Difference Between Internal Audit and External Audit

An audit can be defined as an objective evaluation and examination of the financial statements of a companyFinancial Statements Of A CompanyFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more or an organization to ensure that the records represent a fair and accurate view of the transactions they claim. The audit can be conducted either internally by the firm’s employees or the organization or externally by a third party, i.e., outside the firm. Stating differently, audit alludes to a process of checking, which is independent of the firm’s financial records or an organization, to opine on the financial statements.

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  • An internal audit is not compulsory, but a company can conduct it to review the firm’s operational activitiesOperational ActivitiesOperating activities generate the majority of the company’s cash flows since they are directly linked to the company’s core business activities such as sales, distribution, and production.read more or an organization. In this type of Auditing, the entity’s management determines the work area.On the contrary, an external audit is obligatory for every organization or separate legal entity. A third party is brought to the firm to perform the work and Audit process. It gives its opinion on the company’s Financial Statements, and here the respective statute will determine the working scope.

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  • Auditing I: Conceptual Foundations of AuditingAuditing II: The Practice of Auditing

The auditing process of the two types of audit is almost similar, which is why people often get confused between these two. In this article, we look at the differences between Internal and External Audit in detail –

Internal Audit vs. External Audit Infographics

Key Differences

The key differences are as follows –

  • Internal AuditInternal AuditInternal audit refers to the inspection conducted to assess and enhance the company’s risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more is a constant or continuous audit activity performed by the firm’s internal audit department or an organization. On the other hand, External Audit is an examination and evaluation by the third or the independent body of the annual statements of accounts of the organization or an entity to give an opinion thereon.Internal audit is discretionary, which means there is no compulsion for the same, but the external auditExternal AuditExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more is compulsory.The internal audit report will be submitted to the management. However, the external audit report will be handed over to the major stakeholders such as the shareholders, creditors, debenture holders, suppliers, the government, etc.Internal audit is an ongoing and continuous process, while external audit is conducted annually.The essential purpose of the internal audit is to review the routine processes of the business and give suggestions for its improvement wherever required. Conversely, an external audit will aim at analyzing and verifying the accuracy, completeness, and reliability of the financial statement.An internal audit will provide an opinion on the effectiveness of the operational process or the firm’s or an organization’s activities. On the other hand, an external audit does give an opinion of the true and fair view of the financial statements.Internal auditors are the firm’s employees or an organization as the management of the company itself appoints them. In contrast, external auditors are not the employees, the shareholders, or the company members who appoint them.

Internal vs. External Audit Comparative Table

Conclusion

External audits and internal audits are not opposed to each other. Instead, they complement one another. The external auditor may use the work conducted in the internal audit if he thinks it fits. Still, it will not reduce the scope and the responsibility of the external auditor. On the contrary, an Internal Audit acts as a check on the process and business activities and aids by advising on different matters to gain operational efficiency.

On the contrary, an external audit is independent in which the third party is brought to the firm to carry out the procedure. It checks the accuracy, completeness, and validity of the annual account of the firm.

This article is a guide to Internal Audit vs. External Audit. Here we discuss the top difference between internal and external audits and infographics and a comparison table. You may also have a look at the following articles –

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