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Internal Audit Vs External Audit: What’s The Difference Between Them?

Charlie Brooks

Nov 10, 2022 15:37

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Organizations conduct audits as a vital part of their efforts to enhance their operations and make sound business choices. Audits must be performed on a regular basis, and they are sometimes referred to as a strategic improvement tool that assists firms in refining their processes and management systems. They are of the utmost importance to your firm when you implement an ISO management system and must ensure its compliance. Internal and external audits are the most common forms of audits, but you must first grasp the fundamental concept of audits to properly comprehend each. The distinction between an internal audit and an external audit has been explained in this section. Examine the two kinds of audits in detail.

What Services Should Internal Auditors Provide?

Regular internal audit services support the company's capacity to thrive and survive in a competitive business climate. Auditors achieve this via 


Monitoring, analyzing, and evaluating the organization's risks and controls


Reviewing the compliance of the company with state and federal regulations and legislation


Providing guarantees and suggestions to an organization or business's owners or governing bodies.


Essentially, they collect data on how an organization or business operates and utilize it to identify its strengths and areas for improvement.


Outsourced or co-sourced audits conducted by specialists with no personal ties to the firm are a fantastic investment for businesses. Frequently performed internal audits ensure that the organization is in compliance and that each department is operating as efficiently, effectively, and securely as feasible.

What Is An Internal Auditor (IA)?

An internal auditor (IA) is a skilled professional who is engaged by businesses to conduct independent and impartial assessments of financial and operational company operations, including corporate governance. They are responsible for ensuring that businesses comply with rules and regulations, adhere to established processes, and operate as effectively as possible.


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An internal auditor's (IA) primary responsibility is to detect and rectify issues before they are found during an external audit by an outside business or regulatory bodies, such as the Securities and Exchange Commission (SEC). One of the responsibilities of the SEC is to oversee how corporations present their financial statements to guarantee that investors have access to all pertinent data before investing.

Internal Auditor's Responsibilities

  • Internal audits of an organization occur daily, weekly, monthly, quarterly, or annually. Some departments conduct internal audits with more frequency than others.

  • Monitoring, assessing, and identifying the organization's risk and control.

  • Provide the organization's board, management, and other members with the report's findings and suggestions.

  • An internal auditor is a trusted consultant for an organization and is responsible for advising management on how to effectively manage the risks and objectives of the business.

  • An internal auditor is responsible for promoting ethics and assisting in the identification of unethical behavior.

  • The most crucial responsibility of an internal auditor is to provide objective evaluations.

  • An internal auditor is responsible for detecting and controlling frauds and mistakes.

Advantages of Employing An Internal Auditor (IA)

Depending on the size of the business, the internal audit function may be done by the internal audit department or outsourced. Management determines the scope of their work, but they preserve impartiality and independence by reporting to the audit committee or board. Their audit reports are shared with the executive leadership of the examined region. These papers include suggestions for optimizing internal controls and simplifying processes.


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Generally, internal audits are done continuously. Their audit work considers the organization's financial and non-financial KPIs in the context of comprehensive risk management. They guarantee that a company's business processes assist it in achieving its strategic objectives. Their attention is both forward and backward: they guarantee that financial transactions are accurately documented in an organization's information systems while also ensuring the company's long-term viability.

Which Companies Do An Internal Audit?

Internal audit is often found in extremely big companies in the commercial sector, the public sector, or the "third sector," which includes charities and non-governmental organizations, however many tiny firms may also opt to develop an internal audit function. Under the UK Companies Acts, there is no necessity that a business have an internal audit function. Numerous firms in the public sector are mandated by law to have an internal audit function, thus the situation there is different.


Surprisingly, the Financial Reporting Council's (FRC) UK Corporate Governance Code (April 2016) does not mandate an internal audit role for firms registered on the London Stock Exchange.

What Is An External Audit (EA)?

An external audit is an assessment performed by an impartial accountant. This form of audit is often designed to result in the certification of an entity's financial statements. A simple approach to consider an external audit is that it is conducted by auditors external to the business to ensure their independence. This is done so that the information may be shared with external stakeholders. An external audit is an assessment conducted per certain standards or guidelines that result in an opinion. The provided opinion is either unqualified, indicating that no major exceptions were identified, or qualified, indicating that an exception was acknowledged.


