How do internal and external auditors differ and how should they relate?

Internal auditors are appointed by management and report to management.  External auditors are independent auditors and report to the owners.

External auditors are statutory auditors and internal auditors are part of the internal control system.

Internal Auditors are representing Management and do check on behalf of management and report to Audit Committee comprises of few Board members/mgt team (i.e not compulsory to have as well not compulsorily to do by a qualified CA / CPA). The objective or Scope of work of Internal Auditor varies and mostly depends on the Management's need and focus..simple terms its like CUSTOMIZED Vs.. External Auditor is a statutory obligation of the organization to have the Accounts/ Financial Statement audited by recongnized Audit Practioner - A qualified CA / CPA and member of the recoginzed Chartered Body. - The Objective and Scope is Standard and listed by the Statutory Body - ICAI / CMA/ SOCPA....Basic relation between both of them are making sure that the organization compiled and running the business in a legal way and books are representing correct status and Control Sysem is in TACT

Internal Auditors are usually employee(salary based) of the company while External auditors are from independent auditing firms like Ernst & Young, KPMG and etc hired by the company to make independent audit.

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.

Although they are independent of the activities they audit, internal auditors are integral to the organization and provide ongoing monitoring and assessment of all activities. On the contrary, external auditors are independent of the organization, and provide an annual opinion on the financial statements. The work of the internal and external auditors should be coordinated for optimal effectiveness and efficiency.

Internal and external auditors have mutual interests regarding the effectiveness of internal financial controls. Both professions adhere to codes of ethics and professional standards set by their respective professional associations. There are, however, major differences with regard to their relationships to the organization, and to their scope of work and objectives.

The internal auditors' are part of the organization. Their objectives are determined by professional standards, the board, and management. Their primary clients are management and the board. External auditors are not part of the organization, but are engaged by it. Their objectives are set primarily by statute and their primary client - the board of directors.

The internal auditors scope of work is comprehensive. It serves the organization by helping it accomplish its objectives, and improving operations, risk management, internal controls, and governance processes. Concerned with all aspects of the organization - both financial and non-financial - the internal auditors focus on future events as a result of their continuous review and evaluation of controls and processes. They also are concerned with the prevention of fraud in any form.

The primary mission of the external auditors is to provide an independent opinion on the organization's financial statements, annually. Their approach is historical in nature, as they assess whether the statements conform with generally accepted accounting principles, whether they fairly present the financial position of the organization, whether the results of operations for a given period of time are accurately represented, and whether the financial statements have been materially affected.

The internal and external auditors should meet periodically to discuss common interests; benefit from their complementary skills, areas of expertise, and perspectives; gain understanding of each other's scope of work and methods; discuss audit coverage and scheduling to minimize redundancies; provide access to reports, programs and working papers; and jointly assess areas of risk. In fulfilling its oversight responsibilities for assurance, the board should require coordination of internal and external audit work to increase economy, efficiency, and effectiveness of the overall audit process.