Internal Audit vs External Audit: Difference and Comparison

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 follow the required documentation system. This helps in ascertaining the financial accuracy of the books of accounts provided by the organization.

Key Takeaways

1. Employees of the organization conduct an internal audit, while an independent external auditor conducts an external audit.
2. The internal audit focuses on the efficiency and effectiveness of the organization’s internal controls. In contrast, external audit focuses on verifying the accuracy of financial statements and ensuring compliance with accounting standards.
3. Internal audit reports to management, while external audit reports to shareholders or other stakeholders.

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, auditors working for an external audit firm do an external audit.  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.

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

Comparison Table

Parameters of Comparison	Internal Audit	External Audit
Definition	Audit 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 it	Employees of the company(who know auditing)	Independent auditors who are in no way related to the organization
Users of the audit	Generally members of the organization(management of the part being audited,BOD)	External to the organization like customers, prospective customers, etc.
Objective	To evaluate the routine process and find ways of improvement	To verify the financial statements of the organization
Requirement	Not a necessity but recommended	Obligatory for every separate legal entity or organization

What is an 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, the 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 auditors 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 for these tasks.

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

What is an External Audit?

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

Its objective is to determine if the client is preparing its financial reports per the required rules and regulations. It also checks if the client is presenting a true financial picture. All companies that 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. Ensure that the necessary accounting process is being followed.

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

References

1. https://www.emerald.com/insight/content/doi/10.1108/02686901111151332/full/html
2. https://www.tandfonline.com/doi/pdf/10.1080/00014788.1981.9728789