The Difference Between External Audit & Internal Audit

What is an Audit?

In a nutshell, an audit is an official inspection of a business’s operations, processes, or financial records. There are two types of audits, namely internal and external. While both share similarities in how they are approached and conducted, they are quite different in terms of their objectives, scope, methodologies, and outcomes.

What is an Internal Audit?

Internal audits look at a company’s internal controls and systems and help organizations achieve their goals. Internal auditors work closely with management to thoroughly review all systems and operations within a company to ensure smooth operation. 

Internal audits look at all aspects of a company, from finances to IT. The internal auditor will assess all tangible facets of a business such as supply chains and IT systems, as well as intangible areas such as company culture and ethics. 

Essentially, internal audits are thorough analyses of all aspects of an organization that exist to evaluate the efficacy of systems put in place and to recommend any improvements if necessary. 

What is an External Audit?

External audits, on the other hand, involve a company or business hiring an independent auditor to help them verify that their internal accounting procedures and financial operations run efficiently and meet legal standards. External auditors are registered with ASIC. 

There are a variety of benefits to getting an external audit:

1. They can help prevent fraud
2. They ensure compliance with the relevant legislature
3. They reassure customers and the general public that your company is up to scratch
4. They can help ensure you get a loan from the bank 
5. They can help improve the efficiency of your business

So you can see that while external audits may seem a little intimidating, they can provide great benefits to your company.

Key differences between internal and external audits

There are several differences between internal and external auditors. 

 Appointment

Generally, external auditors are appointed by the shareholders of a company, while internal auditors are often employees of a company but can also be appointed externally and report to an audit committee and/or directors.

The objective of the audit

Internal audits are proactive inspections that seek to identify and address any risks or deficiencies in a business’ processes and operations. They are performed to ensure future success for the business. External audits on the other hand are performed to gain a reasonable degree of assurance on whether the financial statements of a company present a true and fair view, i.e., these financial statements are free from material misstatements regarding the company’s financial performance and position.

Scope of the audit

Internal audits tend to inspect all matters of governance, risk management, business processes, and strategy. Since the objective is to thoroughly analyze and improve the business operations, all key aspects of the processes governing these operations are inspected in detail. Internal auditors not only identify deficiencies within and vulnerabilities around the business processes, but they also suggest ways in which these issues can be addressed.

External audits are much more limited in scope, with the focus primarily on establishing a true and fair view of the financial statements. 

The auditing teams

Internal audits are performed mostly by employees of the company, although the services of a third-party service provider can also be hired for this purpose, whereas external audits are performed by individual professional accountants or firms of professional accountants designated by the applicable corporate laws within the local jurisdiction to act as external auditors. Typically, large businesses tend to establish a dedicated internal auditing department to perform internal audits. External auditors are generally hired by the company’s board of directors. 

To be a member of the internal auditing team, it is preferred but not mandatory to hold a certain type or level of qualification. However, as stated earlier, only legally designated professional accountants may act as external auditors of a company.

The objectivity of the internal auditing team may be questionable to the layman as they are hired by the business itself; however, the auditors address this concern in their code of ethics, encouraging internal auditors to be honest and objective in their assessment. This is typically why auditing committees – which are subcommittees of the board of directors – are formed to oversee the internal audit function.

Mode of Operation:

Internal auditors work with staff and management and provide information on how the business can function better; external auditors are responsible for independently reviewing financial statements and ensuring they meet any regulatory standards, reporting back to the stakeholders. 

The audience

Reports generated by the internal auditors are presented to the company’s management, which could be the board of directors or any of its subcommittees – usually the audit committee. The audit report issued by the external auditors is presented by the board to the shareholders during the company’s annual meeting in case of public or listed companies. Technically, the external audit report is presented to the owners or the shareholders of the company.

Engagement Period:

Internal auditors generally provide auditing and control services related to the company’s finances, business practices, and risks over an extended period. External auditors are appointed for a certain period and once the audit is completed, their engagement with the company terminates. 

Conclusion

On a concluding note, an internal audit examines the efficiency and effectiveness of a company’s processes and operations, whereas an external audit examines whether a company’s financial statements present a true and fair view of its financial affairs.

Auditing, whether internal or external is not easy. It is resource-intensive in terms of the skills, finances, and manhours required. For SMEs, maintaining an in-house internal audit department or frequently undertaking internal audits is far from easy, even though its importance cannot be emphasized enough.

Audits, whether internal or external, are a useful tool for any company. While they have different areas of focus, both are geared towards ensuring that a company’s records, processes, and financials are efficient, accurate and comply with the law. 

Audits give a company’s shareholders and management confidence by ensuring that the company’s accounts are true and fair and that internal processes are efficient. 

No one wants to be audited by the CRA for any reason. This process is stressful, and even if the process ends up in your favor, causes anxiety and worry. When it comes to CRA audits, Filings Taxes helped business owners who have had their taxes prepared incorrectly, who initially tried to ignore CRA confrontation and people who contacted us with close deadlines.

If you are audited by CRA, our professionals will represent you to the tax court if necessary. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.