An external audit is undertaken mainly for non-organizational stakeholders. A financial statement audit is the first example of an external audit that comes to mind, given its prevalence among public corporations. Investors, lenders, and other interested parties are presented with this form of external audit report.


System and organization control (SOC) audits are yet another sort of external audits, and this form of audit report is offered to the organization's existing and future clients. External auditors also conduct Health Insurance Portability and Accountability Act (HIPAA), HITRUST, FedRAMP, PCI DSS, and ISO 27001 audits, among others, for which reports are prepared and sent to customers outside the business.


A contract is signed between an organization and an external audit company for the purpose of performing an external audit. External auditors are supposed to be independent from the audit they are auditing. They must have access to data and resources from throughout the company in order to fulfill the audit's criteria; otherwise, any scope limitations may result in a qualified opinion. In certain situations, the external audit may depend on the work of the internal audit instead of conducting all of the job themselves. In this manner, the external audit determines the independence and quality of the internal audit function's work to validate their reliance on the job.

The Objective of External Audits

In addition to doing audits of financial accounts, auditing services may also include verifying a company's compliance with certain rules or laws. While the goal of an audit determines its scope, external auditors construct audit work plans based on their risk assessment of the business.


Unlike internal auditors, external auditors conduct most of their work at the end of the year, verifying that an organization's financial records accurately represent previous events. However, this sole emphasis on the year's conclusion is shifting. Multiple mini-audits are conducted throughout the year by certain audit companies that have adopted a continuous focus.


After completing their audit, auditors deliver a report to management and other interested parties. Auditing standards stipulate the structure and substance of these external audit reports. Auditors may address flaws in a company's internal controls and make ideas for improving the firm during a closing conference with management. External auditors are permitted to advise improvements, but not to implement them, since doing so would compromise their independence.

What Occurs During An External Audit?

During an external audit, an auditor will comprehensively evaluate your financial records. This entails verifying the correctness and completeness of these documents, whether they were created in line with widely accepted accounting standards, and if your financial statements accurately reflect the financial status of your organization.


Auditors examine the records used to establish each financial statement and recreate them to determine if they were prepared properly. In addition, they will compare your company to others in the same sector in an effort to detect variances and inconsistencies that might indicate improper financial reporting.


At the conclusion of the external audit, the auditor will produce and present to your company a report including the auditor's conclusions and specifics. This will include any financial reporting irregularities and noncompliance with laws and regulations pertinent to your firm.

How Does One Become An External Auditor?

External auditors must possess a bachelor's degree from an authorized four-year college or university. The majority of external auditors have undergraduate degrees in accounting, finance, business administration, mathematics, or statistics. Certain universities will provide bachelor's degrees in auditing. It is recommended to have at least two years of professional accounting experience. External auditors often begin their careers as accounting clerks, bookkeepers, and junior auditors. A Master of Accountancy (MAcc) or Master of Business Administration (MBA) might help a speedier advancement. Any auditors submitting SEC filings are required to complete the 150-hour CPA certification requirement (CPA). According to the Association of Certified Fraud Examiners, external auditors also need to pass the test to become Certified Fraud Examiners (CFE).


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What Audit Similarities Exist?

An internal and external audit are comparable in that they both follow the same audit process, which consists of 1) the planning phase, 2) the fieldwork phase, and 3) the reporting phase. Regardless of whether they are an internal or external auditor, an auditor must be independent from the process or firm they are auditing. The following are similarities between internal and external audit:

Testing

Both external and internal auditors conduct testing procedures, which may entail examining and analyzing several transactions.

Internal Control Systems

Internal auditors and external auditors are concerned with validated processes, internal control systems, and related implementation. Moreover, both are often heavily engaged in information systems, since this is a crucial component of management control and a basic aspect of the financial reporting process.

Standards

Both adhere to professional discipline and norms of conduct.

Cooperation

Both functions seek active interaction between the two, since they are interdependent.

Reporting

Both entities generate official audit reports on their operations.

