Difference Between Internal and External Audit

February 2022 · 5 minute read

Key Difference – Internal vs External Audit
 

The audit process is one of the essential aspects of an organization for its long-term survival and success. An audit committee is appointed by the board of directors to review the effectiveness of audit process of the company. Internal audit and external audit are the two main components of the audit process. The key difference between internal and external audit is that internal audit is a function that provides independent and objective assurance that an organisation’s internal control and risk management system are functioning effectively whereas external audit is an independent function outside of the organization that assesses the financial and risks associated aspects in order to comply with statutory audit requirements.

CONTENTS
1. Overview and Key Difference
2. What is Internal Audit
3. What is External Audit
4. Side by Side Comparison – Internal vs External Audit
5. Summary

What is Internal Audit?

Internal audit is a function that provides independent and objective assurance that an organization’s internal control and risk management system are functioning effectively. The internal audit function is led by the internal auditor who has recent and relevant financial experience. The internal auditor is appointed by the audit committee and the internal auditor is accountable for the audit committee members and should report the audit findings on a periodic basis. The audit committee has the following roles to perform with regard to internal audit.

If the company does not have an internal audit function (this is possible in a certain type of companies, especially in small companies where there is only an external audit function), the need for the establishment of an internal audit function should be considered annually.

What is External Audit?

External audit is an independent function outside of the organization that assesses the financial and risk associated aspects in order to comply with statutory audit requirements. The main role of external audit is to provide an opinion whether the company financial statements present a true and fair view and assess the effectiveness of the internal audit function. Thus, the internal audit function is superseded by the external audit function. External audit function is managed by the external auditor, who is appointed by the shareholders of the company. The audit committee has the following role to perform with regard to external audit.

Difference Between Internal and External Audit

Figure 01: Template of an audit plan used in audit process

What is the difference between Internal Audit and External Audit?

Internal Audit vs External Audit

Internal audit is a function that provides independent and objective assurance that an organization’s internal control and risk management system are functioning effectively.External audit is an independent function outside of the organization that assesses the financial and risks associated aspects in order to comply with statutory audit requirements.
Main Responsibility
The main responsibility of the internal audit is to review the effectiveness of the internal control system.Providing an opinion whether the company financial statements present a true and fair view is the main responsibility of the external audit.
Statutory Requirement
Availability of an internal audit function is not mandated by law.All companies must have an external audit function as stated by law.
Appointment of Auditor
The internal auditor is appointed by the audit committee.Shareholders appoint the external auditor.

Summary – Internal Audit vs External Audit

The difference between internal and external audit is a distinct one where internal audit is conducted by company employees whereas external audit is conducted by a party outside the organization. The audit committee should meet at least twice a year to conduct their review on the effectiveness of the internal audit function and the board of directors should also review the effectiveness of the audit committee on an annual basis. Since the external auditor is appointed by the shareholders and the function supersedes the internal audit, external audit is considered to be more credible.

Reference:
1.”What is the difference between internal audit and external audit? N.p., n.d. Web. 19 May 2017. <http://www.turnkeyconsulting.com/what-is-the-difference-between-internal-audit-and-external-audit>.
2.”What is internal audit?” What is internal audit? | About us | IIA. N.p., n.d. Web. 19 May 2017. <https://www.iia.org.uk/about-us/what-is-internal-audit/>.
3.”Roles & Responsibilities of External Audit Firms.” Chron.com. Chron.com, 26 Oct. 2016. Web. 19 May 2017. <http://smallbusiness.chron.com/roles-responsibilities-external-audit-firms-73924.html>.

Image Courtesy:
1. “Figure 5: Timeline for Validation of Audit Readiness for DOD Service-Provider Operating System Controls” By U.S. Government Accountability Office U.S. (Government Works) via Flickr

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