Difference Between Internal Audit vs External Audit
An audit is the process of independent examination and evaluation of the various books of accounts or financial statements or reports of an organization or individual to make sure that they are accurate and in the manner as per applicable laws and regulations. The Financial Report includes the balance sheet, income statement, cash flow statement, etc. The purpose of an audit is to review the information presented in a financial report is actually matching with the financial position of an organization at a given date or not. The auditor reviews the financial report of the organization, as per the auditing standard set by the government body. In the tax, world audit is referred to the review of a taxpayer’s tax return for accuracy. Auditors predict the future of an organization by analyzing the past accounting period. An auditor does not judge what will happen in the future they can predict and provide suggestions to the organization. The main purpose of an audit is to form an opinion on the information in a financial report.
An Auditor should comply with codes of ethics and should conduct an audit by the international standard on auditing or laws and regulation set up by the government body. Some of the important auditing principles as listed below in the diagram.
General Audit is divided into two types based on an object –
- Internal Audit
- External Audit
Let discuss these two types in detail.
Internal Audit examines the effectiveness of an organization’s internal controls, and it is the accounting process. Internal auditors work for the organization as an internal employee. An objective of the internal auditor is to add value and improve organization operations and making sure that an organization complies with laws and regulations set by the government body. Generally, internal auditors collect all required information on how the organization is operating and use that information to show where it is doing well and where it can improve.
The purpose of an internal audit is to evaluating organization performance periodically and identifying the loopholes to improve in the future, which keeps the company big or small. Planned internal audits are important for organizations in a wide range of industries.
Responsibility of Internal Auditor
- Organization internal audit takes place on a daily, weekly, monthly, quarterly, or annual basis. Some of the departments do internal audits frequently than others.
- Monitoring, analyzing, and finding the risk and control of the organization.
- To provide report findings and recommendations to the organization board, manager, and other members.
- An internal auditor is a trusted consultant for an organization, and he is responsible for advising management on how to manage the company’s risks and goals best.
- An internal auditor is responsible for promoting ethics and helping to identify improper conduct.
- The most important job of the internal auditor is the ability to perform an impartial evaluation.
- An internal auditor is responsible to detect frauds and errors and provide control for them.
The external audit is an independent evolution of the financial statements prepared by an organization. The external audit is performed by an outside organization an independent person. An external audit provides both business and government with a valuable check of organization accounting. In an external audit, a conflict of interest is less likely to happen as compared to an internal audit. External auditor plays a critical role in validating organization finances.
The purpose of an external audit is to review the company accounts to show that they are accurate and complete. Sometimes the organization hires an external auditor for investigating fraud.
Responsibilities of External Auditor
- The external auditor is responsible for providing an independent opinion on the organization’s financial statements.
- Its job is to understand the work environment, operations, and internal controls of the organization.
- Its main objective is to serve the shareholder of the organization by providing an opinion about the soundness of the preparation of the financial reports prepared by the organization.
- Certify the financial statement is the main job of an external auditor.
- To determine the real organization market and financial situation that helps further in managerial decisions.
The below diagram shows the general audit procedure which the auditor or organization follows during the audit.
Head To Head Comparison Between Internal Audit vs External Audit (Infographics)
Below is the top 7 difference between Internal Audit vs External Audit
Key Differences Between Internal Audit vs External Audit
Both Internal Audit vs External Audit are popular market choices; let us discuss some of the major Difference Between Internal Audit vs External Audit:
- Internal audit is a regular, continuous activity that is performed by an internal audit department of an organization. The external audit is a yearly activity to investigate the organization’s financial statement by a third party.
- Internal audit is not compulsory, whereas External audit is compulsory.
- The scope of internal audit is decided by the organization, whereas the external audit scope is decided by law.
- Internal auditors are employees of the organization, whereas external auditors are always independent body to the organization.
- The objective of Internal audits and external audits are different; an objective of the internal audit is to educate management and employees about how they can improve business and efficiency. In contrast, the objective of an external audit is to investigate and give credibility to financial reports that go to shareholders.
- An internal audit report is submitted to the internal management of the organization whereas an external audit is reported to shareholders, Government, Creditors, and Suppliers, etc.
Internal Audit vs External Audit Comparison Table
Below is the 7 topmost comparison between Internal Audit vs External Audit
|The Basis Of comparison between Internal Audit vs External Audit||
|Meaning||It is an ongoing audit function performed within the organization by an internal auditing team.||It is an audit function that is performed by an independent firm.|
|Conducted By||The internal auditor usually from inside the organization and its employee of the organization and appointed by Management.||The external auditor is from outside the organization (Third Party), and the shareholder of the organization appoints it.|
|Audit Period||Continuous process||Once in a year|
|Purpose||To evolutes the routine activities and provide control for the improvement.||To Investigate and verify the financial statement of the organization.|
|Legally Bound||No, an internal audit is not compulsory.||The external audit is compulsory or legally bond as per the government act.|
|Range||The management of the organization decides the range of internal audit.||A range of external audit is decided by a government body or as per rules and regulations.|
Conclusion – Internal Audit vs External Audit
So by and large, both Internal Audit vs External Audit is important for every organization, to assess the overall work. Internal and External audit plays a vital role in the effectiveness of the organization and which gives a true and fair view of the financial statement of the organization. The role of the external auditor is very important and critical as it’s certifying the integrity of the financial statement of the organization. External auditor checks work of internal auditor as a part of the process so that they can reassure the reliability of internal control for an organization.
Internal auditors are salaried employees of the organization and are considered to be independent, whereas external auditors are an independent body that carries out the audit for the organization. In short, we can say that internal and external audit is not opposite to each other; instead, they are the supplement to each other.
This has been a guide to the top difference between Internal Audit vs External Audit. Here we also discuss the Internal Audit vs External Audit key differences with infographics, and comparison table. You may also have a look at the following articles to learn more: