What Is External Documents?

External documents, such as vendor invoices and canceled checks, play a crucial role in company recordkeeping due to their greater independence and verifiability compared to internal documents.

External documents are vital elements of company recordkeeping, often handled by individuals outside the organization. These documents, including vendor invoices and canceled checks, offer higher reliability and verifiability than internal documents due to their independent origin.

Importance of External Documents

Greater Independence

External documents are produced and managed by entities outside of the organization. This external origination significantly reduces the potential for internal bias and manipulation, thereby ensuring greater objectivity and reliability.

Enhanced Verifiability

Due to their independent nature, external documents are typically more verifiable. Auditors can cross-check these documents with the external parties that issued them, providing an additional layer of confirmation and authenticity.

Types of External Documents

Vendor Invoices

Vendor invoices are documents received from suppliers detailing the quantities, descriptions, and prices of goods or services provided. They are critical for accounts payable and expense tracking.

Canceled Checks

Canceled checks are checks that have been processed by a bank and bear the endorsement of the payee, indicating that the funds have been successfully transferred. They serve as proof of payment for financial transactions.

Special Considerations

Audit Reliance

Auditors place considerable reliance on external documents due to their objective nature. This reliance is integral in forming an accurate and fair opinion on the financial statements of an organization.

Recordkeeping Requirements

An organization must maintain a comprehensive and organized repository of external documents to ensure compliance with regulatory and audit requirements. This repository aids in swift retrieval and verification processes during audits.

Compliance

Keeping accurate and complete external documents is not only vital for internal recordkeeping but also for compliance with various statutory and regulatory requirements. Regulatory bodies may require access to these documents during inspections or audits.

Examples of External Documents in Practices

• Vendor Invoices: Used for validating purchases and expenses.
• Bank Statements: Utilized for reconciling company records with bank records.
• Tax Forms: Necessary for compliance with tax regulations.
• Receipts from External Parties: Provide evidence of transactions and payments made.

Historical Context

External documents have long been a cornerstone of financial accountability and transparency. Their role has been accentuated with the advent of modern auditing standards and practices, which prioritize impartiality and verifiability.

Applicability

External documents are applicable across various financial and managerial aspects, including:

• Financial Audits: Providing reliable evidence for financial statement verifications.
• Compliance Audits: Ensuring adherence to regulations by maintaining necessary documentation.
• Internal Controls: Strengthening control mechanisms by incorporating independent documentation.

Related Terms

• Internal Documents: Internal documents are created and maintained within the organization. Examples include internal memos, employee time sheets, and internal financial reports. While useful, they are often regarded as less reliable compared to external documents.
• Financial Statements: Financial statements are formal records of the financial activities and position of a business, person, or other entity, consisting of a balance sheet, income statement, and cash flow statement.

FAQs

Why are external documents considered more reliable than internal documents?

External documents are considered more reliable because they are created and managed by independent third parties, reducing the risk of intentional or unintentional biases.

How should a company organize its external documents?

A company should use a systematic approach to organize external documents, such as digital recordkeeping systems or well-maintained physical files, to facilitate easy access and verification.

Can internal documents ever be considered as reliable as external documents?

While internal documents can be reliable, they do not offer the same level of independent verification as external documents. Robust internal controls and transparency can enhance their reliability.

Summary

External documents are fundamental to accurate and credible company recordkeeping. Their independence and verifiability make them essential for auditors and regulatory bodies, thereby contributing significantly to financial transparency and accountability. By maintaining thorough and well-organized records of external documents, companies ensure smoother audits and better compliance with pertinent regulations.

References

1. Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and Assurance Services. Pearson.
2. PCAOB. Auditing Standard No. 3: Audit Documentation. Public Company Accounting Oversight Board.

By understanding and effectively managing external documents, organizations can bolster their financial integrity and compliance, thereby fostering trust among stakeholders and regulatory entities.