What is an External Audit? Key Concepts & How to Improve

What is an audit?
Audits are independent, unbiased evaluations that verify the truthfulness of an organization’s claims, in financial statements, regulatory reports, and other business critical documents, etc. 

Audits aim to ensure that the information being disclosed by an organization is reliable. This is important because these data—financial statements, compliance reports, information security, etc—are used for decision making. Inaccurate or false data creates a garbage in garbage out (GIGO) scenario for consumers of the data, which can result in poor decisions.   

What are the typical kinds of audits?

Audits are part of the governance process in many firms.  If policies set the goals and guidelines for an org. And if controls are the processes or mechanisms to enforce those policies. Then, audits assess the effectiveness of those controls. While this implies independent external assessments, that’s not always the case. In  fact, there are three main kinds of  audits:

• Self Audits (Self-Assessments): Audits carried out by the individuals or departments who are often operationally involved with the processes or controls being evaluated. These audits are usually the least rigorous and are routinely performed as preliminary checks before official audits.
• Internal Audits: Examinations conducted by a dedicated internal team or department (sometimes called, surprisingly, internal audit). While these audits usually more rigorous and more independent than self-audits, they’re less rigorous than external audits.  
• External Audits: These are the audits most people think about. External audits tend to be the most rigorous because the auditors are often certified and follow strict standards. And they’re also the most independent since the team that is performing the assessment is always an independent 3rd party.

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External audits are excellent examples of external collaboration because of their greater level of rigor and the involvement of independent third parties. The remainder of this article focuses on this topic. 

Who are the parties in external audits? 

External collaborations are when independent organizations come together to work on a shared project or goal. External audits, which are conducted at arms length, are great examples of this. The parties that collaborate across the different stages of the audit process include:

• Beneficiaries, or clients: The beneficiary is the party that benefits from the auditors' assurance about the accuracy and reliability of the subject’s information. 
• Auditors: The independent organization conducting the audit, e.g., regulator, accountancy, specialist organization.  
• Subjects (auditee): The entity being audited, which can be an entire organization, a specific department, or a function within the company. This is the primary subject of the audit. 
• Audit Prep Consultants: Sometimes, organizations will retain audit prep consultants to help them prepare for the audit.  

The use of audit prep consultants is more routine in audits with specialized requirements, such as GxP—Good Manufacturing Practices (GMP), Good Laboratory Practices (GLP), or Good Clinical Practices (GCP)—and where successfully passing the audit is business critical. Prep firms play a critical role in ensuring that all documentation—including policies and controls—is organized and regulatory compliant. By reviewing and fine-tuning the necessary documentation and evidence, audit prep consultants significantly increase the organization's likelihood of a successful audit outcome. 

One final comment about the beneficiaries. It’s worth noting that they can vary and include: 

• Subject (Auditee): In many cases, the subject of the audit itself is a beneficiary. After all there are numerous situations where the subject, or auditee, commission an independent audit to demonstrate compliance or to validate internal processes.  
• Customers, Clients and Partners of the Subject: Customers and business partners are routinely the beneficiary of an audit, particularly those audits that verify IT, quality control, environmental standards, supply chain, and even ethics. These independent audits help assure external stakeholders that the subject is meeting mutually agreed-upon standards, contractual obligations, and any relevant regulatory or legal requirements. 
• “The Public”: Finally, the general public, including investors, regulators, and even consumers can be beneficiaries of audits. This is especially true for financial audits, as the investing public benefits from the assurance that the financial statements and filings are true.

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What does the audit process look like?

While the specific process an audit takes depends on applicable regulations, industry standards, and focus—financial, compliance, operational, etc—audits follow the typical steps. 

