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There are multiple differences between the internal audit and external audit functions, which are as follows:
§ Internal auditors are company employees, while external auditors work for an outside audit firm.
§ Internal auditors are hired by the company, while external auditors are appointed by a shareholder vote.
§ Internal auditors do not have to be CPAs, while a CPA must direct the activities of the external auditors.
§ Internal auditors are responsible to management, while external auditors are responsible to the shareholders.
§ 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.
§ Internal audit reports are used by management, while external audit reports are used by stakeholders, such as investors, creditors, and lenders.
§ Internal auditors can be used to provide advice and other consulting assistance to employees, while external auditors are constrained from supporting an audit client too closely.
§ Internal auditors will examine issues related to company business practices and risks, while external auditors examine the financial records and issue an opinion regarding the financial statements of the company.
§ Internal audits are conducted throughout the year, while external auditors conduct a single annual audit. If a client is publicly-held, external auditors will also provide review services three times per year.
In short, the two functions share one word in their names, but are otherwise quite different. Larger organizations typically have both functions, thereby ensuring that their records, processes, and financial statements are closely examined at regular intervals.
An internal audit is designed to look at the key risks facing the business and how the business is managing those risks effectively. It usually results in recommendations for improvement across departments. Both financial and non-financial elements are usually included and the company’s reputation may be a factor which is assessed.
An external audit focuses on finance and the key risks associated with the business’ financial business. They are usually performed on at least an annual basis to provide the annual statutory audit of the financial accounts. This audit is designed to show whether the accounts are a true and fair reflection of where the company sits financially. External auditors will evaluate all the internal controls put in place to manage financial risk to assess whether they’re working effectively.
Internal Audit is done by the company management while appointing and setting up one Internal Audit Department within the company. They are involve and doing their work throughout the year to control and correct the things before it is too late. While External Audit is mandatory task to be done by each and every company by appointing the External Auditor and they take responsibility of the fairness of the Financial Report which is being accepted by Govt., Banks, Management and Share Holders etc...to review and take the decision acordingly if required.
Internal Audit designed for compliance to internal processes and generally in house. Will have independent reporting to higher management. Have yearly targeted areas with little leverage for flexibility of adding new areas as per requirement. External Audit generally conducted periodically eg., Quarterly, Half Yearly, Yearly and will have overall view on Financial Statements for compliance to Statutes, Company policies etc.,
While external Audit is Mandatory, internal Audit is discretionary,
