What is an External Audit?

What is an External Audit?

The external auditor refers to the Certified Public Accountant (CPA) firms or individuals who work in those firms which offers audit services to their customers. Usually, these firms operate independently from their customers whom they provide the audit services for.

Typically, entities will engage external audit firms (Also see Introduction to Audit Engagement) to audit their financial statements yearly according to the requirement of the shareholders, board of directors, the management, local law and other requirements.

If an audit firm in Johor Bahru wants to offer its services, it needs to acquire the approval from the local authorities which handle the CPA firms. Besides following the ISA and local laws and regulations, the audit partners have to hold a CPA certificate or equivalent too (Also see Characteristics of an Excellent Auditor).


External auditors can offer a variety of assurance and non-assurance services. These include advisory services, review of financial statements, IFRS reporting, financial statement review, financial statement compilation, financial statement audit, internal audit services, as well as risk assurance services (Also see Types of Audit – Statutory Audit and Non-statutory Audit).

Appointment and Termination

Typically, the management of the firm will make an appointment for the external audit, and it requires the approval from the board of directors and the audit committees. In general, the appointment will last for three to five years. On the other hand, the board of directors is responsible for the termination of audit services due to the requests from the company’s management.

Standard of Use

External auditors will perform their services by complying with the ISA, local audit standards, as well as relevant laws and regulation. Also, they will deliver their services according to the designed internal procedures and policies to make sure that they can maintain the quality of the services they offer.

Objectivity and Independence

Usually, external auditors work objectively and independently so that they can ensure that the work they perform is in good quality. Such a condition can also guarantee the integrity of the audited company and its shareholders. Being objective and independent refers to not only the auditors themselves, but this includes the audit firm that hires them. Hence, this ensures that the public has enough trust in the audit firms. Apart from that, the objective and independent audit firms can provide value not only to the company and its shareholders but also to the public.

Audit Approach

Typically, the auditors will not review all the items or accounts in their customer’s financial statements. They will perform a risk assessment on the financial statements before they start performing their testing on the sample they have selected (Also see Introduction to Audit Sampling). The auditors may use different approaches in performing the audit.

Audit Opinion

In the audit report which the external auditors will issue to the audit committee and the board of directors, they will express their opinion based on the results of their audit (Also see What is an Unqualified Audit Report?). There are several types of audit opinions that the auditors may issue, which includes unmodified opinion, modified opinion, adverse audit opinion, as well as the disclaimer audit opinion.