Internal Audit vs External Audit

Difference Between Internal Audit and External Audit

Internal Audit is one of the sector of an organization that ensures providing independent review and unbiased process of system and also helps to add value and improve organizational value, whereas External Audit is a verification of the financial statements of the company conducted by independent or external auditors so as to certify them in order to ensure the credibility of such financials for investors, lenders and public.

An audit can be defined as objective evaluation and examination of the financial statements of a companyFinancial Statements Of A CompanyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more or an organization to ensure that the records represent a fair and accurate view of the transactions they claim. The audit can be conducted either internally by the employees of the firm or the organization or externally by a third party, i.e., outside the firm. Stating differently, audit alludes to a process of checking, which is independent, of the financial records of the firm or an organization, to opine on the financial statements.

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An audit can be grouped into 2 categories, namely, 1) Internal Audit and 2) External Audit. By nature,

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  1. Auditing I: Conceptual Foundations of Auditing
  2. Auditing II: The Practice of Auditing

The auditing process of the two types of audit is almost similar, and that’s the reason why people often get confused between these two. In this article, we look at the differences between Internal and External Audit in detail –

Internal Audit vs. External Audit Infographics

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Key Differences

The key differences are as follows –

Internal vs. External Audit Comparative Table

BasisInternal AuditExternal Audit
 DefinitionInternal audits will evaluate the firm’s internal controls, which include its accounting process and corporate governance. They will ensure compliance with the laws and regulations. They will also make sure accurate and timely financial reportingTimely Financial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read moreFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read moreFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read more and data collection. It aids in maintaining the operational efficiency by identifying the issues and correcting the lapses before an external audit discovers them.External audit purpose is to determine whether the firm or an organization is providing a fair, complete, and accurate representation of its financial position by examining all the information that is available such as bookkeepingBookkeepingBookkeeping is the day to day recording of financial transactions such as purchases, sales, receipts, and payments, and it is the first step in the accounting process. It can be prepared in two ways: single-entry and double-entry; however, the double-entry approach is more widely used and recognized in most countries.read more records, bank balances, and financial transactions.
ObjectiveThe key objective is to review the routine process and the activities and further provide suggestions wherever there is scope for improvement.Here the vital objective is to analyze and verify the financial statements of the firm or the company.
Who conducts itInternal employees of the company (internal audit department) conduct it.A third party will conduct it.
ScopeThe management of the company or the entity decides it’s scope.The relevant authority or the statute will decide the Scope here.
Reporting responsibilitiesInternal audit must be independent of the management of the company and to report functionally (directly) to the board, which is usually through the audit committeeAudit CommitteeA company's audit committee is a group of non-executive directors who are in charge of ensuring the integrity of internal controls, auditing, and financial reporting procedures. It works under the supervision of the Board of Directors and strives to sustain the corporate governance system.read moreA company's audit committee is a group of non-executive directors who are in charge of ensuring the integrity of internal controls, auditing, and financial reporting procedures. It works under the supervision of the Board of Directors and strives to sustain the corporate governance system.read moreA company's audit committee is a group of non-executive directors who are in charge of ensuring the integrity of internal controls, auditing, and financial reporting procedures. It works under the supervision of the Board of Directors and strives to sustain the corporate governance system.read more.External auditors are responsible to the shareholders of the company. In the public sector, they are ultimately accountable for a legislative body such as the Parliament. They are nowhere responsible for the management of the company or the audited body. The management does not direct the extent and scope of their work.
Users of the Audit ReportsManagement is the one that mainly uses the audit reportAudit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements.read moreAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements.read moreAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements.read more to identify loopholes before that gets captured and reported in the external audit.The members, shareholders, the public at large, etc. are some of the stakeholders that use external audit reports.

Conclusion

External audits and internal audits are not opposed to each other. Instead, they complement one another. External Auditor may use the work that is conducted in the internal audit if he thinks fit. Still, it will not reduce the scope and the responsibility of the external auditor. Internal Audit acts as a check on the process and the activities of the business and aids by advising on different matters to gain operational efficiency.

On the contrary, an external audit is independent in which the third party is brought to the firm to carry out the procedure. It checks the accuracy, completeness, and validity of the annual account of the firm.

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