Audits will be routine within corporate governance and compliance. Though there are many forms of audits, the terms internal (in-house) and external audits is used more frequently.

It is important for stakeholders to understand the differences between internal and external audits as they each have a unique but related function in guaranteeing operational efficacy and financial transparency.

Most of the time, internal audits concentrate on a business’s internal operations and procedures, whereas external audits are independent reviews of the external records, usually financial data, kept by the business. Let’s learn about this in detail here:

What is an Internal Audit? 

The internal evaluation of a business’s operations and procedures is known as an internal audit. Assessing the efficacy of internal controls and confirming that business activities comply with internal policies and procedures are the two main goals of internal audit. Internal auditing is another useful tool for identifying possible hazards and areas where the business’s processes could be improved. Internal audits are not mandatory, but many businesses still view them as best practices.

What is an External Audit?

External audit is a un unbiased evaluation of the financial data and documentation of a business. Usually, a company that specializes in external audits or a Certified Public Accountant (CPA) does external auditing.

The goal of the external audit is to ensure stakeholders, including creditors and shareholders, that the company’s financial statements are accurate and compliant with applicable laws. Apart from being often used by private businesses to enhance their financial reporting and draw in investors, external audits are usually mandated by law for publicly traded corporations.

Comparing Internal and External Audit

The following are some of the numerous distinctions between the functions of internal and external audits:

  • Appointment to position: The company appoints internal auditors, whereas shareholders vote to name external auditors.
  • Work status with relation to the audited entity: Internal auditors are employed by the company, whereas external auditors are contracted to an outside auditing firm.
  • Scope: Internal auditing has a broad purview, including a number of internal operations, risk management, and control areas. It may consist of financial, compliance, and operational audits. The financial statements are the main focus of external audits, which make sure they are presented honestly and in compliance with relevant accounting rules.
  • Necessary certification: CPAs are not required to be internal auditors, but they are required to oversee the work of external auditors. That being said, a large number of internal auditors hold the Certified Internal Auditor credential.
  • Format for reports: Internal auditors are not restricted to using a certain structure for their reports. However, external auditors are required to adopt specific templates for their management letters and auditor opinions.
  • Document use: While external audit reports are used by stakeholders, including creditors, lenders, and investors, internal audit reports are used by management.
  • Amount of assistance given: While external auditors are prohibited from providing undue help to an audit client, internal auditors are able to offer guidance and other consulting services to workers.
  • Independence: Although internal auditors are staff members of the company, they could have an impact on Internal Audit. Since outside parties are unaffiliated with the company, an external audit is impartial.
  • Timing of activities: While external auditors only perform one audit per year, internal auditors carry out multiple audits during the year.
  • Topics covered: While external auditors look into financial records and provide an opinion on the company’s financial statements, internal auditors will investigate matters related to business processes and risks within the organization.

Final thoughts

External and internal auditing are not opposed to each other, in fact they complement each other. If the external auditor sees fit, he/she may use the internal auditor’s work; however, this does not reduce the responsibility of the external auditor.

Apart from providing guidance on a wide range of topics to improve operational efficiency, internal audits serve to check on the company’s operations. However, an external audit is conducted by a third party that is brought to the company and is completely independent. It verifies the organization’s annual accounts for accuracy and validity.

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