Tool

External auditing

A periodic, independent examination of financial reporting, fiscal and internal control and risk management.

DESCRIPTION

An external audit is a periodic, independent examination of account books and records conducted by an external and qualified accountant.1,2 The (external) auditor can be, depending on the national regulations on that matter, responsible for reviewing an organisation’s financial reporting, fiscal and internal control, and risk management, but will always have to review as a minimum the integrity of the financial statements. External auditors must be recruited impartially, meaning to appoint him or her neutrally, based on merit, independently from the view of the management or other interested parties, and not according to favours, bribes, family relations or friendship.3,4

PURPOSE & LINK TO INTEGRITY

The objective of an external audit is to determine whether the accounting records of a company or organisation are accurate, complete, and free of material misstatements, fraud, or error, whether they are prepared in accordance with the provisions of generally accepted accounting principles, and whether the statements fairly present the organisation’s financial position, as well as the results of its financial operations.1

For public institutions external audits are usually mandatory.5 Although not always legally required, non-governmental organisations and companies can also benefit from hiring an external auditor. Proper external audits increase trust, increase the attractiveness of funding for international donors and governments, and reduce the risk of filing inappropriate tax returns that could lead to hefty penalties.3,4,6

An impartial appointment is crucial to ensure that the auditor is independent and unbiased. If the auditor fails to fulfil these requirements, a truthful and open auditing is hindered. An improperly conducted recruitment of the auditor can foster corruption, fraud, and misappropriation of funds, and can lead to reduced accountability. Impartiality helps to set the tone for integrity.6

KEY REQUIREMENTS

HOW TO

International standards for external government auditing have been developed by the International Organization of Supreme Audit Institutions (INTOSAI). INTOSAI is an independent umbrella organisation for the external government audit community. The standards can be viewed on the INTOSAI website: www.intosai.org.7

For non-governmental organisations, guidance for handling external audits can be found on the website of the Management Accounting for Non-governmental Organisations (MANGO) website: www.mango.org.uk/guide/externalaudit.8

External audits can only be undertaken by a recognised auditing firm. Usually, it is part of the service of the chosen auditing firm to inform the organisation on how the financial statement has to be produced before it can be audited. In order to make an impartial appointment, the auditor should be recruited based on:

  • The fulfilment of clearly defined and documented requirements
  • Experience in the field of auditing in the water sector
  • The approval of the audit committee.

Furthermore, an external auditor should be appointed who ensures that financial statements and annual audits are being completed and reviewed every year. National audit standards should be consulted to get to know the specific national audit rules, regulations and procedures.

Moreover, it is vital that external audits are accompanied by consistent and effective penalties in order to ensure the compliance with regulations and quality standards.9

You might also consider getting ISO certification. The International Organization for Standardization (ISO) is a worldwide federation of national standards bodies. The following ISO standard is applicable for this tool:

ISO/IEC 17021-1:2015 Conformity assessment — Requirements for bodies providing audit and certification of management systems (http://www.iso.org/iso/home/store/catalogue_tc/catalogue_detail.htm?csnumber=61651): ISO/IEC 17021-1:2015 contains principles and requirements for the competence, consistency and impartiality of bodies providing audit and certification of all types of management systems. Certification bodies operating to ISO/IEC 17021-1:2015 do not need to offer all types of management system certification. Certification of management systems is a third-party conformity assessment activity and bodies performing this activity are therefore third-party conformity assessment bodies.

KEY GUIDING DOCUMENTS

CIMA, no year, Guidelines on the contribution external audit experience may make towards a successful application for membership of CIMA, Chartered Institute of Management Accountants (CIMA), UK

Institute of Chartered Accountants, 2003, Reviewing auditor independence. Guidance for audit committees, Institute of Chartered Accountants, UK

UN, 2009, Audit Manual, United Nations (UN), USA

FURTHER  READINGS

Evans, A., 2008, The Role of Supreme Audit Institutions in Combating Corruption, U4 Helpdesk, Transparency International, http://www.u4.no/publications/the-role-of-supreme-audit-institutions-in-combating-corruption/downloadasset/400, accessed 02.12.2015

Yen and Shiong, 2008, Does an external audit add value?

INTOSAI, no year, International Organization of Supreme Audit Institutions (INTOSAI), http://www.intosai.org/, accessed 02.12.2015

MANGO, no year, Handling an external audit, Management Accounting for Non-governmental Organisations (MANGO), http://www.mango.org.uk/guide/externalaudit, accessed 02.12.2015

MANGO, 2012, Financial Management Essentials – A Handbook for NGOs, Management Accounting for Non-governmental Organisations (MANGO), UK

DFID, 2013, DFID’s Anti-Corruption Strategy for Kenya, Department for International Development (DFID), UK

Doig and Riley, 1998, Corruption and Anti-Corruption Strategies: Issues and case studies from developing countries, Anti-Corruption Resource Centre, Norway

Larcker and Tayan, 2011, Financial reporting and external audit, Stanford Graduate School of Business, USA

WAPP, 2013, Recruitment of the external auditor of the West African Power Pool, West African Power Pool (WAPP), http://tenders.nigeriang.com/federal-government-tenders-in-nigeria/expression-of-interest-at-the-west-african-power-pool-wapp/10915/, accessed 02.12.2015

New Zealand Water and Waste Association, no year, External Audit Independence Policy, New Zealand Water and Waste Association, New Zealand

WHO, 2011, Appointment of the External Auditor, World Health Organization (WHO), Switzerland

FULL REFERENCES

  1. Business Dictionary, no year, External Audit, Business Dictionary, http://www.businessdictionary.com/definition/external-audit.html, accessed 02.12.2015
  2. CIMA, no year, Guidelines on the contribution external audit experience may make towards a successful application for membership of CIMA, Chartered Institute of Management Accountants (CIMA), UK
  3. Institute of Chartered Accountants, 2003, Reviewing auditor independence. Guidance for audit committees, Institute of Chartered Accountants, UK
  4. UN, 2009, Audit Manual, United Nations (UN), USA
  5. Evans, A., 2008, The Role of Supreme Audit Institutions in Combating Corruption, U4 Helpdesk, Transparency International, http://www.u4.no/publications/the-role-of-supreme-audit-institutions-in-combating-corruption/downloadasset/400, accessed 02.12.2015
  6. Yen and Shiong, 2008, Does an external audit add value?
  7. INTOSAI, no year, International Organization of Supreme Audit Institutions (INTOSAI), http://www.intosai.org/, accessed 02.12.2015
  8. MANGO, no year, Handling an external audit, Management Accounting for Non-governmental Organisations (MANGO), http://www.mango.org.uk/guide/externalaudit, accessed 02.12.2015
  9. MANGO, 2012, Financial Management Essentials – A Handbook for NGOs, Management Accounting for Non-governmental Organisations (MANGO), UK
Last updated 12 April 2019

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