Your company’s first external audit can be a bit overwhelming. The audit firm will seek a considerable amount of information from your business – and if you want to prepare for that audit in advance, there’s an equally vast amount of information available about how audits should work.
Every company’s audit experience will be different, depending on the scope and the standard against which you will be audited. Below, however, are several actions that can help you prepare for your first external audit and achieve a favorable outcome.
What Is an External Audit?
An external audit is a procedure where an independent auditor (either one person, or a professional audit firm) evaluates a company’s financial reports. In most cases, external audits are legally required. For example, in the United States and most other countries, all publicly traded companies must undergo a financial statement audit every year. Other times, private investors might require an audit before investing, or state law might require public charities to undergo an audit.
This audit form is usually designed to assess how well the company’s financial statements adhere to a certain set of standards. In the United States, auditors assess how well a company follows Generally Accepted Accounting Principles (GAAP).
What is the Purpose of an External Audit?
An external audit gives investors and financial market stakeholders assurance that a company’s accounting records are “fair,” complete, and in accordance with other legal requirements or compliance obligations.
“Full assurance” means that investors are satisfied that external auditors thoroughly examined a company’s systems or controls and that audit results are correct. In auditing, “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, also known as stockholders’ equity
What is an Internal Audit?
An internal audit is something the company does itself, and is generally not required by law. This audit intended to analyze the primary risks that the organization faces, the company’s effectiveness in managing those risks, and the control systems that management has put in place.
Internal auditors frequently have a more consultative function, making recommendations to assist management in strengthening their systems and controls when they uncover problems in specific business areas.
What is the Difference Between an External and an Internal Audit?
While internal and external audits are complementary and may need close collaboration, their goals and areas of concentration differ.
Internal auditors examine their organization’s governance, risk, and control systems holistically (in other words, internal audits include non-financial issues and data). In contrast, external auditors are concerned with the accuracy of business accounts and the organization’s financial condition or, in some industries, the organization’s regulatory compliance.
5 Tips To Prepare For Your External Audit
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Understand the Standard
An audit is a report that evaluates your organization’s performance against an external standard, so take the time to read and understand the standard you will be compared to. This is critical to understand the approach the external auditors will take. Moreover, it will help you to avoid taking unnecessary actions by touching on topics outside the scope of the audit. Finally, a general understanding can help you manage the external audit more efficiently.
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Identify Your Subject Matter Experts (SMEs)
No one knows your internal processes better than your own SMEs. Based on the standard you need to meet, determine which of your employees have the best knowledge to help the external auditor understand and evaluate your business and information security processes. Make sure you explain the importance of the upcoming audit to those SMEs and present your understanding of the standard, so the auditors can lend knowledge and experience to prioritize actions for preparation.
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Allocate Resources to the Experts
Experts and specialists in every field usually are engaged in their normal day-to-day activities. However, auditing requires significant time, energy, and effort from your SMEs. Therefore, ensure all necessary resources are available so your audit team can proceed efficiently.
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Determine Your Internal Procedures
Gather your SMEs and review internal audit processes relevant to the controls that will be examined during the upcoming audit. The goal is to identify gaps where methods either don’t exist, or don’t sufficiently meet the standard you’ll be audited against. In other words, assure that all the controls required by the standard are in place in your business, and that corrective actions are taken where needed. (Better to do that first, rather than wait for an external auditor to find the flawed procedures and tell you to fix them anyway.)
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Gather Documentation for Your Procedures
Having all internal procedures in place is a great starting point. External auditors will then ask for supporting materials as part of the audit process. They’ll want to see policy documents, financial statements, accounting records, and “process artifacts” (evidence that your internal processes are working as intended).
Based on the business processes determined in the previous step, make a list of documents demonstrating the current internal control structure, and review those documents. This is another gap analysis form to determine whether your documentation is accurate and complete.
What Are the Steps to Conduct an External Audit?
The structure of the external audit process should also factor into your preparation. While every audit will have its unique details, all audits do have some steps in common.
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Define Your Objectives
Knowing what you want to achieve from your audit is a crucial part of your planning phase, and will help you determine what is needed from the audit moving forward.
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Announce the Audit
Everyone in your company should know that the audit is taking place, including senior management and stakeholders.
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Conduct an Audit Entrance Meeting
Present your objectives, the process that will follow, and the time frame for completion of the audit.
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Fieldwork
Once your action plan is in place, the audit procedures can begin. This will include a full investigation into your security system and tests of controls.
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Review and Communicate the Results
Your audit findings should be analyzed and communicated to your committee and staff.
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Conduct an Audit Exit Meeting
Follow up with your entire team to assure everyone is on the same page about the audit’s findings, and any next steps for remediation that might need to happen.
