Externe revision

What Is Externe revision?

External audit, or "externe revision" in Norwegian, is an independent examination of the financial statements of a business or other entity by an outside party. The primary purpose of an external audit is to provide an objective opinion on whether the entity's finansielle utsagn are presented fairly, in all material respects, in accordance with an applicable regnskapsstandarder framework. This process falls under the broader category of audit and accounting, a critical component of financial transparency and accountability. An external audit aims to enhance the credibility of financial information for stakeholders such as investors, creditors, and the public. An external auditor assesses the company's internkontroll and collects revisjonsbevis to support their professional opinion. The process helps in ensuring the reliability of a company's regnskap.

History and Origin

The practice of external auditing has evolved significantly over centuries, largely driven by the increasing complexity of commerce and the separation of ownership from management in businesses. Early forms of auditing can be traced back to ancient civilizations, where stewards would verify accounts. However, the modern concept of independent external audit gained prominence with the Industrial Revolution and the rise of joint-stock companies, which required public confidence in financial reporting.

A pivotal moment in the history of external audit in the United States was the enactment of the Sarbanes-Oxley Act (SOX) in 2002. This legislation was a direct response to major corporate accounting scandals, such as those involving Enron Corporation. SOX mandated stricter corporate styresett and accountability, particularly concerning auditor independence and the reliability of financial reporting. The Securities and Exchange Commission (SEC) adopted rules to implement various provisions of the Sarbanes-Oxley Act, reinforcing the importance of external audits in protecting investors⁷, ⁸. For example, the collapse of Enron in 2001, due to systematic accounting fraud, highlighted the critical need for robust external oversight and contributed to the widespread adoption of such reforms⁶. Today, international bodies like the International Accounting Standards Board (IASB) issue International Financial Reporting Standards (IFRS) which are required or permitted in over 140 jurisdictions worldwide, further standardizing finansiell rapportering and the role of external audit on a global scale⁴, ⁵.

Key Takeaways

External audit provides an independent and objective opinion on the fairness of an entity's financial statements.
It enhances the credibility and reliability of financial information for external stakeholders like aksjeeiere and creditors.
External auditors assess a company's internal controls and gather evidence to form their opinion.
The Sarbanes-Oxley Act significantly strengthened the requirements for external audits in the U.S. following major corporate scandals.
The outcome of an external audit is typically an audit report, which includes the auditor's opinion on the financial statements.

Interpreting the Externe revision

The culmination of an external audit is the issuance of a revisjonsrapport, which contains the auditor's opinion on the financial statements. This opinion is crucial for users of the financial information, as it indicates the level of assurance the auditor provides.

There are generally four types of audit opinions:

Unqualified (Clean) Opinion: This is the most favorable opinion, indicating that the financial statements are presented fairly, in all material respects, in accordance with the applicable accounting framework. It suggests that the auditor found no material misstatements.
Qualified Opinion: Issued when the financial statements are generally presented fairly, but there are specific, material exceptions or limitations in the scope of the audit that prevent the auditor from issuing an unqualified opinion.
Adverse Opinion: This is the most serious type of opinion, stating that the financial statements are materially misstated and do not present the financial position fairly. This is typically issued when misstatements are pervasive.
Disclaimer of Opinion: The auditor issues a disclaimer when they are unable to express an opinion on the financial statements, often due to significant limitations in the scope of the audit or significant uncertainties.

Understanding the auditor's opinion is vital for investors and other stakeholders to gauge the reliability of the finansielle utsagn and make informed decisions.

Hypothetical Example

Consider "NordicTech AS," a publicly traded software company. At the end of its fiscal year, NordicTech prepares its finansielle utsagn. To assure its investors and lenders of the accuracy of these statements, NordicTech engages an independent external auditing firm, "Global Audit Partners."

Global Audit Partners begins its external audit by first understanding NordicTech's business operations and its inherent virksomhetsrisiko. They then assess NordicTech's internkontroll systems to determine their effectiveness in preventing and detecting errors or svindel. The auditors then select samples of transactions and account balances to examine, such as sales invoices, payroll records, and bank reconciliations. They verify these transactions against source documents and external confirmations.

During the audit, Global Audit Partners identifies a minor issue where NordicTech incorrectly classified a certain type of software development cost. While this misclassification is not pervasive, it is material enough to warrant attention. After discussions with NordicTech's management, the company corrects the error. As a result, Global Audit Partners issues an unqualified revisjonsrapport, stating that NordicTech's financial statements are presented fairly, in all material respects, reflecting the company's financial position and performance accurately. This report is then included in NordicTech's annual report, providing assurance to stakeholders.

