Definition
External Documents are records necessary for a company’s recordkeeping that have been processed or handled by external individuals or entities outside of the organization’s control. These documents often include vendor invoices, receipts, bank statements, and canceled checks. Due to their origin and the involvement of third parties, external documents are typically deemed more reliable and verifiable in auditing processes compared to internal documents.
Examples
- Vendor Invoices: Invoices received from suppliers for goods or services provided to the company.
- Canceled Checks: Checks that have been processed and cleared by the bank, providing proof of payment.
- Bank Statements: Monthly statements issued by financial institutions detailing the transactions and balances.
- Receipts from Customers: Receipts provided by customers as proof of payment for products or services received.
- Contracts: Binding agreements between the company and third parties, documenting the terms and conditions of business transactions.
Frequently Asked Questions (FAQs)
1. Why are external documents considered more reliable than internal documents?
External documents are considered more reliable because they are generated and handled by independent third parties, which reduces the risk of manipulation or bias that may occur with internal documents.
2. What types of external documents are crucial for auditing?
Types of external documents crucial for auditing include vendor invoices, canceled checks, bank statements, external contracts, and receipts from customers, as they provide verifiable evidence of financial transactions.
3. How do external documents enhance the audit process?
External documents enhance the audit process by offering an independent verification of transactions, reducing the reliance on the company’s internal records, and increasing the credibility of the financial statements.
4. Can external documents be used to detect fraud?
Yes, external documents can be instrumental in detecting fraud by providing a reliable source for verifying the accuracy and authenticity of transactions.
5. What is the role of external auditors when it comes to external documents?
The role of external auditors is to review and verify these documents to ensure that the financial statements of a company present a true and fair view of its financial position.
- Internal Documents: Documents generated within an organization such as internal memos, internal invoices, and employee records. These are generally considered less reliable than external documents due to potential bias.
- Audit Trail: Comprehensive and systematic documentation of financial transactions, providing evidence for the origin and course of each transaction.
- Financial Statements: Formal records of the financial activities and position of a business, including income statements, balance sheets, and cash flow statements.
Online Resources
- Investopedia - Comprehensive financial dictionary and explanations.
- American Institute of CPAs (AICPA) - Resources for accounting and auditing standards.
- IRS Documentation - Guidelines and reports for financial documentation and audits.
Suggested Books for Further Studies
- “Auditing and Assurance Services: An Integrated Approach” by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley.
- “Principles of Auditing & Assurance Services” by Ray Whittington and Kurt Pany.
- “Auditing: A Risk-Based Approach to Conducting a Quality Audit” by Larry E. Rittenberg, Karla M. Johnstone, and Audrey A. Gramling.
Fundamentals of External Documents: Auditing Basics Quiz
### Why are external documents generally considered more reliable than internal documents?
- [ ] They are created by an organization's employees.
- [x] They are handled by independent third parties.
- [ ] They are used for internal decision-making.
- [ ] None of the above.
> **Explanation:** External documents are handled by independent third parties, decreasing the chances of manipulation and increasing their reliability.
### Which of the following is an example of an external document?
- [x] Vendor invoices
- [ ] Internal memos
- [ ] Employee records
- [ ] Meeting notes
> **Explanation:** Vendor invoices are external documents because they are generated by external suppliers providing goods or services to the company.
### Why do auditors place more reliance on external documents during the audit process?
- [x] Due to their increased independence and verifiability.
- [ ] Because they are easier to obtain.
- [ ] As they are always error-free.
- [ ] Because they reflect management's opinion.
> **Explanation:** Auditors rely more on external documents for their independence and verifiability compared to internal documents, which might be more prone to manipulation.
### What are canceled checks used for in an audit?
- [ ] To confirm employee attendance.
- [x] To verify proof of payment.
- [ ] To calculate inventory.
- [ ] To schedule meetings.
> **Explanation:** Canceled checks are used to verify proof of payment, which is a key aspect in audit procedures.
### In the context of auditing, what is the significance of external contracts?
- [x] They provide binding evidence of business agreements and obligations.
- [ ] They are used for marketing strategies.
- [ ] They align with internal policies.
- [ ] They are exclusive to department records.
> **Explanation:** External contracts are significant in auditing as they provide binding evidence of business agreements and obligations with third parties, which can be verified independently.
### Can external documents be useful in detecting financial fraud?
- [x] Yes
- [ ] No
> **Explanation:** External documents can be instrumental in detecting financial fraud as they offer independent evidence that can validate or refute the financial transactions recorded internally.
### Who should ideally handle the review and verification of external documents?
- [ ] Internal managers
- [ ] Company executives
- [x] External auditors
- [ ] Internal policy makers
> **Explanation:** External auditors should handle the review and verification of external documents to ensure the integrity and credibility of the audits conducted.
### What is one primary feature that distinguishes external documents from internal documents?
- [ ] Their colorful design
- [ ] The number of pages
- [ ] Their format
- [x] The involvement of third parties
> **Explanation:** The primary feature that distinguishes external documents from internal documents is the involvement of third parties in their creation and management, enhancing their reliability.
### Which of these is NOT typically considered an external document?
- [ ] Bank statements
- [ ] Receipts from customers
- [ ] Canceled checks
- [x] Internal accounting records
> **Explanation:** Internal accounting records are not considered external documents as they are generated and maintained within the organization.
### What makes bank statements critical in the context of external documentation for an audit?
- [ ] Their attractive design
- [ ] Their length in pages
- [x] They provide a comprehensive overview of financial transactions and balances.
- [ ] Their internal purpose
> **Explanation:** Bank statements are critical because they provide a comprehensive and independent overview of a company's financial transactions and balances, which is crucial for effective auditing.
Thank you for exploring the intricate world of external documents in auditing. Stay diligent and continue to enhance your financial auditing knowledge!
