Internal Audit vs External Audit

Updated on April 25, 2024
Article byHarsh Katara
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Internal Audit and External Audit

Internal audit is one of the sectors of an organization that ensures independent review and unbiased process of the system and helps to add value and improve organizational value. In contrast, External Audit is a verification of the company’s financial statements conducted by independent or external auditors to certify them to ensure the credibility of such financials for investors, lenders, and the public.

An audit can be defined as an objective evaluation and examination of the financial statements of a company 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 firm’s employees 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 firm’s financial records or an organization, to opine on the financial statements.

Internal Audit vs External Audit

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

  • An internal audit is not compulsory, but a company can conduct it to review the firm’s operational activities or an organization. In this type of Auditing, the entity’s management determines the work area.
  • On the contrary, an external audit is obligatory for every organization or separate legal entity. A third party is brought to the firm to perform the work and Audit process. It gives its opinion on the company’s Financial Statements, and here the respective statute will determine the working scope.

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

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The auditing process of the two types of audit is almost similar, which is 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

Internal Audit vs. External Audit Infographics

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Key Differences

The key differences are as follows –

  •  Internal Audit is a constant or continuous audit activity performed by the firm’s internal audit department or an organization. On the other hand, External Audit 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 audit 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 an ongoing and continuous process, while external audit is conducted annually.
  • 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.
  • An internal audit will provide an opinion on the effectiveness of the operational process or the firm’s or an organization’s activities. 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 firm’s employees or an organization as the management of the company itself appoints them. In contrast, external auditors are not the employees, the shareholders, or the company members who appoint them.

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 reporting 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 bookkeeping 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 its 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 committee.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 report 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. The external auditor may use the work conducted in the internal audit if he thinks it fits. Still, it will not reduce the scope and the responsibility of the external auditor. On the contrary, an Internal Audit acts as a check on the process and business activities 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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