Internal Audit Vs. External Audit: Understanding The Key Differences

There are two ways to conduct auditing: internal and external. These two are conducted for the same purpose but differ at some point. Employees from the organization carry out internal audits, while an independent third party conducts external audits. To understand more, here are the differences between internal and external auditing.

Define internal auditing.

Internal auditing aims to make a firm more efficient, profitable and better at making informed decisions for business growth. For instance, a firm can order an internal audit for its inventory system. Auditors will look at the inventory tracking system to see if it shows the supplies the company has at hand. Doing this helps identify if there are delays and discrepancies. Internal auditors carry out the process as a standard routine in a firm. Their main objective is to evaluate performance and offer insights not affected by office insights within the company.

Benefits of internal auditing

• Enhances efficiency
• Strengthens internal controls
• Improves IT security
• Verifies accuracy and integrity of financial statements
• Ensure compliance and lowers the risk

What is external auditing?

This type of audit focuses on the accuracy of a firm’s financial statements and if accounting practices comply with the rules. Auditors also verify that the financial reports and records accurately represent the firm’s performance. Public entities must do external audits and publish financial statements for investors or shareholders. A third-party auditor or accounting firm in Australia performs this type of audit without connection to the firm. These professionals are required to be certified accountants with qualifications and proper accreditations.

Advantages

• Provides Credibility
• Gives shareholders confidence
• Improves internal systems and controls

Key differences between internal and external audit

Objective

The difference between the internal and external audit functions is based on the objective of the audit. Internal audits are conducted by the organization’s employees and external by a third-party audit firm. Internal audits work as preparatory audits assisting the firm in comprehending its present compliance level. Internal audits work as practice tests before the actual examination by the external auditors.

Reporting

As mentioned, there are considerable differences in the reporting of internal and external audits. These internal audit reports are handed over to senior management or chief audit executives of the firm. On the other hand, external audit reports are shared with stakeholders, regulators, shareholders, investors and other relevant entities. Internal audit reports are more detailed, concentrating on identifying weaknesses in the organization. They also ensure that appropriate mitigation measures are implemented. The report may consist of recommendations for improving internal controls and operational efficiencies.

In comparison, external audits offer consumers an opinion about the organization’s financial statements and internal controls. This report includes an assessment of the firm’s compliance with relevant laws and regulations. Sometimes it may also have recommendations from accounting firms in Australia  to improve for the growth of the business.

Scope

Internal audit scope is more comprehensive compared to an external audit. Internal audits cover a diverse wide area within the organization, including:

• Information security
• Financial reporting
• Business compliance
• Risk management
• Operations and more.

Conversely, external audits concentrate on the financial statements of the firm. Sometimes, this audit may be related to a particular set of regulations that have to be met. For example, if your firm operates as a service provider, a third-party audit firm must conduct a Service Organization Control (SOC) assessment. The assessment evaluates the effectiveness of the controls and safety measures implemented by the organization. It ensures integrity, confidentiality and availability of the services provided to customers. These two audits serve different purposes, but both are vital to ensure compliance and enhance the general performance of a firm. By understanding the scope and requirements of both audit types, organizations can ensure they meet obligations and maintain the stakeholders’ trust. Additionally, it contributes to business growth and determines the businesses future.

Independence

Protecting the internal and external audit departments from pressure from other departments is crucial. However, conflicts might affect the audit’s impartiality because the auditors are internal employees and might be biased. In such cases, firms must opt for unbiased third-party audit firms with no conflicts. So, consumers are likely to depend on the audit reports by third-party firms rather than the services provided by your organization.

Legal Requirements

Legal requirements are something that you need to consider when conducting audits. In most firms, regulated by the government, external audits are mandatory. On the other hand, internal audits are done with varying frequencies and performed to comply with industry regulations. Conducting external audits ensures compliance of the business.

Internal audits help in improving firms from the inside. On the other hand, external audits ensure what’s presented to the outside world aligns with what happened. Although the two are conducted for similar reasons, they also differ. They are different in scope, reporting, objective, independence and legal requirements.