External Audit

External audit refers to the most important financial review process performed by independent auditors, who review the financial records and statements of a company. The purpose of an external audit may be defined as an independent view or opinion on the fairness and accuracy of the financial reporting of a business. Audits performed by independent auditors are imperative to companies in the United Arab Emirates because such audits ensure transparency and uphold the confidence of investors to a higher level by gaining stakeholder trust. They help organisations find inconsistencies and irregularities in books of accounts, reduce financial exposure to risks, and achieve full compliance with relevant laws and regulations by putting in place better financial management and decision-making.

The UAE prescribes certain legal requirements for external audits, especially for companies established in free zones, public companies, and those industries where regulatory oversight is more vigilant. For example, in industries such as banking, insurance, real estate, and construction, most businesses are bound by law to perform an external audit. Auditing would thus be performed in conformance with the standards, both internationally and UAE-specific, to keep the companies compliant with the local and global requirements of financial reporting. The inability to conduct regular audits will attract penalties, reputational damage, or even restrictions on operations.

Some of the industries that UAE audit services are usually attached to include financial services, hospitality, health care, retail, and manufacturing. Since transparency is much needed in these industries, external audits are major avenues for protecting the financial health and credibility of the business world. The companies will make sure their financial statements are correct and present the actual view of their financial performances to the shareholders, investors, and regulators with the help of qualified external auditors.

Why Does a Company Need to Perform an External Audit?

External audits are generally performed to meet regulatory requirements and to provide assurance to stakeholders that a company's financial statements are accurate and reliable. External Audits Services also help identify any potential fraud or mismanagement within a company.

Regulation on External Audit in UAE

The regulatory framework for auditing within the UAE is pretty strong and anchored on compliance with International Financial Reporting Standards. These international standards ensure that financial reporting is presented with consistency, comparability, transparency, and accuracy, hence making it easier for businesses to compare and present their financial statements both locally and internationally. This is not a best practice but rather a legal requirement for many businesses in the UAE, especially those within regulated industries which attract international investments. The framework ensures that businesses conduct activities at the highest level of financial integrity and accountability.

Audits in the UAE are overseen by the Ministry of Economy, as well as several local authorities, which include the DFSA-a.k.a. Dubai Financial Services Authority and ADGM, otherwise known as Abu Dhabi Global Market. These monitor the licensing process of audit firms concerning proper auditing and accounting standards, along with the enforcement of regulations that provide for financial transparency in various sectors. These regulatory bodies ensure that statutory auditors are strictly qualified to perform the work in compliance with various international and local auditing standards to protect stakeholders' interests, including investors, creditors, and the public at large.

According to the UAE Commercial Companies Law, statutory audits are mandatory for public joint-stock companies, LLCs, and those involved in certain industries. This includes the requirement that businesses have their financial statements audited annually by approved, independent auditors to assure compliance with local laws and the provision of accurate financial reporting. The law provides that an external audit is indispensable in identifying prospective financial misstatements for legal compliance and expressing transparency indicative of the sustainable growth of businesses in the UAE.

Documents Required For External Audit

Procedures for External Audit

The process of conducting an external audit includes several steps, from selecting an auditor to delivering the results. The steps that are covered by external auditors in Dubai are listed below:

Step 1: Appointment of an Auditor

For an external audit, a chartered professional independent auditor is assigned. It is advisable to hire a non-member of the organization. At their annual general meetings, the company's shareholders choose the auditor based on skills, qualifications and experience 

Step 2 : Acceptance of Engagement Letter 

The auditor acknowledges their acceptance of the appointment in the letter, which also clearly outlines the scope of work and respective responsibilities.

Step 3: Audit Requirements

Statutory auditors request from the client any information that is required to have a basic understanding of the organization. The following data is thoroughly examined by the auditors.

• Memorandum of association
• Company Profile
• Key employees
• Articles of association
• Previous audit reports
• Reports on internal auditing
• Guidelines and protocols

Additionally, it is recommended that the business keep books of accounts, verify them, and update them while making sure that any necessary supporting documentation is easily accessible. 

Step 4: Audit Planning

External auditors create an audit plan after assessing risks and selecting appropriate analytical procedures. They consider the entity’s regulatory requirements and decide the nature, timing, and scope of their audit. The audit strategy is formed based on audit characteristics, reporting objectives, and available resources. Auditors then define specific objectives and detailed procedures, focusing on key areas and internal controls, to ensure effective audit execution.

Step 5: Audit Execution

At this stage, the audit work begins. The auditor checks risks and controls based on the audit plan. They verify that internal controls work properly and look for evidence to support transactions. Additionally, the auditor ensures that the accounting records comply with standards and legal requirements.

