Checklist Description
This checklist provides an overview of how to choose and appoint an external auditor.
Definition
An external audit is an unbiased, independent review of a company’s business and financial situation conducted by an external auditor. Public organizations and publicly traded firms are usually required to have an external audit conducted yearly. The firm’s management is responsible for the selection and appointment of an external auditor.
There are many external audit firms to choose from. Public organizations and publicly traded firms must undergo a stringent process of appointing an external auditor that usually involves tenders and bids. The external auditors who are invited to tender are persons or companies with an in-depth knowledge of audit, finance, and management. The invitation to tender and bid must contain a clear description of the company and its audit requirements. It will explain the type of business the company undertakes, will specify what type of audit it is seeking, and should also give a clear description of the company’s internal audit controls, administrative procedures, and management.
Once the bids are submitted the organization or company will start to analyze them. Certain bigger organization might put in place an evaluation committee to examine the bids and to ensure a transparent and fair selection process.
There are many factors to consider in the decision, including the auditor’s reputation, past experience, and staff.
If the bids and tenders submitted are not sufficient to arrive at a decision, interviews and consultations can be organized to allow the evaluation committee to make better-informed decisions during the selection process.
Once the external auditor has been selected and appointed, the appointment is confirmed through a written agreement between the company and the external auditor. The agreement deals with the scope of the audit and its timing, cost, and standards, and it will also contain information relating to the obligations of the auditor and the support that the company will provide.
External audit regulations around the world differ. In the United States companies can use only certified public accountants to undertake their audit, while in Commonwealth countries, such as the United Kingdom, Canada, Australia, and New Zealand, the regulations demand the use of a chartered accountant.
Advantages
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An external audit helps an organization to assess the state of its business and to put in place measures to improve and develop it.
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External audits assess its risk management policies and help to deter fraud.
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Appointing the right external auditors will ensure a smooth and thorough examination of the company and a transparent and thorough audit.
Disadvantages
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External auditors can be expensive. Plan your budget accordingly and make sure you negotiate a reasonable fee.
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In certain circumstances a company will be required to change its external auditor yearly or after a fixed period.
Action Checklist
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Take time to recruit the best external auditors. Obtain as much information from as many sources as you can before appointing an external auditor.
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Consider a selection bidding process and examine each bid carefully before making a decision.
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Communicate clearly to your external auditors what you would like to achieve from the auditing process. Explain your business plans and aims and allow the external auditors transparency in examining documents and speaking with key staff.
Dos and Don’ts
Do
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Establish good communication between management and external auditors.
Don’t
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Do not appoint external auditors based only on cost—consider other factors such as reputation and experience; a more expensive auditor may offer better value for money in the medium to long term.
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Do not underestimate the need for proper training of directors and employees to help them to fulfill their duties.
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