Meaning of Audit
The process of auditors analyzing a company's financial accounts is referred to as an audit. Auditors use this procedure to analyze financial statements to guarantee that they are accurate and fair. In the same way, it looks to verify if these statements fit the requirements of the applicable financial reporting structure.
The term audit is most commonly used to describe an external examination of a company's financial accounts. Some organizations, on the other hand, may use their internal audit role to improve corporate governance. The core goal of any audit stays the same, regardless of the type. There are, nevertheless, particular distinctions between the two audits.
Difference Between Internal and External Audit
There are a few distinctions between internal and external audits. The external audit is primarily sourced from outside sources, whereas the customer conducts the internal audit. Both types usually do not rely on each other and can function independently. External and internal auditors of a corporation may work together in various instances. It is not, however, required to do so.
The following are some of the most significant differences between internal and external audits.
1. Definition
The fundamental distinction between the two types of audits stems from their definitions. An internal audit is a procedure in which a corporation hires auditors. Internal auditors have a variety of responsibilities in addition to analyzing a company's financial accounts. These positions usually have something to do with the company's internal controls.
An external audit is a process in which a corporation hires a third-party auditor to review its financial accounts. The external auditor's report is the result of the external audit procedure.
2. Purpose
An internal audit's primary goal is to evaluate and analyze a company's internal controls and performance. In addition to this, the internal audit function assesses a company's risks and controls. Internal auditors, in general, ensure the efficacy of internal controls and risk management.
The primary goal of an external audit, on the other hand, is for auditors to deliver an opinion. An audit report contains this opinion. External auditors state if the financial statements meet the requirements of the applicable financial reporting frameworks in this report. Internal controls are also the subject of external audits. That is not, however, its principal function.
3. Focus
Each sort of audit has a different focus based on the description and objective stated above. Internal audits are primarily concerned with enhancing and safeguarding the value of an organization. Internal auditors examine a company's operations to see if they support its strategic goals. It also focuses on detecting hazards that may influence a company's goals.
On the other hand, external auditors examine whether a company's financial statements are accurate and fair representations of its financial affairs. Furthermore, it aims to verify that the organization meets all regulatory obligations.
4. Users
Both auditors perform critical jobs for their clients. The end-users for each of their works, however, are different. Internal auditors' users include the company's management and board of directors. Internal auditors are firm employees who report to management. It may also limit their independence in some circumstances.
In contrast, external auditors issue a report to a company's stakeholders. It mainly consists of investors and shareholders. Customers, suppliers, employees, the government, and others may be included. It also means that, in comparison to internal audits, the activity of external auditors has a more significant influence.
5. Scope
Both audits have different scopes. Internal auditing is a continuous process. Internal auditors are required to provide ongoing services due to the nature of their profession. It entails recognizing risks and limitations to internal controls regularly.
On the other hand, external audits are a one-time event. Companies may conduct these audits after a certain amount of time has passed. Financial reporting and compliance requirements are the focus of external audits. External audits may also make observations on internal controls in addition to this. However, it is not required.
6. Business Relationship
The organization employs internal auditors in an internal audit procedure. As a result, both parties are inextricably linked. It means that internal auditors may not be independent of the company's management in some cases.
External auditors are not bound by the company's or management's interests. They work with the client regularly. In comparison to internal auditors, they are more independent and objective. External auditors and the corporation are on an equal footing in this partnership.
7. Perspective
Internal auditors examine the company's previous results. They consider the future using this information. They also look at past data to see whether there are any flaws in internal controls. It means that internal audits consider both the past and the future.
External audits are purely historical. These audits do not take into account any potential future consequences. External auditors merely look at a company's financial statements, as previously stated. The financial matters of the company in the past are reflected in these statements.
Key Differences of Internal Audit Vs External Audit
| Basis | Internal Audit | External Audit |
| Definition | It is a procedure in which a business hires auditors. | It's a procedure in which a corporation hires an outside auditor to examine its financial statements. |
| Purpose | Internal controls and the performance of a corporation are assessed and analyzed. | To express an opinion on an audit. |
| Focus | Ensures that the organization's worth is enhanced and protected. | Pays attention to whether a company's financial statements give an accurate and fair picture of its financial situation. |
| Users | The company's management and board of directors. | Investors, shareholders, consumers, suppliers, employees, the government, and others are among the company's stakeholders. |
| Scope | Provides ongoing services, mainly focusing on internal controls. | It all boils down to financial statements and regulatory requirements. |
| Business Relationship | Relationship with the company as an employee. | Isolated from the corporation and its administration. |
| Perspective | Examines the company's past success as well as its prospects. | Takes a historical perspective. |