External audit + internal audit = value squared

There’s no doubt about it:  external financial audits, generally conducted to protect outside investors and creditors, have become exponentially more stringent and complex after scandals like Enron, Madoff, and the financial issues facing our businesses and country in the wake of the market downturn in 2007.

Fittingly, financial auditing has tapped into international auditing standards, governance models for boards are substantially more important, and standards are moving to evaluating a business on its true economic value.

Although this can easily be seen as a headache for everyone involved in the process, it turns out that there is a valuable benefit of these extensive and exacting external audits.  You can use the data and reports to shift your financial practices for short and long term benefit.   With an internal audit function and management review and analysis of the financial data in detail, not just at the bottom line, your company can improve dramatically.

In fact, the very process of collecting the data can show areas of vulnerability for your company about which you may not have otherwise been aware.

The key benefit involves risk assessment

Analysis of the external audit’s data not only helps identify the risks to your company, but it can actually be used to identify ways to implement improvements and evaluate the reliability of accounting controls.  These factors, because they are part of an independent assessment, give a balanced picture of the financial condition of the company and its true economic value.

The process of using the best data provided by external auditors involves:

1.    Review the final review letter provided by external auditor to understand and analyze the suggestions for improvement.
2.    Take the time for a detailed review of contents of the external audit report and financial statements
3.    Suggest a meeting with external auditors, internal auditors and management to discuss results and best practices

So how does this work exactly?

Here’s a short list of how you can use external audit information for internal business health.

•    Check your true value.  Review the value of the company and economic/market value of assets with the data provided by auditors and identify differences.   Are your impairments of value assessed correctly?  Pay attention to the value and risk involved in holding stocks, bonds and other financial instruments.

•    Exercise your financial fitness.  You can ensure all of your company’s financial liabilities are properly accounted for as compared with the external audit, while also adding newly discovered  and contingent liabilities.  External auditors may also be able to help you determine that you’re financial group is applying best practices when it comes to measurement of financial income and expenses.  This is the right time too, to determine if there is undue economic dependence, or unseen opportunities for fraudulent activities.

•    Get it all under control.  From the external auditor report you can ensure that internal controls are in place that keep the financial value of your company safe, including all assets.  Evaluating financial risk that could damage the your financial worth or that could threaten the value of your business is critical so that you can work with internal audit to correct those types of situation.

Although they can be stressful and time consuming for your accounting and financial departments, external audits can be very beneficial.  Not only does management and your internal auditing group get the value of an independent assessment of financial

worth and risks, you are gifted with the opportunity to safeguard your business with improved internal controls.

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