How do internal and external auditors differ and how should they relate?

How do internal and external auditors differ, and how should they relate?

Let's start with internal audits, the internal auditors they're part of your management system. They're a technique or internal audits and the internal auditor is a technique that's used for internal business improvement.

If you look at the ISO standards, there's three objectives to make sure you're in-line with the standard, so it's an internal audit against the standard you can grab one of the free checklists from our website to help you with that. There's a checklist for each of the ISO standards on the website, you download it, you start an internal audit and you can answer the questions.

So that's an internal. The three objective are compliance with the standard, compliance with your planned arrangement, so your management system, the things you said you would do. Are you doing the things you would said you will do and then the third objective is to identify opportunities for improvement.

So across any of the management system standards that are talking about internal auditors, they're your three objectives. The external auditors - like we are here at Best Practice - are all about verifying compliance from the standard and the system having implemented and then helping you to grow your business and identify opportunities for improvement.

Now we've done agenda, we've got to be able to put a hand on your heart or in this case our hand on our Best Practice logo and say that we've seen enough evidence to demonstrate that you comply with the standard so that you can have a certificate you can use our great Best Practice logos and you can say that you're certified.

So, they're the two different ways.

Now how do they relate it's often good for an external auditor and an internal auditor to chat when there's an external audit taking place so that they can discuss the internal audit strategy what the priorities are and ensure that the external audit program and the internal audit program complement each other but don't duplicate and probably the principal thing you want to try and avoid there in the business is internal audit fatigue.

On the contrary, External Audit which is obligatory for every separate legal entity, where a third party is brought to the organization to perform the process of Audit and give its opinion on the Financial Statements of the company. Here the working scope is determined by the respective statute.

The auditing process of the two types of the audit is almost same and that is why people get confused between these two. However, there is a fine line of difference between internal audit and external audit.

Content: Internal Audit Vs External Audit

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

Definition of Internal Audit

By Internal Audit, we mean that an unbiased and systematic appraisal function, performed within the business organisation, with the purpose of reviewing the day to day activities of the business and providing necessary suggestions for the improvement.

Internal audit performs a wide spectrum of activities such as:

• Evaluating the accounting and internal control system.
• Examining the routine operational activities.
• Physical verification of inventory at regular intervals.
• Analysing financial and non-financial information of the organisation.
• Detection of frauds and errors.

The main aim of the internal audit is to increase the value of an organisation’s operation and to monitor the internal control, internal check and risk management system of the entity. An Internal audit is conducted by the internal auditors who are the employees of the organisation. It is a separate department, within the organisation where a continuous audit is performed throughout the year.

Definition of External Audit

The periodic, systematic and independent examination of the financial statements of the company conducted by a third party for specific purposes, as required by statute is known as External Audit. The main aim of external audit to publicly express an opinion on:

• The truthfulness and fairness of the financial statement of the company
• The accounting records are complete in all respects and prepared as per the policies outlined by GAAP (Generally Accepted Accounting Principles) or not.
• All material facts are disclosed in the annual accounts.

For carrying out an external audit, the auditor is appointed by the members of the company. He should be independent, i.e. he should not be connected to the organization in any way so that he can work in an impartial way without any influence. The auditor has the right to access books of accounts to obtain necessary information and provide his opinion to the members by way of the audit report. The report is of two types:

• Unmodified
• Modified
  • Qualified
  • Adverse
  • Disclaimer

If the report is modified, the auditor has to give reasons for the same.

The following are the major differences between internal audit and external audit:

1. Internal Audit is a constant audit activity performed by the internal audit department of the organisation. External Audit is an examination and evaluation by an independent body, of the annual accounts of an entity to give an opinion thereon.
2. Internal Audit is discretionary, but the External audit is compulsory.
3. Internal Audit Report is submitted to the management. However, the External Audit Report is handed over to the stakeholders like shareholders, debenture holders, creditors, suppliers, government, etc.
4. Internal Audit is a continuous process while the External Audit is conducted on a yearly basis.
5. The purpose of Internal Audit is reviewing the routine activities of the business and give suggestions for improvement. Conversely, External Audit aims at analysing and verifying the accuracy and reliability of the financial statement.
6. Internal Audit provides an opinion on the effectiveness of operational activities of the organisation. On the other hand, External Audit gives an opinion of the true and fair view of the financial statement.
7. The scope of internal audit is decided by Those Charged With Governance (TCWG). As opposed to external audit, whose scope is determined by law.
8. Internal Auditors are the employees of the organisation as they are appointed by the management itself, whereas External Auditors are not the employees, they are appointed by the members of the company.

Conclusion

Internal Audit and External Audit are not opposed to each other. Instead, they complement each other. External Auditor may use the work of the internal auditor if he thinks fit, but it does not reduce the responsibility of the external auditor. Internal Audit acts as a check on the activities of the business and assists by advising on various matters to gain operational efficiency.

On the other hand, external audit is entirely independent in which a third party is brought to the organisation to carry out the procedure. It checks the accuracy and validity of the annual accounts of the organisation.