5 Tips To Prepare For Your External Audit

Your company’s first external audit can be a bit overwhelming. The audit firm will seek a considerable amount of audit evidence from your business – and if you want to prepare for that compliance audit in advance, there’s an equally vast amount of information available about how audits should work.

Every company’s audit experience will differ, 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 annually. 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 specific set of standards. In the United States, auditors determine 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 following 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 is 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.

What is the purpose of the audit report?

The audit report is the primary deliverable provided after an external audit. It aims to communicate the external auditor’s opinion on whether the financial statements are presented fairly and by Generally Accepted Accounting Principles (GAAP) and auditing standards.

A clean audit opinion indicates that the financial records are free from material misstatement and can be relied upon by the annual report readers and board of directors. Any disclaimers, qualifications, or adverse opinions would be highlighted in the audit report, along with the underlying audit issues.

The report may also communicate significant findings or issues encountered during the on-site audit. Overall, the audit report aims to assure the accuracy of the financial reporting and statements to the business owner and audit committee.

Reading the audit report helps stakeholders understand the results of the external audit and determine if the presentation of the company’s financial position and expenditures can be depended on.

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. Finally, a 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 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.

     3. 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.

     4. Determine Your Internal Procedures

Gather your SMEs and review internal audit processes relevant to the controls examined during the upcoming audit. The goal is to identify gaps where methods don’t exist or don’t sufficiently meet the standard you’ll be audited against. In other words, ensure that all the controls required by the standard are in place in your business and that corrective actions are taken where needed. (It’s better to do that first rather than wait for an external auditor to find the flawed procedures and tell you to fix them anyway.)

     5. 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.

     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 committee and staff.

     6. Conduct an Audit Exit Meeting

Follow up with your entire team to ensure everyone is on the same page about the audit’s findings and any next steps for remediation that might need to happen.

     7. 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.

Understanding the Auditor’s Conclusion

​​The auditor’s conclusion, or opinion, is the most critical component of the audit report. This summary at the end of the report details all of the findings from the audit.

Depending on what the external auditor finds, the conclusion is declared as either qualified or unqualified:

• If the auditor finds problems or discrepancies in the financial statements, she gives a qualified opinion. This indicates material misstatements or noncompliance with accounting standards, meaning the company must make adjustments.
• If the auditor completes the audit procedures and finds no discrepancies, she gives an unqualified opinion. This clean opinion states that the company’s financial statements are fairly present and comply with GAAP.

Understanding the auditor’s conclusion allows the company to take corrective actions to fix deficiencies before regulatory bodies are notified. The auditor’s findings offer the business a way to remedy discrepancies and become compliant actively.

Ace Your Next Audit With RiskOptics

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 ZenGRC can help.

With a single integrated experience that allows you to track your compliance efforts across departments and quickly generate audit reports, the ZenGRC Platform has every tool you need to ensure your next audit is successful.

The ZenGRC 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 the ZenGRC, 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 ZenGRC can work for you.