Difference Between Internal Audit and External Audit (With Table)

The term ‘audit’ refers to the process of examining or inspecting the books of accounts by auditors. After the inspection of books, inventory is physically checked to ensure that all departments are following the required system of documentation. This helps in ascertaining the financial accuracy of the books of accounts provided by the organization.

Internal Audit vs External Audit

The difference between Internal Audit and External Audit is that the former is done by the employees of the company (Hence the term internal). On the other hand, external audit is done by auditors working for an external audit firm.  These auditors are hired by the company specifically for this purpose.

Internal Audit is the kind of auditing conducted by an internal auditor to review the company’s operational activities. This process helps in improving and evaluating the effectiveness of risk management in the company. It also helps in finding out if the company is working in compliance with all the applicable rules and regulations.

External Audit is the audit done by an independent auditor to carefully examine the financial records of the company. This helps in finding out if any of the company’s employees is engaging in embezzlement of funds or fraud and if there is an error in the financial books.

Comparison Table Between Internal Audit and External Audit

Parameters of ComparisonInternal AuditExternal Audit
DefinitionAudit done to maintain efficiency of the organization’s operations and identify the issues thereon.Audit done to determine if the organization is providing an accurate and fair financial report..
Who does itEmployees of the company(who know auditing)Independent auditors who are in no way related to the organization
Users of the auditGenerally members of the organization(management of the part being audited,BOD)External to the organization like customers, prospective customers, etc.
ObjectiveTo evaluate the routine process and find ways of improvementTo verify the financial statements of the organization
RequirementNot a necessity but recommendedObligatory for every separate legal entity or organization

What is Internal Audit?

It is a process to ensure that the organization is complying with all established rules and regulations. Any deviation from the rules and regulations comes to light through this process. It is done by an auditor who also has other roles within the organization.

Internal auditors are answerable to the board of trustees or boards of directors, the audit committee or the accounting officer. Their main tasks comprise the following:

  1. Assessment of risk management
  2. Advising management at all levels of the organization
  3. Confirm information provided and analysis of operations
  4. Evaluation of risk and controls
  5. Working with various other assurance providers

It helps the organization to understand various areas of improvement. It helps in identifying control breakdowns, extent of loss, and potential fraud. It keeps a constant check on the staff of the organization. They remain careful with their job due to the fear of internal auditor catching their mistakes.

It plays a significant role in cutting costs. It helps in identifying areas where money is being spent uselessly. This can only be done if the auditor is qualified in these tasks.

However, it is often found that the management is ignorant to the results of internal audit. They often do not take the necessary steps to improve the working of the organization.

What is External Audit?

External Audit is done by independent auditors, external to the organization. Its results are used by people who are not a part of the organization like suppliers, potential customers, etc.

Its objective is to find out if the client is preparing its financial reports as per the required rules and regulations. It also checks if the client is presenting a true financial picture. All companies who trade publicly are required by law to get their financial books audited by external auditors. The main responsibilities of external auditors are as follows:

  1. To find the real financial and market position of the company
  2. To validate financial books of accounts and bring to light any error or fraud
  3. To ensure that the necessary accounting process is being followed

After the gathering of necessary data, the report is given in writing to the concerned parties.

However, it is an expensive method. Moreover, it is not fully reliable as audit is based on the company’s sample data.

Main Differences Between Internal Audit and External Audit

  1. The main purpose of an internal auditor is to evaluate an organization’s performance and controls system. Whereas external audit is used by auditors in providing an opinion.
  2. Internal audit focuses on finding areas of improvement for the organization. On the other hand, external audit verifies the financial books of accounts provided by the company.
  3. The end users of internal audit are the company’s board and management whereas external audit is used by company’s stakeholders.
  4. In internal audit, auditors are related to the company whereas in external audit, auditors are independent and are in no way related to the company.
  5. While internal audit isn’t essential, external audit is essential for every separate legal entity.

Conclusion

Both internal audit and external audit play an essential role in the working of the organization. They don’t rely on each other, though, external auditors can use the internal audit to draft external audit.

Though internal and external audit differ from each other in a variety of ways, they are actually complementary to one another. Internal audit helps the organization in knowing the areas where it is lacking. It helps the company to gain efficiency of operations. External audit on the other hand, helps in finding out if the organization’s financial statements are true and transparent.

With the proper use of these reports, an organization can solve various issues and be successful.

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