Difference between Internal Audit and External Audit

Key Difference: The basic difference between an internal audit and an external audit is that an internal audit is conducted internally, by employees of the company or organization, whereas an external audit is conducted by hiring professional auditors.

According to Investopedia, the definition of an audit is an unbiased examination and evaluation of the financial statements of an organization. The term audit generally has a negative connotation, as to most people it implies that the person or the organization is being investigated for some sort of impropriety, and that there is a chance for penalties in case the person is caught. However, that is not always the case; audits can be conducted for a variety of reasons, including but not limited to ensuring the company’s financial records are accurate and up to date, or to ensure that the company is on track with its objectives, and that the company is turning an adequate profits, etc.

The two main types of audits are the internal audit and the external audit. The main difference between the two, as the name suggest, is that the internal audit is conducted internally, i.e. in house, whereas the external audit is conducted externally, i.e. by hiring auditors. A big enough company usually has auditors on their payroll who are responsible for conducting audits as and when required. However, there are times when a more thorough audit needs to be done; this is where external auditors come into play. Another benefit of an external audit is that it is likely to be unbiased.

Another difference between the two is the reasons why they are conducted. They can be conducted for the same reasons, but the reasons usually differ. The internal audit is conducted to ensure that the company is on track and that the financial documents are accurate and up to date. They may also be conducted to help the business manage its risks and meet its strategic objectives, as well as to look at the key risks facing the business and how the business is managing those risks effectively.

As said, the external audit may be conducted for the same reasons. However, an external audit is usually conducted to determine whether an organization is providing a fair and accurate representation of its financial position. It can also ensure the correctness of the company’s accounts and show the company’s financial situation to the shareholders.

An external audit usually checks information such as bank balances, bookkeeping records and financial transactions. The internal audit can also check this, but it can also be conducted to check any other information regarding internal systems, such as cash management, as well as to ensure that the company meets regulations.

Due to these differences, some companies have only external audits, or both internal and external audits. Another reason for this is that having internal auditors on the payroll costs money; hence, if a company is small and does not absolutely require regular internal audits, they usually opt to hire external auditors for the few times that they do need to conduct audits.

Comparison between Internal Audit and External Audit:

 

Internal Audit

External Audit

Definition of Audit (Investopedia)

An unbiased examination and evaluation of the financial statements of an organization.

Description

An audit that is conducted internally, i.e. by the staff of the company or organization

An audit that is conducted externally, i.e. by hiring a professional auditor 

Purpose

To ensure that the company is on track and that the financial documents are accurate and up to date.

To determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions.

Conducted by

Internal auditors that are employed by the business or outsourced.

An outside firm of accountants who are Registered Auditors

Focus

Help the business manage its risks and meet its strategic objectives. Also to look at the key risks facing the business and how the business is managing those risks effectively.

To ensure the correctness of the company’s accounts and to show the company’s financial situation to the shareholders.

Image Courtesy: internalaudit.rice.edu, iopcfunds.org

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