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Audit Report
The external auditor’s final product is an auditor’s report. This report will review what the auditor examined, whether the financial statements are fairly presented, and whether the auditor believes any internal controls have a significant deficiency (a somewhat serious problem) or a material weakness (a major problem). Use that report to guide your next steps and to prepare for the auditor’s next visit, whenever that might be.
Understanding these steps can be instrumental in the success of your external audit – and can save you both time and money moving forward.
Ace Your Next Audit With Reciprocity ROAR
Audit planning can be challenging, but using risk assessment software can start you on the right path. If you’re searching for solutions for your next external audit, the Reciprocity® ROAR Platform can help.
Our platform provides a single integrated experience that easily allows you to track your compliance efforts across departments and quickly generate audit reports. Reciprocity ROAR has every tool you need to assure your next audit is successful.
Reciprocity ROAR automatically builds relationships and related work assignments during program setup, audit generation, or finding identification.
Its operational dashboards may give visibility into the status of audit evidence collection, control efficacy, results, and other indicators, allowing you to keep work moving forward and explain your compliance posture.
You gain a unified, real-time view of risk and compliance with Reciprocity ROAR platform, providing the insight required to make wise decisions that keep your company secure and earn the trust of your stakeholders.
Schedule a demo today and learn more about how Reciprocity ROAR can work for you.
Your company’s first external audit can be a bit overwhelming. The audit firm itself will be seeking a huge amount of information from your business — and if you want to prepare for that audit in advance, there’s an equally huge amount of information available about how audits should work.
Every company’s audit experience will be different, depending on the scope and the standard against which you will be audited. Here are a few key actions that can help you prepare for your first external audit plan and achieve a favorable outcome.
5 Tips To Prepare For Your External Audit
1. Understand the Standard
An audit is a report that evaluates your organization’s performance against an external standard, so take the time to read and understand the standard you will be compared to. This is critical to understand the approach the external auditors will take. Moreover, it will help you to avoid taking unnecessary actions by touching on topics outside the scope of the audit. Having that general understanding can help you manage the external audit more efficiently.
2. Identify Your Subject Matter Experts (SMEs)
No one knows your internal processes better than your own SMEs. Based on the standard you need to comply with, determine which of your employees have the best knowledge to help the external auditor understand and evaluate your business and information security processes. Make sure you explain the importance of the upcoming audit to those SMEs, and present your understanding of the standard so the auditor can lend their knowledge and experience to prioritize actions for preparation.
3. Allocate Resources to the Experts
Experts and specialists in every field usually are engaged with their normal day-to-day activities. Auditing requires significant time, energy, and effort from your SMEs. Make sure that all necessary resources are available so your audit team can proceed with ease.
4. Determine Your Internal Procedures
Gather your SMEs and go through internal audit processes relevant to the controls that will be examined during the upcoming audit. The goal is to identify any gaps where processes don’t exist or don’t sufficiently meet the standard you’ll be audited against. In other words, make sure that all the controls required by the standard are in place in your business, and that corrective actions are taken where needed.
5. Gather Documentation for Your Procedures.
Having all internal procedures in place is a great starting point. External auditors, however, will ask for supporting materials as part of the audit process. They’ll want to see policy documents, financial statements, accounting records, and “process artifacts” (that is, evidence that your internal processes are working as intended).
Based on the business processes determined in the previous step, make a list of documents that demonstrate the current internal control structure and review these documents. This is another form of gap analysis to determine whether your documentation is accurate and complete.
What Are the Steps to Conduct an External Audit?
The structure of the external audit process should also factor into your preparation. While every audit will have its own unique qualities, all audits do have some steps in common:
1. Define Your Objectives
Knowing what you want to achieve from your audit is a crucial part of your planning phase and will help you determine what is needed from the audit moving forward.
2.Announce the Audit
Everyone in your company should know that the audit is taking place, including senior management and stakeholders.
3. Conduct an Audit Entrance Meeting
Present your objectives, the process that will follow, and the time frame for completion of the audit.
4. Fieldwork
Once your action plan is in place, the audit procedures can begin. This will include a full investigation into your security system and tests of controls.
5. Review and Communicate the Results
Your audit findings should be analyzed and communicated to your audit committee and staff.
6. Conduct an Audit Exit Meeting
Follow up with your entire team to make sure that everyone is on the same page.
7. Audit Report:
Don’t overlook the reporting phase: recording your results will be instrumental in preparing for your next audit.
Understanding these steps can be instrumental in the success of your external audit, and learning them before you begin will save you both time and money moving forward.
Guarantee Success For Your Next Audit
Audit planning can be challenging, but using risk assessment software can start you on the right path. If you’re searching for solutions for your next external audit, ZenGRC can help.
Our platform provides a single integrated experience that allows you to track your compliance efforts across departments, and to generate audit reports with ease. ZenGRC has every tool you need to ensure that your next audit is a success. Schedule a demo today and learn more about how ZenGRC can work for you.
