refine the accounting process.
- Provides assurance
An audit assures company directors who are not involved in the accounting functions on a day-to-day basis that the business is running in accordance with the information they are receiving, and helps reduce the scope for fraud and poor accounting.
So, not only does an audit enhance the credibility and reliability of the figures being submitted to various stakeholders (shareholders, employees, customers, suppliers, investors and tax authorities), but it also provides assurance to shareholders that the financial figures show a true and fair view.
- The management letter
Auditing standards require the auditor to write a management letter addressed to the directors. Some business owners question the value of such a letter, and may get a little sensitive when confronted with a management letter that details the areas within a business that require further assessment. Once again, it’s all about perspective!
Firstly, a management letter is addressed to the management of the company and is not submitted to any of the authorities – therefore its contents are purely confidential. Secondly, a management letter brings to the attention of the management particular control deficiencies that could result in the inappropriate collection of data for financial reporting or compliance purposes. This means that the management of a company is actually being given a value-added service where the weaknesses within the business have been identified and can be addressed moving forward.
Why and when does the external auditor present a management letter?
Our professional standards do not require the auditor to offer advice to clients. The management letter allows our audit team to provide feedback and ways to improve and rectify deficiencies. An auditor is required to assess the financial and compliance risks found within an organisation. Once the financial and compliance risks are identified, then, it is the duty of the auditor to report a control deficiency, so management can address the risk appropriately as part of its risk assessment process. It is then suggested that control deficiencies should be reviewed and corrected without delay.
A management letter can be viewed as a formal communication intended to help improve the organisations. Arguably, the most value added final step of the audit.
Why are audits useful in the long term?
- If owners are planning to sell their business in the foreseeable future, potential buyers will refer to audited financial statements as part of their decision-making process.
- Credit ratings may be affected if an audit has not taken place.
- Suppliers and banks may not be prepared to give the required credit limits without an audit.
External audits with a difference at NM Group
When NM Group is requested to perform an audit, an audit engagement is planned and time-frames are agreed upon with our clients. We carry out audit procedures according to the International Standards of Auditing. The team will make it a point to propose adjustments and discuss these adjustments with our clients before we actually pass an adjustment, if any. Our ethos is based on providing a smooth process for the client, where they are always a part of the equation, and never left in the dark.
How can NM Group follow-up on your audit?
Now that you’ve had your external audit, you might find that an internal audit of all your internal processes may be useful for you to help action further improvements across your business. NM Group can help with this by providing you with a team of experts who will assess and review the different areas of your business, be it administration, marketing, or after-sales. Interested? Get in touch!