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Internal Audit And External Audit: An Accurate Comparison Of Internal And External Audit

Posted in Internal Audit on July 2, 2024
Internal Audit And External Audit

Internal audit and external audits can be confused. Some question, when the organization’s accounts are being audited externally, why have internal auditors? 

The characteristics of Internal Audit And External Audit have a major difference. The scope of internal audit is much wider than that of external audit. External auditors’ primary responsibility is to provide assurance over the financial statements of the organization. In contrast, scope of internal audit is much more holistic. It encompasses the evaluation of internal controls, identification of inefficiencies/wastages in the process, and even recommendations for improvements.

Internal Audit And External Audit

Internal Audit and External Audit Major Differences

If enumerated, the major differences between internal audit and external audits are as follows:

  • Internal auditors are generally employees of the company while external auditors necessarily work for an outside audit firm.
  • Internal auditors are primarily responsible to the management and board. External auditors are primarily responsible to the shareholders through their audit report.
  • Internal auditors can issue their findings in any type of report format while external auditors must use specific formats for their audit opinions and management letters as defined by international standards or legal and regulatory requirements.
  • Internal auditors can be used to provide advice (such as a consulting role) and other consulting assistance to management. External auditors are constrained from supporting an audit client too closely.
  • Internal auditors examine issues related to company business practices and risks. External auditors only examine the financial records and issue an opinion regarding the financial statements of the company.
  • Internal audits are conducted throughout the year as per the audit plan, and external auditors generally conduct a single annual audit. 

Internal Audit in Contrast with External Audit

Whereas the internal audit and external audit functions are comparable and may require close collaboration, their goals and areas of focus are distinct. According to the Institute of Internal Auditors (IIA), the Internal Audit And External Audit functions do not bid or conflict; rather, they both enhance the effectiveness  of governance.

Internal auditors examine their organization’s management, risk, and automation holistically (that is, primarily non-financial information), whereas external auditors are concerned with the accuracy of business accounts and the organization’s financial condition or, in some businesses, the organization’s compliance with relevant laws.

Internal auditors will investigate issues concerning the firm’s business practices and risks, whereas external auditors will analyze the financial records and issue an opinion on the company’s financial statements.

Internal Audit And External Audit also conducted in different time. Internal audits are performed throughout the year, whereas external auditors perform a single annual audit. External auditors will also provide review services three times per year if the client is publicly traded. Also, Management relies on internal audit reports, whereas stakeholders such as investors, creditors, and lenders rely on external audit reports.

Internal Audit And External Audit

Internal Audit Functions

The model Internal Audit Charter, as issued by IIA, mentions the scope of the internal audit function as:

“The scope of internal auditing encompasses, but is not limited to, the examination and evaluation of the adequacy and effectiveness of the organization’s governance, risk management, and internal controls as well as the quality of performance in carrying out assigned responsibilities to achieve the organization’s stated goals and objectives.”

To increase and protect organizational value by providing risk-based and objective guarantee, guidance, and perspective, while constantly establishing trust and strengthening relationships with administration, through the implementation of good and distinctive internal audit services.

Internal audit is an independent, objective assurance and consulting activity that adds value and improves the operations of an organization.

Internal audit is responsible for assessing the effectiveness of risk management, regulation, and governance mechanisms and providing insight and recommendations for improving these processes, particularly in the areas of:

  • Operational efficiency;
  • Financial management and reporting dependability; and
  • Observance of laws and regulations.

Internal auditing may also include conducting fraud investigations to identify fraudulent acts and post-investigation fraud audits to identify control malfunctions and financial loss.

External Audit Functions

External auditing ensures that a company’s internal controls, processes, standards, and policies are sufficient, effective, and in accordance with governmental requirements, regulatory requirements, and organizational policies. This type of audit further ensures that reporting mechanisms prevent financial statements from being tainted by errors.

There are objectives of an external audit to be determine:

  • The comprehensiveness and accuracy of the client’s financial statements;
  • If the client’s accounting records were prepared in accordance with the applicable accounting framework; and
  • Whether or not the client’s financial statements accurately represent its results and financial position.

The external auditor’s opinion, as well as the work that the external auditor does to provide it, exist to add verification, legitimacy, and reliability to the company’s findings to its stockholders. External independent bodies, such as external auditors, may not have the same level of familiarity with the organization that an internal audit function does, but they can bring a new and valuable perspective. Furthermore, their minority status is clearly visible to third parties, allowing them to not only be independent, but also be perceived to be self sufficient.

Final Thoughts

The term “audit” refers to the process of independently checking an organization’s financial records in order to provide an opinion on the financial statements. It is divided into Internal Audit And External Audit. Internal auditing is not required by law, but it can be performed to review the organization’s operational activities. The work area is determined by the entity’s management in this type of auditing.

On the other hand, external auditing is required for every separate legal entity, and it involves bringing in a third party to perform the auditing process and provide an opinion on the company’s financial statements. The working scope is determined by the applicable statute in this case. The auditing process for the Internal Audit And External Audit is nearly identical, which is why people get confused between them. However, there is a fine line between Internal Audit And External Audit .