Internal Audit vs External Audit

Article byHarsh Katara

Reviewed byDheeraj Vaidya, CFA, FRM

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 Company Financial 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,

Internal audit is not compulsory, but a company can conduct it to review the operational activitiesOperational Activities Operating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more of the firm or an organization. In this type of auditing, the entity’s management determines the work area.
On the contrary, external audit is obligatory for every organization or every separate legal entity. A third party is brought to the firm to perform the work and the process of Audit. It gives its opinion on the Financial Statements of the company, and here the respective statute will determine the working scope.

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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 AuditInternal Audit Internal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more is a constant or continuous audit activity which is performed by the internal audit department of the firm or an organization. External Audit, on the other hand, is an examination and evaluation by the third or the independent body, of the annual statements of accounts of the organization or an entity to give an opinion thereon.
Internal audit is discretionary, which means there is no compulsion for the same, but the external auditExternal Audit External Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more is compulsory.
The internal audit report will be submitted to the management. However, the external audit report will be handed over to the major stakeholders such as the shareholders, creditors, debenture holders, suppliers, the government, etc.
Internal audit is ongoing and a continuous process, while the external audit is conducted on an annual basis.
The essential purpose of the internal audit is to review the routine processes of the business and give suggestions for its improvement wherever required. Conversely, an external audit will aim at analyzing and verifying the accuracy, completeness, and reliability of the financial statement.
Internal audit will provide an opinion on the effectiveness of the operational process or the activities of the firm or an organization. On the other hand, an external audit does give an opinion of the true and fair view of the financial statements.
Internal auditors are the employees of the firm or an organization as the management of the company itself appoints them. In contrast, external auditors are not the employees, the shareholders or the members of the company appoint them.

Internal vs. External Audit Comparative Table

Basis	Internal Audit	External Audit
Definition	Internal 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 Reporting Financial 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 Financial 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 Financial 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 bookkeepingBookkeeping Bookkeeping 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.
Objective	The 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 it	Internal employees of the company (internal audit department) conduct it.	A third party will conduct it.
Scope	The management of the company or the entity decides it’s scope.	The relevant authority or the statute will decide the Scope here.
Reporting responsibilities	Internal 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 Committee A 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 A 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 A 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 Reports	Management is the one that mainly uses the audit reportAudit Report An 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 An 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 An 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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