External auditors of a company in simple words
An auditor is a person mandated by the shareholders of a company to verify whether their investments have been judiciously used so as to bring maximum benefits to them. The auditor is usually appointed at the Annual General Meeting (AGM) for a year. Auditors act as watchdogs to shareholders of a company. They look after their property.
Therefore the role of the auditor is to see to it that the company, which is owned by the shareholders but managed by the Directors, is not put at risk. The auditor works in accordance with auditing standards and procedures set out and accepted by professionals and is assisted by a team. The auditor needs to ensure, among others, that:
- The company is not engaged in any illegal dealings and complies with all the laws and regulations of the country. This would prevent the company from incurring penalties in the form of court cases, fines or other sanctions. Shareholders have invested their money to earn maximum profit. Fines and unnecessary expenses in legal disputes would reduce their profit and bring disrepute to the company. This would in turn result in loss of customers and sales revenues.
- Internal procedures and control systems set out are properly followed. Such procedures and systems are important as they are deterrent to mismanagement and fraud.
- Transactions of the company have been correctly recorded and accounting procedures have been followed so that financial statements of the company show a true and fair view of the financial position of the company.
How does the auditor do his work?
The work of an auditor involves a series of tasks which help in gathering information so that the auditor can formulate their opinion:
- The most basic task of an auditor is to analyse accounting records, that is the ledger and other books in which transactions are recorded. These also include invoices, receipts, cheque counterfoils, purchase orders and internal memos. In so doing, the auditor and his team try to detect irregularities, frauds and non-compliances with procedures, standards and legislations.
- In order to look for further clarifications, the auditor also interviews management and employees. This helps to get justifications for suspicious transactions and to measure the seriousness with which management and employees have been in managing the affairs of the company.
- The auditor also need to have inventory control as well as inspection of the company’s assets. These will confirm whether the records are true, that inventory is well manage and assets are being well maintained and efficiently used.
- The ultimate task consists of preparing reports. These are based on observations made. Generally, the auditor will conclude whether the accounts of the company show a true and fair view of the financial performance and position of the company. Reports are also accompanied by recommendations on how to improve control systems and management of the company among others.
Who benefits from the jobs of the auditors?
All stakeholders benefit when a company is audited, especially when properly audited.
- The shareholders get the assurance that their investment is being properly utilised for the sake of generating profit which they would receive in from of dividends.
- Employees get the assurance that the company is not engaged in malpractices that may jeopardise its existence and consequently their jobs. Also, auditors may detect any non-compliance to labour laws and regulations or any malpractice regarding wage policy.
- Government has the assurance that the correct amount of tax is being paid and legislations are adhered to.
- Creditors and providers of loan get the assurance that the company has repayment capacity and their money is not at risk.
- Customers get the assurance of the honesty and integrity of the company in providing goods and services of good quality at reasonable prices.
- The society has the assurance that the company is not involved in activities that would impact negatively on the environment and the life of the people.
So, as explained above, a company auditor is generally someone with an accounting background who conducts a thorough check on the functioning of the company. Emphasis is more on the management of financial resources and on generating profit. To this end, the auditor also investigates how far the reputation of the company has been safeguarded.