What is the scope of an external audit?

The scope of external audit mainly covers the preparation and presentation of financial statements. In other words, each financial statement component is an audit area and subject to assessment/examination.

Detailed understanding

The following are the distinct areas that the auditor needs to emphasize.

1-Compliance with the regulatory framework-

The auditor needs to ensure compliance with the applicable financial reporting framework. Compliance includes presenting financial information, related disclosures, disclosure of significant accounting policies, and other information related to business operations.

2-Validation and reliability of the financial statement-

It’s about the overall validity and reliability of the financial statement. The validation covers financial statement classification, accuracy, completeness, and presentation. It includes understanding financial transactions and how they were recorded in the accounting system.

3-Accounting record supporting preparation of financial statement-

The auditor is responsible for ensuring financial statements are backed by sufficient and appropriate accounting records. Each accounting transaction/movement must be supported by sorted and organized documentation. So, it can be tracked as and when needed.

4-Risk assessment in terms of internal controls and business understanding

The audit scope covers business understanding and internal controls applicable to financial reporting. So, if the controls on the financial reporting are strong, the assessed risk is lower, and vice versa. Similarly, if the auditor concludes that the business is more risky, it results in a higher risk of material misstatement and vice versa.

Conclusion

The external audit scope refers to areas where the auditor needs to make an assessment/examination. These areas include, but are not limited to, compliance with applicable financial reporting mechanisms, the financial statement preparation process, validation of the financial statement, and identification of risky business areas.