Step 6: Issuance of External Audit Report

The draft audit report is created using the collected data and the auditors' conclusions. Afterward, the external audit report is reviewed, completed, and it is delivered to the client.

Step 7: Audit Follow-up

Lastly, the auditor confirms the corrective actions done and follows up with the customer regarding the audit report's recommendations.

Role of Auditors 

Auditors, therefore, hold a very important position in the examination of financial statements and assessment of internal controls. Auditors examine books of accounts to attest to their correctness, and that they are presented under each standard and regulation. They may also assess internal controls to identify weaknesses that may lead to financial misstatement or fraud. Therefore, the independent assessment adds credibility to the financial report development important to stakeholders and regulating bodies.

Importance of Auditor Independence and Objectivity

Auditor independence and objectivity are critically essential in maintaining the integrity of the audit process. External auditors will have to be partial, without any conflict of interest, by proving findings and recommendations credible. This is part of an essential element needed in giving stakeholders a view of the presentation on the financial position of the company that is considered fair and balanced; thus, it instills trust and confidence in the organization's governance and financial practices.

Benefits of External Audit Services in UAE

External auditors in Dubai play a vital role in giving stakeholders trustworthy information about a company's financial health. They ensure that financial reports are accurate and reliable. Here are the key benefits:

• Statutory Compliance: External audits ensure financial statements comply with legal requirements and proper disclosures are made.
• Comparability: Audits make sure financial statements are consistent with prior periods and similar organizations.
• Ease of Funding: Audited reports help secure financing from banks and investors.
• Unbiased Advice: External auditors provide impartial recommendations for business improvement.
• Internal Control Review: Auditors evaluate internal controls, ensuring their effectiveness.
• Internal Audit Strengthening: Audits help to improve internal audit functions and processes.
• Operational Efficiency: Auditors identify weaknesses in operations, improving efficiency.
• Credibility: An audit improves the company’s reputation by accurately representing its financial position.
• Error Correction: Auditors detect and rectify errors in financial records.
• Impartial Opinion: Auditors maintain independence, ensuring an unbiased opinion on financial statements.
• Fraud Prevention: External audits help minimize the risk of financial fraud.

Common Challenges in External Auditing

• Incomplete or incorrect financial records lead to delays and discrepancies.
• Keeping updated with the latest local and international regulations, such as IFRS and UAE-specific laws.
• Highly complicated auditing of companies with complex financial relationships or international operations.
• Pressing schedules and hence internal resource availability during auditing periods.
• Intra-team communication along with auditors is less frequent, leading to delays in providing the required documents and views.

How to Deal with Such Challenges

• Use accounting software and audit management tools to speed up the data-gathering process by making it more accurate and even automate processes whenever possible.
• Internal audits conducted periodically help to keep financial records updated and in order, making errors less frequent during the external audit.
• The best practice will be to encourage open communication and collaboration between the internal staff and auditors. In this way, it is easy to move swiftly through an audit.
• Provide training on regulatory updates, as well as best practices in financial reporting, to the finance teams for continued compliance.
• The ability to prepare for audits much earlier means that the documentation could be organized and any known issues dealt with in advance.

Difference between an External Audit and Internal Audit

An external audit is conducted by an independent auditor, while an internal audit is conducted by the company's staff. External audits are generally required by law, while internal audits are voluntary. The main purpose of an external audit is to assure to shareholders, investors, and other stakeholders, while the main purpose of an internal audit is to evaluate the effectiveness of a company's internal controls and processes.

Choosing the Right External Auditor in UAE

The selection of the appropriate UAE external auditor will facilitate accurate financial reporting and maintain compliance with the regulations of this state. The main points to be considered by the management will be the following: experience of the auditor, industry specialization, and market reputation. One should consider a partnership with an auditing firm that understands your business sector, whether a small, mid-size, or large corporation and can provide appropriate solutions. Some of the leading auditing firms in the UAE, such as Reyson Badger, have extensive service portfolios that include financial audits, tax compliance, and advisory services to enable business functions in the country's dense regulatory atmosphere. On top of that, seek out those firms that demonstrate a robust track record of timely and accurate audit reports and deep knowledge of both IFRS and UAE-specific regulations. Businesses can attain, by choosing an appropriate auditor, improvement rather than mere compliance in financial management and decision-making.

Conclusion

External audits play a crucial role in ensuring the accuracy and reliability of a company's financial statements. External Audit Services in Dubai and UAE are essential for compliance with regulatory requirements and for assuring stakeholders. Reyson Badger is a leading provider of External Auditing Services in Dubai, with a team of experienced who are dedicated to helping companies meet their regulatory requirements and provide assurance to stakeholders.