Auditor's Reports

What is a report from an auditor?

After an internal and external audit, the auditor's report will be provided. This is a letter from the auditor attached to your firm's financial statements and expresses the auditor's opinion about compliance with standard accounting standards.


Typically, the report is included in the company's annual report. Typically, a report consists of three paragraphs. The first paragraph will outline the auditor's and directors' duties. The second paragraph defines the audit's objective, scope, and conventional accounting methods. In the third paragraph, the auditor's view is stated.


It is arguable that the auditor's opinion is the most essential and crucial aspect of the auditor's report.

Four shared viewpoints

In an auditor's report, four frequent views are offered for corporations.

1. Unqualified or Unblemished Report

This opinion indicates that the auditor thinks the company's financial records are accurate and compliant with GAAP standards. Typically, an audit will end with this conclusion.

2. Credible Opinion

This opinion indicates that the auditor determined that the firm did not adhere to the appropriate accounting standards. However, the corporation technically did not violate any laws or regulations. In order for the business to make the required modifications, the auditor will identify the precise cause and location of each problem.

3. Negative Opinion

This conclusion indicates that the auditor determined the firm did not follow appropriate accounting processes and discovered financial inconsistencies. The auditor will record any suspicions of misstatements or misrepresentations in the company's financial statements. This view is the worst possible conclusion and, if not addressed immediately, may have very serious legal implications.

4. Contravention of Opinion

In this opinion, the auditor was either unable to finish the audit or elected not to submit an opinion. This might occur when the auditor needs to maintain objectivity or acquire the necessary information.

Internal Audit VS  External Audit


Internal Audit

External Audit

What Are The Objectives Of The Audit? 

To identify and emphasize any difficulties associated with a company's risks and business procedures.

To review the financial records of a firm and offer an audit opinion to the appropriate stakeholders.

Who Conducts The Audit?

A person who is employed by an organization is termed an employee of that organization.

A person who is employed by an organization is termed an employee of that organization.

What qualifications must the auditor possess?

An internal auditor may be a certified public accountant, although it is not required (CPA).

A CPA is required to supervise external auditors.

Who is the Auditor accountable to?

An internal auditor is accountable to the organization, specifically its executive management and regulatory board.

External auditors are accountable to (essentially "watching out for") the shareholders of the business. This is why external audits are so vital for publicly listed organizations, while internal audits may also be beneficial for publicly traded and traded enterprises.

How can audit notes assist the organization?

The auditor may provide audit notes as a means of advising and assisting staff.

Due to the risk of a conflict of interest, external auditors are prohibited from supporting the organization or its employees too closely.

What format should be used for the audit?

An internal audit may be presented in any sort or style of report.

An external audit necessitates the use of established and specified forms.

Who Gets Auditors' Reports?

The company's leaders and high management

The lenders, investors, stakeholders, and creditors of an organization

How often are audits performed?

Multiple internal audits may be conducted annually, often at the discretion of the business.

Annually, a formal external audit is performed. In addition, three audits will be conducted by an external auditor on publicly traded companies.

Assistance

Can be used to provide advice and advisory services to the organization's personnel.

External auditors are prohibited from assisting audit clients (the benefit of this is to provide an unbiased audit report to the stakeholders).

Time

Internal audits are conducted throughout the year (the organization is responsible to decide how many audits they want to take)

External is conducted at least once a year (this is a recommended by the law)

Summary

Simply stated, an internal audit improves your organization from the inside out, i.e., it aids in the enhancement of normal operations, management processes, and staff performance. It promotes the continuous enhancement of your company's production. In contrast, an external audit verifies the claims made by your firm or internal auditors on your operational effectiveness. It demonstrates to the outside world, i.e., stakeholders, that your firm is dependable and operating well, therefore gaining their confidence. Therefore, an external audit strengthens your company's connections with its stakeholders.


Internal and external audits are not contradictory but complement one another. In reality, external auditors request internal audit reports to fully understand your company operations and the level of compliance with a specific standard/standards. Then, they evaluate the procedures from their own perspective. Therefore, both are necessary to conduct your operations effectively and efficiently while adhering to your organization's applicable laws and regulations.