Practical Applications

External audits serve several crucial practical applications across various financial domains:

Investor Confidence: For publicly traded companies, a clean revisjonsrapport from an external auditor significantly boosts investor confidence. It assures potential and existing aksjeeiere that the financial information they rely on for investment decisions is accurate and reliable.
Regulatory Compliance: Many jurisdictions, particularly for publicly listed companies, mandate annual external audits as a regulatory requirement. These audits ensure compliance with specific regnskapsstandarder and financial reporting laws.
Access to Capital: Lenders and creditors often require audited financial statements before extending loans or credit. The external audit provides them with an independent assessment of the borrower's financial health and ability to repay. Research by the Federal Reserve indicates that audit quality can affect loan contracting, potentially leading to more favorable loan terms for companies with stronger audit profession development³. The presence of strong external audits enhances transparency for banks and can positively influence lending decisions².
Mergers and Acquisitions (M&A): During due diligence processes for M&A, external audits play a vital role in verifying the financial health of the target company.
Tax Compliance: While not directly for tax purposes, audited financial statements can provide a strong basis for accurate tax filings, reducing the risk of discrepancies with tax authorities.

Limitations and Criticisms

Despite their critical role, external audits have certain limitations and face various criticisms:

Sampling Risk: Auditors do not examine every transaction; they rely on sampling techniques. This introduces a risk that material misstatements or svindel could exist in the population but not be captured in the sample tested.
Materiality Judgment: Auditors express an opinion on whether financial statements are "fairly presented in all material respects." The concept of materialitet involves professional judgment, meaning what one auditor deems material, another might not. This subjectivity can be a point of contention.
Cost: Performing an external audit can be a significant expense for a company, especially for smaller entities, leading to debates about the cost-benefit ratio, particularly concerning certain regulatory provisions like Section 404 of the Sarbanes-Oxley Act¹.
Auditor Independence: Maintaining true uavhengighet is paramount for an external auditor, but potential conflicts of interest can arise, especially if the auditing firm also provides non-audit consulting services to the client. This issue was a key concern leading to the Sarbanes-Oxley Act after the Enron scandal, where the auditor, Arthur Andersen, was also heavily involved in consulting.
Inherent Limitations of Financial Reporting: Audits are based on historical financial data and reflect management's judgments and estimates. They do not guarantee future viability or the complete absence of virksomhetsrisiko. An audit is not designed to detect all instances of fraud, especially highly sophisticated schemes.
Audit Risk: Despite rigorous standards, there is always some revisjonsrisiko—the risk that the auditor may unknowingly fail to modify their opinion on financial statements that are materially misstated.

Externe revision vs. Interne revision

While both "externe revision" (external audit) and interne revision (internal audit) involve the examination of an organization's operations, their primary objectives, scope, and reporting lines differ significantly. External audit is conducted by independent third parties and focuses on providing an opinion on the fairness of the financial statements for external users. Its mandate is typically statutory or regulatory. In contrast, internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. Internal auditors are employees of the company and report to the audit committee and senior management, focusing on improving risk management, control, and styresett processes. While external auditors are primarily concerned with financial reporting accuracy, internal auditors have a broader scope, examining operational efficiency, compliance with internal policies, and strategic objectives.

FAQs

What is the main goal of an external audit?

The main goal of an external audit is to provide an independent and objective opinion on whether a company's finansielle utsagn are presented fairly, in all material respects, according to established regnskapsstandarder. This enhances the reliability of the financial information for outside parties.

Who performs an external audit?

An external audit is performed by independent auditing firms, composed of certified public accountants (CPAs) or their international equivalents, who are not employees of the company being audited. This independence is crucial for objectivity.

Why is auditor independence important?

Auditor uavhengighet ensures that the auditor's opinion on the financial statements is unbiased and free from any conflicts of interest. Without independence, the credibility of the external audit would be severely undermined, eroding trust in the financial reporting process.

Can an external audit detect all instances of fraud?

While external audits are designed to provide reasonable assurance that financial statements are free from material misstatement, whether due to error or svindel, they are not guaranteed to detect all instances of fraud. Sophisticated fraud schemes can be difficult to uncover, especially if they involve collusion or management override of controls.