1. Initiate Audit: In this step involves the decision to conduct an audit, often initiated by the Beneficiary based on regulatory requirements, internal policies, or specific concerns. Formal notification is sent to the Subject, and the scope, objectives, and timing of the audit are established.  In many cases, audits occur on a routine basis. For example, many financial and security audits happen on an annual basis.  Key Parties Involved: Beneficiary initiates, Subject is notified, and Auditor is selected (if no auditor was previously selected).
2. Pre-Audit Consulting: During this phase, the Subject (auditee) may engage with Audit Prep Consultants to help prepare for the upcoming audit. This includes organizing documents, reviewing systems and processes to ensure compliance, and addressing potential issues that could affect the audit outcomes. Not all audits involve pre-audit consulting. For less complex audits, prep may be handled internally without external help.  Key Parties Involved: Subject works closely with Audit Prep Consultants. 
3. Conduct Audit: The Auditor audits the Subject, examining the necessary documents, systems, and controls. This phase includes gathering evidence, interviewing staff, and assessing compliance with the stated audit criteria. Key Parties Involved: Auditor leads this step with cooperation from the Subject’s staff. In some cases, the Audit Prep Consultants support the subject throughout the audit. 
4. Audit Reporting: After completing the audit, the Auditor compiles the findings, conclusions, and any recommendations into a comprehensive audit report. This report is reviewed with the Subject to ensure accuracy and understanding before being finalized and submitted to the Beneficiary. This phase includes discussions of the findings, decision-making based on the report, and planning for any follow-up actions or corrections. Key Parties Involved: Auditor prepares and delivers the report; Subject reviews and responds; Beneficiary receives the report and decides on subsequent actions.

When the audit is complete, all of the content is retained for record-keeping processes in case of legal or regulatory review.  All three main parties—beneficiaries, auditor, and subject—typically archive the audited material and findings.

How do the different parties collaborate?

As previously mentioned, external audits are external collaborations. When conducting the audit, the auditors and subjects (auditees) work together. If pre-audit consulting is required, the subject (auditee) and pre-audit consultant collaborate. At the conclusion of the audit, the auditor reports the results to the beneficiary.  

All the participating parties—the auditors, pre-audit consultants, and audit subjects—will have internal tools that will be used throughout the duration of their phase. For example, auditors have access to audit management software, project management, and analytical tools, such as Mircosoft Excel.  On the audit subject or auditee side, internal control systems and enterprise applications will produce the data and documentation.  However, when it comes to working together or supporting the actual external collaboration that occurs between the parties, it’s mostly email.  There has been some adoption of purpose-built tools such as file-sharing solutions (e.g., Google Drive), document collection apps (e.g., ClustDoc),  messaging/chat software (e.g., Microsoft Teams), and video conference software (e.g., zoom).  But, perhaps ironically, the use of these disparate tools often increases email correspondence because the parties need to coordinate their effort across the multiple tools. 

Email limitations are well known.  Email makes the entire process much more confusing, with dozens of threads with hundreds of scattered messages and attachments. Not only does that mess make it difficult to track conversations and attachments, but it also reduces everyone’s productivity.  The fact that those sensitive and confidential documents are distributed to everyone’s inbox increases the risk in breaches and creates numerous data graveyards. And that’s not the only security concern. Increasingly, email is a common vector for cyberattacks, e.g., BEC, and confidentiality accidents, such as inadvertent data disclosures. In a world where security and confidentiality are increasingly important, the use of email in audits can contribute to less efficient, less secure, and less transparent external collaboration. 

Why You Should Consider TakeTurns for Your Next External Audit

TakeTurns is a new breed of external collaboration tools. It’s multimodal. Instead of delivering each capability via an independent tool, TakeTurns integrates all the features audit teams need—real time chat, asynchronous notes, file sharing, document collection, revision management—into a shared workspace we call a TakeTurns Flow™.  

Each Audit becomes its own TakeTurns Flow, which is a single, cohesive workspace that’s shared between the auditors and the subjects. By keeping all the content and communications together, TakeTurns makes it easy to find everything.  In addition, TakeTurns is also secure: it’s SOC2 Type 2 certified, each participant’s email is verified before they can join the flow, and the leaders can add or remove participants when required. This finer-grain control over participation helps avoid accidental data disclosure via misdirected emails.  Finally, TakeTurns tracks all the activity in your flow, enabling you to see a complete timeline of all exchanged documents, requests, queries, and communications. The audit trail helps demonstrate thorough due diligence and adherence to compliance standards. To learn more, visit TakeTurns and how it supports audit, visit: https://www.taketurns.com/solutions/audit