The difference between internal and external audits

/

What is an Internal Audit?

An internal audit refers to the department located within a business that monitors the efficacy of its processes and controls. The internal audit function is especially necessary in larger organizations with high levels of process complexity, where it is easier for process failures and control breaches to occur. A smaller organization may not have an internal audit department, especially if it has simple processes.

What is an External Audit?

An external audit is an examination of an organization’s accounting records that is conducted by an independent accountant. This type of audit is most commonly intended to result in a certification of the financial statements of an entity. This certification, which is in the form of an auditor’s opinion, is required by certain investors and lenders, and for all publicly-held businesses.

Related AccountingTools Courses

How to Conduct an Audit Engagement

Internal Auditing Guidebook

Comparing Internal and External Audits

There are multiple differences between the internal audit and external audit functions, which are as follows:

  • Employment status with the entity being audited. Internal auditors are company employees, while external auditors work for an outside audit firm.

  • Appointment to position. Internal auditors are hired by the company, while external auditors are appointed by a shareholder vote.

  • Required certification. Internal auditors do not have to be CPAs, while a CPA must direct the activities of the external auditors. However, many internal auditors have obtained the Certified Internal Auditor certification.

  • Responsibility. Internal auditors are responsible to management, while external auditors are responsible to the shareholders.

  • Reporting format. Internal auditors can issue their findings in any type of report format, while external auditors must use specific formats for their auditor opinions and management letters.

  • Report usage. Internal audit reports are used by management, while external audit reports are used by stakeholders, such as investors, creditors, and lenders.

  • Level of support provided. Internal auditors can be used to provide advice and other consulting assistance to employees, while external auditors are constrained from supporting an audit client too closely.

  • Topics examined. Internal auditors will examine issues related to company business practices and risks, while external auditors examine the financial records and issue an opinion regarding the financial statements of the company.

  • Timing of activities. Internal audits are conducted throughout the year, while external auditors conduct a single annual audit. If a client is publicly-held, external auditors will also provide review services three times per year.

In short, the two functions share one word in their names, but are otherwise quite different. Larger organizations typically have both functions, thereby ensuring that their records, processes, and financial statements are closely examined at regular intervals.